We’re now headed into the final three months of the year and forecasted transaction volume still seems a long ways off. Despite strong industry fundamentals, concerns over macroeconomic issues continue to limit the confidence of investors and the pace of deals. I get the sense that is about to change.
Earlier this week, I had the chance to speak with the leaders of several REITs for a session I’m moderating at The Lodging Conference — “Is It Time for Investors to Check into REITs?” The week before, I was in Nashville for the Hotel Data Conference and moderated a session with three of the analysts who track those companies and the public hotel brand companies.
Not surprisingly, the hotel REITs were far more bullish about their companies and the industry than the analysts tracking them. Still, both groups agreed on a couple points: One, the looming “fiscal cliff” is of little concern because it is inconceivable that our government, no matter how contentious the two sides are, would let the economy fall off the edge. And two, the climate now is good for transactions and more deals should start getting done.
Whether that happens by year’s end, in enough time to reach the $15 billion in transaction volume forecasted by Jones Lang LaSalle Hotels and the total reached last year, remains to be seen. Through August, according to JLLH, transaction volume of deals $5 million and up totaled $8.7 billion. But it seems like the pace is picking up and should continue through this year and next.
Stock prices for most REITs are at or close to 12-month highs and at or close to the levels reached in early 2011 when these companies were highly active, to say the least, driving values to near peak levels and cap rates to historic lows.
Earlier this week Chesapeake Lodging Trust raised $132.5 million by issuing 6.5 million shares priced at $18.50, slightly more than its last offering of $17.75 in March of 2011. The money will in part be used to fuel more acquisitions. This comes on the heels of Chesapeake buying the Hyatt Regency Mission Bay in San Diego for $62 million earlier this week, less than a month after buying the W Chicago Lakeshore for $126 million.
Sunstone Hotel Investors, on the other hand, last week sold three of its “non-core” hotels (DoubleTree Guest Suites Minneapolis, Hilton Del Mar and the Marriott Troy for $107.1 million) in a “pruning” of the portfolio, said president and CEO Ken Cruse. With an improved balance sheet, my guess is Sunstone will jump back into buying mode sooner than later.
Also this week, Marcus Hotels, its affiliate MCS Capital and minority partner LEM Capital bought the Cornhusker Hotel in Nebraska. And Eagle Hospitality Properties Trust reached an agreement with its lender — Blackstone — to sell its 13 hotels to pay off the debt at a discount. The hotels are all premium branded and located in mostly desirable Midwestern markets.
Depending on the asset and strategy, it can be both a good time to buy and sell. There’s pent up demand from buyers and capital at the ready. Pricing can be attractive to the seller, and with industry performance strong and an expected long runway ahead, buyers are more willing to pay those prices.