Though debt markets improved, uncertainty holds back hotel buyers

The hotel deals environment has slowly improved over the course of the year, but there are still factors holding back both buyers and sellers.

During their recent third-quarter earnings calls, hotel real estate investment trust execs spoke about their respective deals and the overall transaction environment as well as their expectations for next year.

"So, on many occasions, both in meetings and on earnings calls, I've said that we will be opportunistic with our capital allocation when it comes to dispositions and acquisitions. And the two deals that we've already announced and provided metrics on this year, I think, are really strong indications of our ability to execute. To sell the Washington Marriott Metro Center at 12.7 times trailing 12 months [earnings before interest, taxes, depreciation and amortization], a 6.5% cap rate [on an] urban hotel is, I think, a solid read through in many ways with respect to what sort of value is locked in this company. I mean that's not one of our best assets. And we're trading at 9.4 times plus EBITDA plus or minus, and we're able to execute on that deal at 12.7 times. Come on, guys, where's the multiple? Let's go.

"And the same with the disposition of the Westin Cincinnati, as well as when we're in a position to talk about it, I think you'll be pleased with the metrics on the St. Regis in Houston as well. We're not in a position to talk about that today. So we continue to test the market. We don't have to sell anything. I'll make that perfectly clear."

"So I think just as a general backdrop, the transaction market has kind of been gyrating between risk-on and risk-off all year. The one constant throughout the year, however, has been the debt markets. The debt markets have been improving. They're getting more competitive. There's more availability, there's better pricing. And in some instances, it's actually becoming an alternative to a sale for many sellers from that perspective. Because I think on the equity side, again, it's kind of more risk-on, risk-off.

"I think ... [the] government shutdown would be kind of flat to negative operating performance that you see in the weekly and monthly stars. I think STAR reports, we're just kind of at a pause right now until there's a little more macro clarity. But what I would say to you is, over the course of the last 60, 90 days, we've seen, I think, a real pent-up demand by investors. You've seen some larger transactions take place. You've seen a return of some of the bigger private equity names. You've seen some of the owner-operators.

"So I think there — my sense here is that, there's just — they're all just waiting for that catalyst. And I think if you listen to what Jon [Bortz] had indicated in our call about 2026, I think once things turn and there's better visibility, I think there's going to be a lot of pent-up demand for transactions moving forward. I think the risk-off situation right now is nobody really wants negative leverage and they're focused on smaller deals and those will continue. But until there's some clarity, I think we're going to be a little bit of a pause here."

"Really our top 20 assets account for 90% of the value of the company, and if you really focus the core metrics of those 20 assets, it's really as strong as any portfolio in the sector. We remain laser-focused on selling [15 non-core assets] and recycling that capital. I think it's important to remind listeners, we have sold or disposed now of 47 assets for north of $3 billion since the spin. So we have [sold] in the worst of times, even during the pandemic. Keep in mind, we had six assets in San Francisco. We now have one asset, and we sold two of those in the worst of times during the pandemic. It is challenging in this environment. It's not an issue of of debt. There's plenty of debt capital. There's plenty of equity capital. I think if you can get just better visibility and less volatility that certainly will help."

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"There's plenty of liquidity out there, and I think the buyer pool is mixed. I mean, you've got from owner-operators, certainly family offices, you've got small private equity to larger private equity. You've really got the normal menu. And as I think about assets, our team has had great success in really finding that buyer for a particular opportunity. And we continue to come through and have discussions.

"I think the hesitation with some buyers is debt markets certainly have improved. But if you believe that rates are going to continue to come down, you might be a little more hesitant on that front. And then certainly, just better visibility on the demand front. And probably, candidly, just clarity on some of the geopolitical and trade and inflation. I mean, all the things that all of us are working through right now. Uncertainty really is the enemy of decision-making.

"So I do think that there are some buyers out there that are being a little more hesitant. And in some cases, we certainly understand that. From my own experience, periods of dislocation really create the best opportunities to be buyers, particularly if you've got an intermediate and longer-term hold period. Obviously, we continue to work hard. Again, we've got the track record. And I just — I can't emphasize that enough and how we've been able to reshape this portfolio since the spin here, and now we're 47 assets that we've sold or disposed of and two more in the queue and several more at various stages, whether [letter of intent] or the marketing process."

"I would say that, in general, the transaction environment continues to be overshadowed by the uncertainty, and the sentiment around transactions is a little bit volatile. So the market is not necessarily fully functioning because there's a lack of conviction in terms of underwriting and [property improvement plan] cost given the tariff situation. But the debt market is open, and so that will help volume increase. Deals are taking a little bit longer, and most of the deals that are getting done are deals that are better suited for owner-operators. And so overall, we're constructive, and as things sort of settle down, you should see us be more active. And that would be active on transactions that we think can actually get done."

"We have always been disciplined in our approach to capital allocation, balancing both near- and long-term allocation decisions to capitalize on existing opportunities while securing the long-term relevance, stability and performance of our platform. Through all phases of the economic cycle, we seek transactions that enhance the quality and competitiveness of our existing portfolio, drive earnings per share, create value for our shareholders and ensure we are well-positioned for future outperformance.

"In the current environment, we have strategically executed select dispositions and forward commitments on new development to manage our near-term CapEx needs and to ensure we are exposed to markets with strong growth profiles. At the same time, we have been able to take advantage of near-term opportunities that exist because of the disconnect in public and private market valuations, using proceeds from dispositions and cash from operations to fund share repurchases.

"We will continue to adjust tactical capital allocation strategy to account for changing market conditions and to act on opportunities at optimal times in the cycle to maximize total returns for our shareholders.

"Since the beginning of this year, we have completed the sale of three hotels for a total combined sales price of $37 million, including our full-service Houston Marriott, which we sold during the third quarter for $16 million. We currently have four hotels under contract for sale for a total combined sales price of approximately $36 million, including the previously announced pending sale of our Hampton and Homewood Suites in Clovis, California, as well as the contracted sale of our Hampton and Homewood Suites in Cedar Rapids, Iowa. We anticipate closing on the sale of these hotels during the fourth quarter of this year.

"While the overall transaction market continues to be challenging, we have successfully executed on select asset sales and ways to continue to optimize our portfolio concentration, manage CapEx and free capital, which we have been able to accretively redeploy at a meaningful spread. Pricing for the individual hotels varies."

"With respect to the transaction environment, we continue to underwrite acquisition opportunities, mostly group-oriented hotels, urban select service hotels and resorts. While we had our eye on a few potential candidates this past quarter, we did not feel the ultimate pricing was defendable after considering realistic CapEx needs versus where our shares are trading. In general, we see upper-upscale resorts with asking cap rates in the 7% to 9% range, but inclusive of near-term CapEx needs, the all-in cap rate was closer to 5% to 7%. Similarly, the ask for luxury hotels remains in the 5% to 7% range or about 4% to 6% all in. At that pricing, our strong preference is to reinvest in the luxury and upper-upscale hotels DiamondRock already owns through share repurchases.

"On the disposition side, we continue to have active conversations around the disposition of a handful of our assets, and we expect to remain active in the market in the coming year. We have nothing to share at this time, but we believe we will see elevated capital recycling in the next 12 to 18 months compared to our history."

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"I think there is an appetite. I think for a while there earlier this year, it probably had a little bit of a pause. I think it's coming back because I think there's an expectation that RevPAR growth is going to be stronger next year. Interest rates are coming lower. So, it feels like probably a better environment where they could sort of strike and get the growth that they need to sort of drive the returns that private equity would need if you were looking for those types of situations.

"The only thing I would just caution, and I say this to everybody, is that ultimately, a lot of that math works where you can drive financing on assets. And for financing, you need cash flow. Effectively, it's very hard for people to kind of underwrite assets in markets where cash flow is not recovered. It's one of the struggles even we have when we look at some of the markets.

"For example, like on the West Coast, where you can have RevPAR recovering but assets still losing money. That's very hard from a pricing standpoint. And I would say that applies to public companies, too."

"We always have viewed that there's kind of a bottom 10% of the portfolio. And I think when we think philosophically about capital allocation, what we want to make sure we do is we always have a portfolio, a real estate portfolio that is — that's consistent with where guest expectations and what guests — where they want to stay.

“And so, we feel like we constantly have to evolve the portfolio. That's what we've done historically. That's what you can expect from us going forward. And again, I think without quantifying it or identifying specific assets, you should always expect us to be an active recycler of capital.

“One of the things that we have prioritized is identifying slower growth assets that have significant capital needs. And again, if you look at the dozen assets we've sold over the last couple of years, you'll see lower cap rate deals and assets that needed pretty significant capital expenditures over the next several years.

“And so again, we've been very pleased with that execution. It is still a very soft transaction market generally.

“As everyone is well aware, there have not been a lot of deals that have gotten done. A lot of that, I think, has been driven by some of the uncertainty on the fundamental side of the business and the lack of RevPAR growth that we've seen over the course of the second and third quarters. We do expect that to improve as we get into the later parts of this year and into next year. But again, our efforts have really been very focused on finding the right buyer in the right market, and I think we've been successful doing that."

"I mean it seems like kind of contrasting it to where things were maybe six to 12 months ago. It does seem like there are some more hotel transactions coming to — potential hotel transactions coming to market. It does seem like there's a little bit more volume that the broker community is seeing. And as it relates to us, I mean, obviously, we're still looking at the various ways how we can allocate capital, and given our cost of capital at this point, especially with how attractive our own portfolio looks and share buybacks continue to look probably more attractive than acquisitions at this point, I wouldn't expect us to be really active on the acquisition side here in the very near future.

"I think a lot of that's going to have to do with what happens with pricing in the private markets if there is maybe a little bit more now softness, if you will, if prices are coming down a little bit, and they come a little bit closer to what we view to be something that is a good use of capital for us. But I don't foresee that here really in the very short term.

"As it relates to dispositions, we'll continue to look at what we've always done. This doesn't make sense to continue to fine-tune the portfolio slightly, especially when it comes to assets that may need some additional capital where we don't feel the appropriate [return on investment] might be — we might be able to get the right appropriate ROI on those projects.

"So we'll continue to evaluate that. I wouldn't expect any wholesale changes, but we certainly could see another disposition or two over the next 12, 18 months as we continue to fine-tune and review our portfolio."

“We continue to execute our strategy and are working to recycle more assets. The transaction market remains depressed, and equity capital, especially for larger deals, remains tight. We regularly meet with financial and other advisors to discuss market conditions and potential alternatives available to the company.

“We have a great portfolio with meaningful embedded growth, and we have a well-informed and realistic view of the market and the value of our portfolio today and what we expect it to be in the future. At the same time, we also understand the lack of depth and liquidity in the current transaction environment. We are also well aware that market conditions can change quickly, so we will remain nimble and ready to pursue any alternative that will create value for our shareholders.”

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