REPORT FROM THE U.S.—A strengthening market for initial public offerings is leaking into the hotel sector.
Included in the IPOs announced this year is the $100-million offering announced by Extended Stay America and Ashford Hospitality Trust’s planned spinoff of its higher performing hotels into a separate real estate investment trust called Ashford Prime.
It’s not just U.S.-based companies that have announced plans to go public. In December, FIBRA Hotelera Mexicana went public, becoming Mexico’s first hotel-focused REIT.
So far in 2013, a total of 110 IPOs had been filed as of 26 July, according to data compiled by Renaissance Capital. There were 128 IPOs filed in all of 2012 and 125 filed during 2011.
“There are pockets of strength everywhere,” Wes Golladay, an analyst at RBC Capital Markets, said of the IPO activity.
The hotel-related IPOs made this year are tied to attractive valuations and strong performance within the industry, analysts said.
“You’re getting mid-cycle cash flows and valuations at premiums to historic levels, which is typically primed for companies to go public,” said Ryan Meliker, managing director of REIT research and lodging research at MLV & Company.
David Loeb, senior hotel research analyst with Robert W. Baird & Company, agreed. “Valuation is pretty solid … It’s got a lot of people thinking about their exit.”
ESA’s owners—Blackstone Group LP, Centerbridge Partners and Paulson & Company—all either declined to comment or did not return calls for comment. However, during Blackstone’s second-quarter earnings call, executives discussed the IPO market.
“I think there is still more value to come in real estate, but there are some assets that are getting near their intrinsic value, and when it’s public stock, you’ve got to go public,” said Tony James, Blackstone’s president and COO.
More offerings to come
There are likely more IPO deals to come, analysts said.
“There are multiple entities out there that are considering an IPO as an attractive alternative to the sale of assets—guys who have larger portfolios and essentially want to do a bulk sale through IPO,” said Matt Comfort, executive VP with Jones Lang LaSalle’s hotel and hospitality division.
In the hotel sector, the one IPO the industry is awaiting is that of Hilton Worldwide. Steve Schwarzman, Blackstone’s chairman and CEO, alluded to the range of potential exit strategies for Hilton during Blackstone’s earnings call, saying “the avenues are open.”
“You kind of want to let your winners run a little bit because you’re accreting a lot of value for your shareholders every quarter, and we think Hilton’s a great company and we think that we’ll have plenty of exit options,” he said. “We’ll have (recapitalization) options, we’ll have (merger-and-acquisition) options, we’ll have IPO options, we’ll have all those kinds of things.”
IPO success
Stock price volatility is one challenge that needs to be overcome to have a successful IPO, sources said. Comfort said stock prices are relatively volatile in the hotel space
“That kind of kills every deal,” Golladay said of pricing.
Also, Comfort said there is greater scrutiny over the way owners are “pruning” assets to lift revenue per available room.
“However, what’s interesting is that a higher RevPAR portfolio doesn’t necessarily equate to more profitable hotels,” he said. “That can be a challenge. You can have tremendous cash flow in assets that aren’t getting valued appropriately.”
Sources said Wall Street will put a lot of value on the strength of the company’s management team and quality of its portfolio.
“That makes a deal go smoother,” Golladay said.
Comfort said the upside and downside of a prospective public company has to be considered.
“As assets reach maturity and stabilization, their upside is only around 5% to 10% but their downside can be between 30% and 50%,” Comfort said. “As some of these entities look at their portfolio and evaluate whether an IPO makes sense, they have to take that into account.”
Hotel News Now’s Ed Watkins and Jason Q. Freed contributed to this article.