REIT execs: The bid-ask gap is widening, slowing deals
 
REIT execs: The bid-ask gap is widening, slowing deals
11 JUNE 2019 8:37 AM

It’s getting harder to do deals for large institutional owners like the hotel real estate investment trusts, REIT executives said at the 2019 NYU International Hospitality Industry Investment Conference.

NEW YORK—Sellers have options and optimism, while buyers are acting a bit more cautious due to slowing performance metrics, which combines for fewer hotel transactions, according to real estate investment trust executives speaking at the 2019 NYU International Hospitality Industry Investment Conference.

Speaking during “The REIT stuff: Current business challenges and opportunities in the REIT segment,” Ashford Hospitality Trust President and CEO Douglas Kessler cited the 31% drop in hotel transactions during the first quarter of 2019, which he attributed to “a drop-off of portfolio transactions” and a slight increase in sellers’ pricing expectations.

“With transactions down and pricing up, you think the bid-ask gap is widening a little,” he said. “If you’re an owner today, you might be thinking, ‘I’ll hold on a little bit longer because there’s more room in the cycle, and there are a lot of aspirational prices from brokers.’”

Michael Bluhm, EVP and CFO of Host Hotels & Resorts, said sellers have more options today because of the strong financing environment, but the metrics do make things a little more difficult for buyers.

“There are a fair amount of data points that you may need to model in slower growth over the next couple of years,” he said.

Daniel Hansen, chairman, president and CEO of Summit Hotel Properties, said the varied views and approaches among the buying pool can make it difficult to win deals today, but he noted REITs will continually “find ways to do deals.” He said that more buying and selling needs to be pinned to some way to improve a property.

“Sometimes it’s about operations improvements; sometimes it’s a dislocated market,” he said. “But it’s getting harder and harder to find. (And private equity buyers) use more leverage and don’t have the same transparency (as publicly traded REITS), so they can take a longer-term view.”

Leslie Hale, president and CEO of RLJ Lodging Trust, said one major issue is a “dearth of quality assets on the market.”

“We were a net seller in 2018, and our ability to sell was driven by the quality of our assets,” she said.

Neil Shah, president and COO of Hersha Hospitality Trust, said his company has largely been using available capital on “CapEx and ROI projects to transform existing hotels,” as well.

He said companies like his have relied largely on recycling assets to raise capital because public markets have been undervaluing their assets.

“If there are attractive opportunities to create value, we’ll look at recycling capital rather than raising it,” Shah said.

Could costs spur deals?
One thing that might make owners increasingly reticent about being long-term holders is rising costs, Shah said.

“Some of these things are taking the rose off just sitting still,” he said. “With wage growth, margins are going down, and many hotel owners will have less EBITDA this year.”

Shah said labor costs and the age of some assets could lead to a rebound in the transactions market.

“The renovations and big CapEx PIPs hitting in the next couple of years could motivate more transactions,” he said. “You can hold with good (refinancing), but if you have to put in $15 million to $40 million to hold and have two to three years of disruption with increasing wage growth—and it’s not just wage growth but the frustration of holding on to top talent—with some of that pain … maybe some newer owners (will want to sell).”

Who are the buyers?
Hale said the pool of current buyers consists of private equity funds, high-net-worth individuals and yield-driven family offices.

“They can’t buy apartments at 4% to 5% cap rates and get the yield they need,” she said.

Bluhm said global sovereign wealth funds are “playing a meaningful role” in the transactions environment, as well.

Waiting on a big deal
While panelists agreed the current transactions market has been dominated by single-asset sales rather than portfolios, they noted that could change and there’s at least one big deal many expect to hit in the second half of the year.

Kessler said that year-to-date numbers on portfolio deals are down 74%.

“But that may change if the Strategic (Hotels & Resorts) portfolio deal occurs and filters in to the numbers,” he said.

That portfolio is held by Anbang Insurance Group and the Chinese government, and Bluhm noted there’s “a fairly big amount of buzz” around a deal getting done in the relatively near future.

He said the interest level for the high quality of assets in the Strategic portfolio will help it buck the overall trends, noting there is a “real, discernible difference in the degrees of interest” between that portfolio and lower-quality assets.

He said portfolio deals are still attractive with those sorts of hotels, likening it to the deal his company did for three Hyatt Hotels Corporation properties in early 2018.

Bluhm also noted there’s relatively fewer potential buyers in those sorts of deals.

“With those big ticket items, there are not a lot of players who compete for them,” he said.

M&A expectations
After years of various hotel REIT executives saying their sector was ready for consolidation, that’s exactly what’s happened in recent years.

“We’ve had a deal every year of the last three years after 20 years of no (mergers and acquisitions),” Shah said.

He noted, though, that M&A can be “sloppy” and the advantages of scale aren’t as automatic in hotel ownership as in some other businesses.

“The idea of scale economics makes so much sense in so many business, but lodging may be different,” he said. “You have to run hotels and create great guest experiences, so there are some diminishing returns to scale in lodging.”

Hale said ultimately she doesn’t think corporate-level transactions are accelerating in the REIT space, but the difference is the recent deals, including RLJ’s purchase of FelCor Lodging Trust, have been public to public instead of public to private. She said it’d be foolish to expect another deal this year just because it’d continue the trend.

“The publics have better balance sheets than last time, and transactions happen at unique points in time for unique reasons, none of which can be predicted,” she said.

Bluhm agreed that it’s key to look at each of the deals, including Pebblebrook Hotel Trust’s purchase of LaSalle Hotel Properties and Park Hotels & Resorts pending buy of Chesapeake Lodging Trust, individually.

“It’s not much of a social change,” he said. “FelCor was for sale forever. Chesapeake has been for sale since 2017, and from the outside looking in, I don’t think the LaSalle transaction was voluntary.”

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