Private equity firms that were essentially boxed out of purchasing premium hotel assets by REITs are now aggressively chasing deals as those publicly traded companies are now sitting on the sidelines.
For all intents and purposes, hospitality REITs halted deals on core hotel assets they had in the works after their stocks slid down, some precipitously, during the debt ceiling chaos in Washington, D.C., that took hold in August.
As fears of a fall back into recession have swept across the country, capital has been moved away from hospitality investment. Hotels are considered a risky bet during a recession, as companies and individuals often tighten their belts and spend less on business and leisure travel, making hotels one of the first asset classes to feel the effects of an economic downturn. That, in turn, causes occupancy to drop and revenue per available room to drop with it.
And those are losses a REIT that has already seen its shares drop can’t afford right now. So, it looks like private equity firms will be up to bat for top-shelf hotels.
“With the stock market shaken up, it took August and a few weeks into September to get back to business, and the private equity guys are the ones that jumped right in,” said Jim O’Connell, principal of Danvers-based O’Connell Hospitality Group, which advises clients on hotel and resort transactions.
But for those investors to look at deals, asking prices need to come down from the sky-high rates REITs were able to pay. Until recently, the prices to purchase luxury hotel assets had been driven so high by REITs with easy access to cash that in most cases the REITs themselves were the only entities able to afford them.
Those potential investors include Boston-based Rockpoint Group, New York’s Westbrook Partners, and Newton’s Charles River Realty Investors. Brian Kavoogian, president of Charles River Realty, told Banker & Tradesman that while his company felt priced out of the local hotel market in the last year, he will be looking more closely at deals if valuations have adjusted.
For example, the Fairmont Copley Plaza was bought by a FelCor Lodging Trust, a REIT, in late 2010 for $98.5 million. The Hyatt Regency sold to another REIT, Pebblebrook Hotel Trust; and Charles River Realty itself sold the Newton Marriott to Chesapeake Lodging Trust, a public hotel REIT, for $77.2 million in August of 2010. Charles River bought the property for $29 million in June of 2009.
“With hotel REITS on the sidelines given the nearly 20 percent decline in their stock prices this year, private equity may once again be competitive in acquiring existing hotel assets,” Kavoogian told Banker & Tradesman.
Open-Ended Stay
But since it’s still early in this landscape shift, those investors are not likely to find downtown deals for prices lower than what REITs have been paying, said Roger Clark, partner in CHM Partners, the acquisitions arm of Beverly-based private equity firm Capital Hotel Management.
Even though the REITs are out of the market, it’s still unclear whether the move out is for good, or just temporary. As a result, owners are still evaluating their options to sell and are holding back larger luxury assets.
On the larger downtown assets, Clark said his company thinks a lot depends on the coming election cycle to determine the economic climate that will affect the stock market and REITs. On the select-service side of the market, with Hilton and Marriott-branded properties among the most popular, Clark said he thinks it could be a while before REITs get back into that market.
Several owners in that market are refreshing their brands with large lobby and room renovations, putting added pressure on them to sell an asset or two to pay for capital improvements, so prices seem to be settling down somewhat, especially in the Route 128 markets, Clark said. And according to multiple sources, there are several deals pending in those markets.
Even so, it remains to be seen whether private equity firms will actually pull the trigger on those deals, said Joshua Bowman, a partner at Boston-based law firm Sherin & Lodgen. REITs drove prices up about 10 percent above what private equity was willing to pay in the last year. Now it will depend on if revenue and operations numbers can hold steady in the face of a potentially worsening economy.
If those numbers don’t hold, private equity firms might not be all that interested in buying underperforming assets. But if those numbers do hold steady, we could be seeing a good number of deals close in the coming months, sources said.
