ANAPOLIS, Maryland—Once the belle of the ball, real-estate investment trusts today are on the outside looking in when it comes to hotel deals.
Big declines in the capital markets have ripped away the cost-of-capital advantage REITs held for much of 2011. As such, the top executives at several REITs have said their respective companies are momentarily, at least, stepping away from hotel acquisitions to focus on core operations.
One of these executives, Chesapeake Lodging Trust’s CFO Doug Vicari, recently took time to speak with the Hotel Investment Barometer about the company’s acquisition strategy and the state of the hotel industry in general.
Q: How will the decline in stock price affect your ability to acquire?
A: Cost of capital, that’s been a major advantage for us. That’s going to put a lot of pressure on us. … We still have some advantages; we have our corporate credit facility with (available capital.) We have a little bit of power in transactions.
Q: That said, what are you looking for in the deals you make? How are you evaluating deals?
A: As a lodging REIT, where we’re trading at today is approximately 11 times next year’s (earnings before interest, taxes, depreciation and amortization.) That’s where it will make the most sense for us to transact. Sellers are not there yet. … We’re going to buy deals that make the most sense …
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Q: Do you think you’ll be net buyers or sellers this year?
A: I would characterize us as long-term holders. I would characterize us in ’11 as (overall) being aggressive buyers. … Now, we will have to be more selective. That’s what the capital markets and investors are telling us.
Q: Chesapeake recently announced it is buying the 613-room Denver Marriott City Center for US$119 million. How was this deal financed?
A: We used cash on our balance sheet and capital available under our credit facility. We drew down (US)$110 million to (US)$120 million; the total facility is (US)$150 million with a (US)$50-million accordion. We have (US)$30 million to (US)$40 million remaining under the facility.
Q: What rate are you getting on the credit facility?
A: The spread is 575 basis points. We’re in the process of revising the credit facility. We hope to have something done (soon.)
Q: Getting back to the Denver deal, what about the hotel and the Denver market do you find attractive?
A: This is a fully renovated hotel in a resilient market. There are multiple (demand drivers). … The bottom line is our investment strategy, our focus is on top markets. Denver is a market we have targeted since the inception of our company. We like the submarket; the hotel is downtown in the heart of the central business district.