Capricious Wall Street forces REITs’ hand


Lodging real estate investment trusts thrive and wither on the whims of Wall Street. Their stock prices have taken it on the chin of late, down anywhere from 17 percent to 40 percent, over the past 52 weeks, depending on the stock, compared to an S&P 500 52-week change of -5.45 percent as of early March. Tumbling share prices have put asset managers on notice, informing them that their stocks are trading below the value of their assets, a clear indication that dispositions and buying back shares is the shrewd tack.

According to Michael Bellisario, who covers REITs as a VP at Robert W. Baird & Co., this approach is becoming more common amongst the REITs. “Right now, there is a fairly large disconnect between where assets are trading or would trade on the private side versus where the stocks are trading on the public side, in terms of the implied valuations,” he said. “Management teams’ hands are tied in terms of issuing capital to grow, so they’re in asset-management mode and thinking about dispositions.”

Some REITs, RLJ Lodging Trust, Hersha Hospitality Trust, Host Hotels & Resorts, have already embarked on the buyback strategy; others, DiamondRock Hospitality, LaSalle Hotel Properties, Pebblebrook Hotel Trust, to name three, haven’t pulled the trigger yet. “It’s really, ‘We are going to try and sell some assets in 2016, mostly non-core assets, and match fund those proceeds with buybacks because we want to manage our leverage, given that we are in year seven of the upcycle, and growth has slowed a bit,” Bellisario said.

Wall Street tends to run for the hills when it sees swoons in revenue per available room, and REITs are left holding the bag. “They have been taking a beating,” said Daniel Marre, a partner at Chicago law firm Perkins Coie, where his practice focuses on real estate transactions and development, with an emphasis on hospitality.
Unlike REITs that own shopping centers or office buildings, where a set of leases provide a steady stream of income, hotel rooms are priced every night—perishable items. “When the economy hiccups, hotel companies suffer,” Marre said.

According to a recent Credit Suisse note, the financial services company expects RevPAR to sour, a drag on REIT share prices. It wrote: “We are cutting lodging REIT price targets by 20 percent as RevPAR forecasts are conservatively cut nearly in half to 3 percent.” Notice that it doesn’t go so far as to believe there will be RevPAR retraction. “RevPAR growth is unlikely to turn negative in 2016, that is unless you believe we are facing a U.S. recession,” which is not what Credit Suisse is calling for.

This is not 2007, according to Bellisario. “There’s a big difference,” he said, between now and then. “In 2006-2007, you had a ton of M&A, the debt markets were frothy and companies were getting taken out, like the Hilton takeover. Fundamentals had started to turn negative, then stocks ran and hit a wall. Capital markets tightened.”

That was then; today is vastly different, though there has been a pullback in stock prices despite overall positive fundamentals. “In 2015, if you wanted to buy a hotel, debt was available, and there was mezzanine debt so you could complete the capital stack. But deals on the margins that got done last year might not this year,” Marre said.

“Since late January of last year,” Bellisario said, “fundamentals were really strong, and there was good RevPAR growth, and the stock market hit highs in May, June and July before it stared to roll over, which was led by the debt markets. The underlying fundamentals are still positive, there is not any negative 10-percent RevPAR growth, but stocks almost feel like they are trading there.”

Which is why some REITs have decided to proceed on a path of asset divestures paired with stock buybacks. In early February, Hersha Hospitality Trust agreed to a joint venture with China’s Cindat Capital Management Limited on seven of Hersha’s limited-service hotels in Manhattan for $571.4 million. The JV is structured such that Cindat is the preferred partner holding a 70-percent ownership stake, with Hersha retaining the remaining equity interest. The hotels included the 210-room Holiday Inn Express Times Square (pictured above) and the 188-room Candlewood Suites Times Square.

Likewise, later in the month, Summit Hotel Properties completed the sale of six hotels, in Colorado and Washington, totaling 707 guestrooms to American Realty Capital Hospitality Trust for $108.3 million. “This sale represents another success for us in executing on our capital recycling strategy and is particularly significant given the current volatile market conditions,” said Dan Hansen, the company’s president and CEO.

In 2016, lodging REITs will be net sellers, agree both Bellisario and Marre, meaning there has to be another willing group of buyers. In this environment, expectations are that private-equity shops will answer the bell. “The REITs aren’t buying, sovereign wealth is still buying, but not at [the same clip]. Who does that leave you with? Private equity,” Bellisario said. And, in negotiations, as Bellisario put it, it’s PE that has the upper hand. “They have more leverage.” Added Marre, “There is a gap between sellers’ expectations and what buyers are looking for.”

On top of a Wall Street tizzy and enervated stock prices, like hotel brands, REITs, according to some, are also feeling the sting from Airbnb. “The impact of Airbnb on the hotel industry is not fully understood, but the impact is real and growing,” said Rob Goldstein, Sr. analyst at CenterSquare, the real asset investment arm of BNY Mellon with approximately $8 billion in assets under management. “Management has generally noted that they’ve seen the most direct impact during compression nights, where they are finding that they are no longer able to achieve as much pricing power as occupancy approaches full levels. The impact of Airbnb is largest in major cities, such as New York and San Francisco, markets where the hotel REITs tend to be concentrated, causing hotel REITs to be more negatively impacted than the broader industry.”

Bellisario referred to Airbnb as part of his “big short” thesis. “The thought process from investors was, ‘I don’t want to own hotels because Airbnb is going to crush them,’” he said.

Enter Hilton Worldwide, which, during its fourth-quarter earnings call, called attention to its plan to spin off some 70 hotels into a REIT, effectively ditching the real estate business. As Chris Nassetta, Hilton CEO put it, REIT status “[enables] it to operate in a structure that is  competitive with its peers to facilitate access to capital markets and to be more tax efficient.”

When it debuts, the bulk of the assets within the REIT will be U.S. based, better appealing to the REIT investor base, said Nassetta, who formerly ran Host Hotels & Resorts.

The move by Hilton to spin off assets into a REIT, while at the same time decoupling its timeshare business, makes Hilton’s structure more like Marriott International—something Wall Street will embrace. “Twelve months from now, when the deals are done, Hilton should be a cleaner, more interesting story,” Bellisario said. “That deserves and should get a premium multiple relative to where the combined company is trading today.”