Hotel Slump Lures Buyout Firms After Shares Slide From Early '15

  • Bloomberg hotel REIT index down a third from January 2015 high
  • U.S. hotel deal pace, down 76% year to date, seen picking up

Buyout firms expect bargains may emerge in hotel investments following the slump in U.S. lodging stocks, suggesting a potential pickup in deals after a slow start this year.

“Market volatility creates opportunities for longer-term, value-oriented investors like ourselves,” said Tyler Henritze, co-head of U.S. real estate acquisitions for Blackstone Group LP, which raised a record $15.8 billion property fund last year. The private equity firm in December bought Strategic Hotels & Resorts Worldwide Inc., owner of properties including the J.W. Marriott Essex House in New York, Westin St. Francis in San Francisco and Four Seasons Resort in Jackson Hole, Wyoming.

The deal pace this year has been tepid as buyers and sellers assess the changing outlook and capital-market gyrations drive up borrowing costs. U.S. hotel transactions totaling $2.99 billion were completed through Feb. 29, down from $12.3 billion a year earlier, when Hilton Worldwide Holdings Inc. sold the Waldorf Astoria in Manhattan to China’s Anbang Insurance Group Co. for a record $1.95 billion, according to research firm Real Capital Analytics Inc.

Transactions reached $49.7 billion in 2015, up 43 percent from the prior year and the most since 2007’s record $80.9 billion, according to Real Capital. The peak year included Blackstone’s $26 billion takeover of Hilton.

“In the fourth quarter of last year, there was a slowdown in transaction activity -- fewer bidders coming to the table,” said Jerry Ehlinger, managing director and lead portfolio manager in Heitman LLC’s North American public-securities group. “Early this year, that continues to be the case.”

A Bloomberg index of U.S. hotel landlords is down 33 percent from its early 2015 high as room rates and occupancies decelerate from the big gains of prior years, even declining in some cities, such as New York. After the industry’s six years of recovery from the financial crisis, increases in new supply and a slide in travel from overseas amid the strong dollar are curbing forecasts for growth, even as hotel stocks recoup some losses since mid-January.

“My sense is the hospitality stocks are going to get cheaper,” said Ralph Rosenberg, global head of real estate at KKR & Co. Many property investors are selling economically sensitive shares such as lodging to reduce risk and buying “more defensive things like multifamily or high-quality retail stocks.”

Growth Slowdown

Hotel owners and operators last month released estimates that imply little to no pickup in rate and occupancy growth this year. Host Hotels & Resorts Inc., the biggest U.S. real estate investment trust in lodging, said on Feb. 17 that it expects revenue per available room, the industry’s main gauge of performance, to rise 3 percent to 4 percent in 2016, after a 3.8 percent increase last year. More than 90 percent of Host’s hotels are in the U.S. Revpar nationwide is forecast to rise 5 percent this year, following gains of 6.3 percent last year and 8.1 percent in 2014, according to travel researcher STR Inc.

Property values in privately negotiated sales remain stronger than public-market values, and some hotel owners are trying to take advantage of the gap to exit older investments. Private equity firms -- along with REITs, pension funds and sovereign wealth funds -- often are looking to sell holdings at the same time they’re seeking to buy new assets.

Starwood Hotels & Resorts Worldwide Inc., owner of the St. Regis New York, aims to sell $800 million of holdings this year. REITs such as Chesapeake Lodging Trust and FelCor Lodging Trust Inc. have said they’re reviewing options including sales.

Mergers Accelerating

Industry mergers have accelerated, with deals including Marriott International Inc.’s takeover of Starwood on track to be completed by midyear, and Accor SA’s pending purchase of FRHI Holdings Ltd., the owner of the Fairmont, Raffles and Swissotel brands.

“Our book is the largest book we’ve ever had,” said Kevin Mallory, global head of CBRE Group Inc.’s hotel unit. “REITs are taking advantage of the arbitrage in pricing between the public and private markets” to sell assets, sometimes using proceeds to buy back stock. “Many private equity funds are harvesting profits from seasoned investments,” he said.

Prospective buyers are taking more time to analyze investments than they did this time last year, Mallory said. “We’re seeing a slow shift in leverage from the seller to the buyer.”

While their cheaper stocks make REITs more attractive merger candidates, lending spreads have widened in the commercial mortgage-backed securities market. That has made some types of financing more expensive for investors.

“There’s more likelihood we’re going to see strategic merger activity between hospitality companies to create synergies or brand power,” rather than buyouts, because of the difficulty of getting low-cost financing and the necessity of paying a premium, said Rosenberg of KKR.

‘Price Correction’

Gilda Perez-Alvarado, a managing director at brokerage Jones Lang LaSalle Inc., said there could be “some degree of price correction in lodging assets. It will be case by case, with highly coveted assets remaining unaffected.”

New York -- where revpar slipped 1.7 percent last year from 2014, according to STR -- remains “very compelling” to many foreign investors with longer-term horizons, said Perez-Alvarado. “While fundamentals may not be as strong over the next 12 to 18 months, given supply growth, New York offers strong value appreciation mid- to long-term.”

The Abu Dhabi Investment Authority last year bought the leasehold on the London NYC in Manhattan for $382 million. Hersha Hospitality Trust last month agreed to sell stakes in seven Manhattan hotels to a Chinese investment firm, and recycle some of the $300 million into buying other hotels, a common strategy used by sellers to avoid taxes.

“As valuations adjust in the midst of an increasingly uncertain economic outlook, there may well be investment opportunities in the hotel sector we choose to take advantage of,” said Kelvin Davis, founder and co-head of TPG Real Estate, which raised $2.1 billion for a new fund last year. “It’s probably a bit early.”

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