REPORT FROM THE U.S.—Real-estate investment trusts have dominated the hotel deal landscape since transactions came back to life this year. But uncertainty in the capital markets could soon level the playing field for other groups to jump into the fray.
For much of 2011, REITs relied on their low cost of capital to acquire assets, essentially shutting out private buyers. But with the market downturn that started in early August, that advantage has disappeared as public REITs have seen their capital base erode.
“With our stock price at (US)$5.50, we’re not looking at any deals right now,” Kenneth Cruse, CEO of Sunstone Hotel Investors, said during a recent webcast of a Bank of America Merrill Lynch panel involving REIT CEOs. “Clearly, deal flow has dried up over the last several months.”
During August, the Baird/STR Hotel Stock Index decreased 14.9%, closing Friday at 1804.04. During that same period, the Dow Jones Industrial Average is down 5.1% and the Nasdaq is down 4.5%.
Chesapeake Lodging Trust has been among the active public REITs this year. The company so far this year has announced a half dozen deals totaling US$466.55 million.
The company’s stock price Friday closed at US$12.28 per share, down 25.8% since 1 August when the stock was trading at US$16.54 per share.
Chesapeake going forward will more closely scrutinize deals that come its way, so as not to overreach, Vicari said.
“That has been a major advantage for us,” Chesapeake CFO Doug Vicari said, regarding the REIT’s cost of capital. “That’s going to put a lot of pressure on us.”
But it could be opening doors for other players.
Hotel Assets Ad Will Appear Here
Private companies circling
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Michael Medzigian |
Sources contacted for this story said private buyers now have the opportunity to elbow their way in to the transactions field and make a play for the many assets that remain for sale.
Michael Medzigian, chairman and managing partner of Watermark Capital Partners which created non-traded REIT Carey Water along with W.P. Carey, said public REITs likely are challenged by declining stock prices.
“Their cost of capital has changed dramatically over the last several weeks,” he said.
Medzigian declined to disclose specific details of his own investment firm’s buying plans, though he is optimistic about the company’s prospects. The REIT’s portfolio includes two full-service properties in California.
“From our perspective as buyers, we like this market,” he said. “We’re opportunistic. We’re not trying to build a homogenous portfolio.”