The REITs are sitting out of the next round of acquisition activity, and private equity is unlikely to fill the void, panelists said during the Lodging Conference.
PHOENIX—“The public guys? We’re basically done now.”
There was nothing surprising when Jim Francis said those words during a breakout session at the 17th annual Lodging Conference. As president and CEO of Chesapeake Lodging Trust, he was one of a number of panelists during a breakout session who reiterated real-estate investment trusts—facing significant hits to their stock prices—largely were out of the buying game.
The real question, then, was whether private equity would help fill that void. The answer, generally speaking, was no.
“I don’t see a tidal wave swing here,” Francis said. “I think there’s going to be a lack of transactions for a while. I just don’t know for how long.”
It’s not that private-equity firms lack the dry powder to get deals done. On the contrary, “There are 421 real-estate-dedicated, private-equity funds in the U.S. that have somewhere around (US)$150 billion in buying capacity right now,” said Ken Cruse, president of Sunstone Hotel Investors.
However, that number pales in comparison to the looming commercial mortgage-backed debt maturities coming due during 2012 and 2013. There’s simply not even private equity to fill that vacuum, said Ashish Parikh, CFO of Hersha Hospitality Trust.
Another concern is debt, which “is still closed for most lodging types,” Cruse said.
That’s especially true for assets outside of the mainstream, institutional-grade fare in top markets. An overall lack of clarity in the markets right now doesn’t help matters, the panelists agreed.
Adi Bhoopathy, who as principal and executive VP with Noble Investment Group was the lone non-REIT representative on the panel, said private equity might not fill the buying void even if there was more certainty in the financial systems. Economic headwinds affect all companies, whether private or public, he said. Not to mention that most private equity wasn’t chasing the trophy assets and other big buys that served as prime REIT fodder.
“That’s not the type of product we were necessarily targeting,” he said.
Main Street vs. Wall Street
“There’s a massive disconnect between Wall Street and Main Street,” Cruse said, adding valuations are so far below Sunstone’s estimates and warranted value of their portfolio that they would be “ill-advised” to engage in any acquisition activity.
Francis painted a similar picture for Chesapeake. During the past 12 months, the REIT has purchased several assets in major urban markets for approximately US$260,000 a key. Today, however, the enterprise value suggests the assets are worth only US$215,000 a key despite even stronger operating fundamentals.
The fundamentals have been so strong, in fact, Cruse suggested a double-dip recession would not be a “big negative” for the hotel industry.
“The underlying value of our assets is actually very good and doesn’t fluctuate with the broader economy,” he said. “If we see a recession or slowdown next year, what we’re likely to see is a continuation of those positive metrics,” especially given such muted supply growth.
This would be a different recessionary environment, Cruse added. Unlike during 2008, corporate America is insulated by massive cash reserves generated by record profits. If anything, companies are likely to double their efforts amid another slowdown, he said.
Francis did say the uncertainty of future projections has increased to a degree. Relative to 120 days ago, it’s much harder to assess future cash flows four quarters from now.
“That’s not to say that this quarter and next quarter and as far as we can see the numbers aren’t extremely strong,” he said. “In fact, our numbers are getting stronger. Our numbers are stronger today in our projections than they were 30 days ago. There’s a huge disconnect.”
He said, however, the Europe debt crisis is something to keep an eye on.
“While I believe the market is overreacting because the strength of the U.S. is different than what it was two years ago … I don’t think anyone really knows what’s going to save Greece, what’s Germany going to do, and then what happens in Portugal, Italy, Spain and so forth, and what are the repercussions in the U.S.
“We have a global overleveraged economy at the private level and even more at the public level at this point,” Francis said.