How the REIT sell-off is a huge win for international buyers

(Viceroy Miami)

We've been hearing it for months now: Real estate investment trusts are taking it on the chin. You can read about their fall from grace here, here, here, here and, for good measure, here.

Research firms, such as Ladenburg, as far back as January of this year, heralded the end of this lodging cycle, imploring investors to sell their REIT shares. In fact, hotel REITs were, according to Market Realist, citing BATS Exchange, the worst performers among the 10 sub-groups of REITs as of September 2015. Investors began dumping lodging REITs after concerns of softening growth in European countries, and, more recently, a slowdown in China.

This entire sell-off has come despite continued healthy industry performance numbers, which include record demand, ADR and occupancy.

The Concern

One of the problems with hotel REITs is their volatility. Unlike other stocks, they react quickly to the shifts in the economy. Unlike other assets, that have fixed leases or other long-term arrangements, hotels are able to raise or lower rates on a whim, so when the economy is healthy and tourism is robust, hotels perform well. Not so when the broader economy and travel founder.

As REIT stock prices have tumbled, REITs have focused their concentration on selling assets and buying back shares. There's reason to sell now. According to the Moody's/RCA Commercial Property Price Indices(CPPI), overall property prices are now 17.3-percent higher than they were during the last market peak in 2007, and 12.7-percent higher than they were a year ago.

As Orest Mandzy of Commercial Real Estate Direct writes: "This might be the equity markets trying to tell us that the six-year climb in property values is nearing its end and values will soon decline."

The Buyers

That REITs are looking to sell properties is a windfall for buyers, who are looking to buy. Consider Pebblebrook Hotel Trust. It's reportedly marketing a portfolio of six Manhattan hotels (1,733 rooms), which it bought a 49-percent stake in, in 2011, for some $910 million. The hotels are all under the Denihan Hospitality umbrella.

Meanwhile, Pebblebrook made news today off the reported $64-million-dollar sale of The Viceroy Miami, in the Brickell neighborhood, to Al Rayyan Tourism Investment Company, the international hotel investment and hospitality subsidiary of Al Faisal Holding Company, one of Qatar’s largest private industry groups. The hotel is also reportedly now been rebranded the W Miami, part of Starwood Hotels & Resorts. (Another W, the W South Beach, already exists.)

ARTIC’s other South Florida property is the St. Regis Bal Harbour Resort. The company also owns Radisson Blu in Chicago, the St. Regis Washington D.C. and the Manhattan at Times Square W Hotel in New York. Overall, ARTIC’s portfolio includes 24 hotels and projects in the Middle East, Africa, Europe, and North America.

In addition to the Viceroy sale, Pebblebrook also sold The Redbury Hotel in Los Angeles and a plot of land near the Revere Hotel Boston Common.

Other REITs are following a similar path to that of Pebblebrook. LaSalle Hotel Properties today announced the sale of the Indianapolis Marriott Downtown to affiliates of White Lodging Services Corporation and REI Investments for $165 million. The company acquired the hotel in February 2004 for $106 million.

DiamondRock Hospitality, for its part recently indicated it would be selling certain non-core properties and using proceeds to fund its purchase of up to $150 million of its common shares.

As REITs continue to sell properties, buyers, both domestic and foreign, will step in to fill the void. The foreign buyers, from China, from the Middle East, continue to show heavy interest in hotel real estate, particularly high-end properties. With more coming to market, this appetite will not abate.