Portfolio sales the new norm as investors guzzle down midscale

Midscale portfolio buys are becoming de rigueur as investment groups, particularly REITs, seek out the high returns the sector offers, mixed with lower operating costs.

American Realty Capital Hospitality Trust, for one, is slurping up portfolios like a sweet-toothed child devours chocolate: in bulk. Today, the REIT announced it was picking up a 13-hotel portfolio for $300 million from Noble Investment Group. The portfolio consists of 12 select-service and extended-stay hotels and one full-service hotel totaling 1,913 rooms in nine states, including Boston; Atlanta; Monterey, Calif.; Columbus, Ohio; Fort Worth, Texas; Chicago; Minneapolis; Birmingham, Ala.; and Northern and Central New Jersey.

With the acquisition, ARC's portfolio now stands at 166 hotels totaling 20,193 rooms across 34 states, the bulk in the select-service category.

"We believe these assets, when acquired, will be in the upper echelon of our portfolio and we expect these hotels to lead our RevPAR growth across the company. We are excited that, assuming all recently announced transactions are completed, our aggregate portfolio will represent a competitive unlevered yield in the mid-7-percent range based on trailing 12 month net operating income as of May 2015 at an attractive basis, which we believe is well below replacement cost, said Jonathan Mehlman, CEO of ARC Hospitality.

Mehlman has been busy of late. Today's buy complements two other portfolio buys in the past two weeks for the REIT. On June 4, ARC announced it had agreed to acquire a portfolio of five midscale hotels totaling 565 rooms for $92.5 million from Wheelock Real Estate Fund, The hotels are in the midscale segment.

Then, only days later, ARC agreed to acquire a portfolio of 26 hotels for $351.4 millionfrom fellow REIT Summit Hotel Properties. The portfolio consists of 25 select-service and extended-stay hotels and one full-service hotel, totaling 2,793 rooms in 11 states.

ARC isn't the only REIT after premium-branded, select-service hotels. Two days ago, American Hotel Income Properties has agreed to acquire a portfolio of three Marriott-branded, select-service hotels located in Ocala, Fla., for an aggregate purchase price of $30.8 million. "The availability of long-term, low-cost, fixed-rate, interest-only CMBS debt highlights a key aspect of our conservative approach to leverage, aimed at providing highly stable returns and delivering value to unitholders," said Rob O'Neill, AHIP's CEO.

In May, Ashford Hospitality signed a deal to acquire nine hotels for $224 million, which includes eight select-service hotels and a one full-service property for a total of 1,251 rooms.

Seems everyone today is bullish on midscale—even Blackstone Group, known more for its big-ticket acquisitions. "Outside a handful of cities, running full-service hotels in the traditional way is increasingly difficult," Jonathan Gray, Blackstone's head of global real estate, recently said. "The move is toward select service in large way," or what he called full-service light, like Hilton's DoubleTree brand. "Full service is not growing the same way. The core Hilton brand has grown 25 percent; Hilton Garden Inn much more like 225 percent. The major change is the move toward less service: a good clean room, not a lot of interaction—a push toward select service. This is the megatrend."