Are hotel REITs headed for consolidation?

An era of consolidation within the lodging real estate investment trusts could be imminent. That's according to, citing Fitch Ratings, which contends that the REITs could be in for a wave of consolidation.

Specifically, the ratings agency cites American Realty Capital Hospitality Trust’s agreement earliest this month to acquire the former Equity Inns portfolio from affiliates of Goldman Sachs for $1.925 billion, making ARCHT it not only one of the largest hospitality REITs in North America, but also a major player in the select-service space and making other REITs in that space possible and logical takeover targets.

"Consolidation could create another industry giant to rival Host Hotels & Resorts, albeit with a differentiated portfolio focus," according to Fitch. At a minimum, though, the announced Equity Inns deal provides further evidence of "the widespread capital availability for hotels."

Fitch’s report notes that American Realty Capital, an affiliate of ARCHT's external advisor, has sponsored a number of private REITs "with a history of consolidation in their respective sectors, most notably American Realty Capital Properties."

Notable among these are a triple-net portfolio bought from GE Capital, the purchase of two other ARC-sponsored private REITs (American Realty Capital Trusts III and IV) and the acquisitions of Cole Real Estate Investments Inc. and CapLease Inc.

Although ARCHT has targeted both limited- and full-service hotels, it has called the limited-service segment as "especially attractive." In that sector, other REITs with sizable ownership include RLJ Lodging Trust, Ashford Hospitality Trust, Hersha Hospitality Trust, Chatham Lodging Trust and Hospitality Properties Trust.

As ARCHT stakes out potential acquisitions, Fitch reported that investors have questioned the need for so many lodging REITs withsimilar strategies, suggesting that the market would support consolidation. "Moreover, Fitch believes that REIT equity investors would welcome another investment option with a market capitalization and liquidity profile similar to Host Hotels & Resorts."

Up until now, corporate M&A within the lodging REIT space has been rare, wrote. It said that Fitch attributes this to "limited differentiation within lodging REIT trading multiples and, to a lesser extent, a lack of willing sellers."

Much of the lodging M&A activity in the previous real estate cycle took the form of private equity firms taking hotel companies private, such as Blackstone Group’s 2007 acquisition of Hilton Worldwide.


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