There has been no shortage of merger and acquisition activity in the hospitality REIT [real estate investment trust] sector in recent months and years as investors continue to show an appetite for these publicly traded platforms. Executives from a handful of large REITs assessed the current business climate for the sector at the New York University International Hospitality Industry Investment Conference earlier this week.
In a session entitled “The REIT’s in 2018: What – or Who – Is On The Menu?” executives covered a number of topics ranging from consolidation to the impact of tax reform as well as current capital market conditions.
Tom Baltimore, Jr., Chairman and CEO, Park Hotels & Resorts, believes the merger and acquisition activity will continue and consolidation would ultimately benefit the sector.
“We are the most fragmented subset of the industry. There are some situational issues right now that perhaps have given rise to some of the activity, but I think that’s only going to increase. I’ve been over the years one of the strongest advocates for consolidation, I do think it’s going to occur in our sector and it should occur. I think it will be a more efficient use of capital,” he stated.
Doug Kessler, CEO, Ashford Hospitality Trust, agreed. “Our industry needs to be consolidated; it’s too fragmented right now. There are too many me-too like platforms,” he noted.
Kessler elaborated on the benefits while providing a recent high-profile example.
“It’s healthy for this to happen, but it’s not necessarily consolidation from REIT to REIT, it’s the privatization opportunities, which I think given the Blackstone bid for LaSalle, is almost a validation. There’s a view that there’s more value in lodging REIT platforms today,” he added.
According to Kessler, that value is being recognized more and more.
“I think there was a point where REIT activism was viewed as being a low likelihood, but in fact you’re just as likely to have activism in REITs as any other segment,” he said, noting the “number of funds that are directed for activism has escalated over the last 15 years.”
Meanwhile, when it comes to the capital markets the panelists agreed that financing terms remain quite favorable and there is plenty of capital available as well.
Jonathan Mehlman, President and CEO, Hospitality Investors Trust, noted the company is in the process of recycling hotels and pointed out that from his perspective the current climate for activity remains solid.
“Given all the emails that I’ve received from many of the brokers in this audience over the last two weeks, there is plenty of capital out there as well as acquisitions. The debt capital markets have been white hot,” he said.
Michael Bluhm, executive vp and CFO, Host Hotels & Resorts, concurred. “The market is pistol hot right now. The ability to get debt is very attractive. You can achieve very low spreads, they have come in quite a bit from where they were a year-and-a-half ago,” he said.
Bluhm added the attractive financing terms provide other options as well, pointing out that Host has been able to refinance well over a billion dollars in debt, for example. “That is really capitalizing on the capital market opportunities that are available today. I think that’s really one of the reasons the supply pipeline has been low for transactions because people have the option to refinance,” he maintained.
Baltimore, Jr., meanwhile, acknowledged the refinancing options and talked about the strategy a number of large publicly held REITs, including his company as well as RLJ Lodging Trust and Host Hotels & Resorts, have employed.
“We all want to be low levered and we all aspire to be investment grade. The issue that a lot of sellers have today is, do I sell or do refinance and get the proceeds that I want? That’s a viable option I think for many. In our case I want to continue to delever over time so I can continue to have that strong balance sheet so I can go on offense and get to the point of investment grade. I think candidly that’s what most dedicated new investors are looking for…There’s no right or wrong, it really depends on where you are. As a public REIT, I do think investors really prefer for you to have that low levered balance sheet,” he asserted.
Bluhm also emphasized the importance of the quality of the overall portfolio.
“We did an investor survey about a year-and-a-half ago and we were asking investors what are the differentiating attributes that you really like. A pretty consistent response as a top reason they liked Host Hotels was because we are an investment grade hotel group,” he commented.
In assessing current economic conditions, Bluhm suggested that the recent corporate tax breaks have had a positive impact. “Here we are nine years into the cycle and you see a reacceleration [in corporate travel] and the one major independent variable that you had here that changed is tax reform,” he said.
Bluhm further touted the current economic conditions around the world and the potential impact on the lodging industry. “This is a global business. If you go back to 2007 we had a really interesting economic global synchronicity that we hadn’t really seen and for the past nine years we haven’t seen it either, whether it was Europe having problems or Asia was starting to have its issues. Now we’re back to a point where every major region of the world has really interesting economic growth, or at least outlooks. It sort of makes you feel good about being in the business today,” he concluded.