REITs see long-term opportunities, but market stalled

REIT executives see the chance to make deals in the future as the hotel industry continues to cope with the COVID-19 downturn, but many said deals are put on hold for the time being.

REPORT FROM THE U.S.—While many are eager to see the deals market open up, with the expectation that distressed assets could be available, executives with real estate investment trusts said they are still examining the market before ultimately making moves.

Here’s what executives had to say about potential deal making during first-quarter earnings calls:

Neil Shah, president and COO, Hersha Hospitality Trust
“Generally, I think smaller assets are easier to sell, and assets and investment opportunities that don’t require … traditional capital markets are more likely to get done today. Frankly, I think the four (deals) we have under contract were probably the most likely to get done in an environment, generally. But since we have hard deposits on these four, that is where most of our effort and focuses (are) … expecting those to close. We continue to always consider inbound inquiries for other hotels in the portfolio, and we’ve had conversations with a lot of investors. But you’ve seen the math. A buyer today for … a traditional institutional grade hotel asset needs a pretty high return to justify making an investment. There’s no debt market that they can use to support their investments or they’re thinking of it as an unlevered deal without any clarity on when operating losses stop. Most investors consider pretty long drag on operating losses. When the math generally comes out to where you hear buyers or private equity talking about interest in deals, is that kind of 11% to 12% kind of cap rates on 2019 kind of performance? I don’t think there is many sellers at that level.”

Dan Hansen, chairman, president and CEO, Summit Hotel Properties
“I think it’s fair to say that everybody is in some level of distress right now, particularly the smaller owner-operators. I don’t know that there is an immediate opportunity regardless of the level of leverage or operations. Banks have generally been supportive of smaller owner-operators and giving them time to get their feedback under them. As far as opportunities, our priority right now is really on the portfolio. And based on our portfolio, the locations, the chain scale and the operating model, we think there is a lot of value to be created from here simply with that. But to the extent there is an opportunity in the future, we do have as good a relationship with our lenders as anybody in this space.”

Justin Knight, CEO, Apple Hospitality REIT
“Our expectation is that in the early phases of recovery, there will be an increase in the number of opportunities that would be attractive to us. Our first preference, though, is getting back to cash positive. I think it would be reasonable for us to assume that while we are eager to pursue opportunities from a capital allocation standpoint, which would drive shareholder value. Our No. 1 priority at this point is getting back to a position where we’re producing positive cash flow from operations. Until we get to that point, I think it’s fair to say that we would be conservative in pursuing optional uses of cash.”

Thomas Baltimore, Jr., president and CEO, Park Hotels & Resorts
“Park is not interested in (deals) at this time. We are laser-focused on all the initiatives that we’ve outlined, laser-focused on getting through the recession so that we are well-positioned when the recovery begins.”

James Risoleo, president and CEO, Host Hotels & Resorts
“We are in a unique position given the strength of the company and the fact that we came into the year at 1.6x debt to (earnings before interest, taxes, depreciation and amortization) with $1.6 billion of cash on the balance sheet, we are truly in a position to persevere through this downturn, through this pandemic and come out the other side in a position to play offense. Now when does that happen? I think right now it’s very premature at this point in time, I don’t think you’re going to see us or anybody else in a position to acquire hotels until we have greater visibility on the case of how the U.S. economy is going to perform and how it’s going to recover. Everyone is in agreement today that we are in a recession. We just don’t know the depth of the recession, nor do we know the duration of the recession. There are numerous conversations occurring between hotel owners and lenders today with respect to waivers, interest forbearance, it’s a question of how that’s all going to play out and where the opportunities are going to be. It’s a little too soon to know. But when we have visibility and when we start seeing opportunities come to market, we will be in a position to take advantage of those opportunities. We’re talking to our bank group about giving us some optionality to acquire hotels as we move forward.

“Obviously, the hotels are going to have to be a strategic fit for us. They’re going to have to be priced appropriately, they’re going to have to allow us to believe that we’re going to be able to create shareholder value or we’re going to continue to be disciplined in our approach to capital allocation. We think it served us very well toward the end of this cycle and given us an opportunity to play offense.”

Sean Mahoney, EVP and CFO, RLJ Lodging Trust
“As we think about deploying on acquisitions, which we still need to get through COVID-19 before really focusing on acquisitions in any meaningful way, but certainly, the new normal will factor into our thoughts around geographic reallocation within our portfolio. But our footprint today, we have a portfolio for a reason, which is we like to have a diverse geographic dispersion and we’re comfortable with our footprint today.”

Keith Cline, president and CEO, CorePoint Lodging
“These deals that closed were deals that we had struck pre-COVID-19. Generally, the vast, vast majority of the people that are buying these hotels are existing hotel owners that may either own a La Quinta flag or potentially even other flags. I will tell you from the onset, these deals were closed for the purpose of continuing to operate a hotel. Now, that may change over time, but the deals that we’ve struck, the vast majority of those are for continuing hotel operations.”

Jon Bortz, chairman, president and CEO of Pebblebrook Hotel Trust
“We also expect there to be significant opportunities over the next few years to acquire properties in distress, due to a likely prevalence of cash strapped and over-levered owners and many properties that go back to lenders.

“Our team has been through two prior crisis-driven opportunistic periods, including the creation of Pebblebrook in late 2009 following the tail end of the Great Recession. Following that crisis, we were able to fairly quickly and aggressively assemble a very unique portfolio of high-quality hotels and resorts at very attractive prices that also had substantial upside opportunities. Given our ability to operate our properties more efficiently than the vast majority of buyers … our unique strength and redevelopments and transformations, we believe we’ll have a significant advantage as opportunities arise over the next few years.”


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