Hotel REITs Looking Hot As Acquisitions Step Up

Omens of investing opportunities are in the air from the spate of recent hotel REITs' acquisitions which reportedly saw ownership of 604 US hotels changing hands during the first half of 2013.

The dollar value for these transactions was estimated at $8.1 billion, the highest two-quarter sales level since 2007 when a record high of 3,218 hotels were sold. And the acquisition binge is continuing such that the previous peak is likely to be breached in the next 12 months.

One ride on the buying spree
An affiliate of the private-equity powerhouse Blackstone Group LP (NYSE: BX  ) anchored the flurry of hotel buying toward the end of the third quarter when it bought 16 hotels from Hersha Hospitality Trust to the tune of $217 million. Besides hotels in New York's Long Island, the deal also includes those in suburban Philadelphia, Rhode Island, and Connecticut.

The purchases' announcement comes on the heels of Blackstone's filing for an IPO for its Hilton Worldwide Holdings. The public offering expected this December is for about 113 million shares projected to be priced between $18 and $21 per share. At the midpoint of this price range, the IPO would raise approximately $1.2 billion, making it the biggest REIT public offering since 1993. 

Robust market fundamentals
This IPO is one investing opportunity worth looking into amid the current active environment of lodging REITs. Expectations are that the U.S. hotel industry will grow in lockstep with gains in employment and the economy in general up to 2016.

The hotel industry research firm STR sees a favorable supply and demand dynamics for lodging REITs. It expects a 0.8% supply growth against a 2.2% increase in demand toward year-end.

Next year, STR sees supply gaining 1.1% which remains below the 1.7% long-term average. It predicts a 1.3% growth in occupancy rate to 63.2%, a 4.6% rise in average daily room rate (ADR) to $115.73, and a 6% increase in revenue per available room (RevPAR) to $72.97.

Lenders' cash box open
Given these encouraging prospects, lenders and financing intermediaries are now "ready and willing" to provide debt and equity financing for hotel acquisitions and refinancing, as well as funding for some new developments.

In the recent North America Hotel Investment Conference, competition was even noted among local and smaller bank lenders. With lenders getting more aggressive in the market, borrowers are getting better rates and terms. It was estimated that debt yields are now typically at the 10–10.5% range compared to 12–13% 12 months ago.

Beefed up balance sheet
Chesapeake Lodging Trust (NYSE: CHSP  ) , which owns 20 hotels having an aggregate of 5,932 rooms in eight states and the District of Columbia, is one hotel REIT reaping benefits from this favorable rate environment and positive overall market sentiment. This company, whose affiliated brands include Marriot and Hyatt, refinanced during its third quarter a $130 million loan with two new long-term loans at fixed interest rates of 3.5% and 4.5%.

Able to lock on these rates at the opportune time, the company has successfully pursued efforts to strengthen its balance sheet. And with its healthy financial position, Chesapeake Lodging acquired five new hotels this year including Hyatt Place New York Midtown South, Hyatt Fisherman's Wharf, and Hyatt Santa Barbara. These new additions further enlarged the company's footprint in the top U.S. lodging markets, which should also help endear this equity among prospective investors.

Value-added opportunities
Sunstone Hotel Investors (NYSE: SHO  )  is another lodging REIT which had a high-profile acquisition recently. This December, it acquired the 802-room Hyatt Regency San Francisco for $262.5 million. It was funded by the proceeds of an issuance of common stock in November. In July, the company acquired the 1,053-room Boston Park Plaza hotel and the 250-room Hilton St. Charles New Orleans in May.

With these additions, Sunstone's interests now total 29 hotels having an aggregate of 13,744 rooms. These establishments primarily cater to the upper upscale market segment and operate under well-recognized brands like Marriott, Hyatt, Hilton, Sheraton, and Fairmont.

Notably, the company reported that leasing of the 43,000 square feet of retail space at the Boston hotel is proceeding well, and it expects all retail tenants to be in place next year. This ability to capitalize on the value-added opportunities in acquisitions should be a plus for investors eyeing a hotel REIT addition in their stock portfolio.

Superior asset management
Chesapeake and Sunstone are in a position to achieve significant margin improvements from their recent acquisitions. Superior asset management expertise was evident in their recent robust results which compare with an estimated 6.1% contraction for the entire REIT sector for the third quarter.

During the period, Chesapeake's RevPAR for 19 comparable hotels rose 4.2% year over year to $172.76. Adjusted hotel EBITDA margin was 34.5%, an increase of 170 basis points from a year ago. This was better than the company's target margin expansion of about 150 basis points.

Comparable RevPAR grew by 7.6% to $152.24 in the third quarter for Sunstone whose same-store hotel EBITDA margin also rose by 220 basis points. This resulted in a 30.4% increase in adjusted FFO per diluted share to $0.30.

Checking in
Both Sunstone and Chesapeake Lodging look worthy of inclusion in investors' watch list, along with keeping tabs on Blackstone's Hilton IPO. The fundamentals of their market point toward sustained growth in the years ahead. Additionally, their hotel portfolios are mostly well-known brands that lean on the luxury segment where growth is expected to be stronger.

Lastly, these companies have established significant presence in the country's top lodging markets and have the financial capability to further expand their territories.


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