• Reits continue buying spree

Host Hotels & Resorts, Strategic Hotels and Resorts and LaSalle Hotel Properties have all reiterated their commitment to acquisitions, with the latter two Reits going to the market to bolster their war chests.

The moves came as Host and Strategic reported strong trading figures, with revpar increases of and 5.4% and 14.5% respectively and, with fundamentals looking set to rise further, the first comments suggesting that the buyers may become sellers.

Host ended the quarter with over $150m in cash and around $440m of capacity on its credit facility. During the quarter, it raised approximately $100m under its continuous equity offering programme and used its earnings call to announce its acquisition of a 75% stake in the 364-room Hilton Melbourne South Wharf Hotel, making a $49m equity investment.

The group has also signed an agreement with its partners in its existing European venture to form a second fund with a total equity commitment of Eu450m. Host will own a third interest in the second fund and will serve as its general partner and asset manager. Assuming around 55% leverage, the new fund will be able to acquire approximately Eu1bn-worth of hotels.

Ed Walter, president and CEO, said: "As part of the formation of the new venture, Host is contributing the Le Meridien Piccadilly for a transfer price of £64m, which reflects our costs related to the acquisition of the hotel, including the purchase price transaction costs and other costs related to the acquisition."

The results announcement came prior to news from Host that it was to raise around $415m through a $420m senior note offering. The Reit will use the money to redeem $250m of outstanding notes due in 2013 and repay $50m in borrowings under its credit facility and for general corporate purposes, thought likely to be further acquisitions.

Walter added that, towards the end of the year, Host would review its portfolio. He said: "We anticipate that activity will begin to expand beyond just the major market, and we are reviewing our portfolio for likely sale candidates. We expect that our disposition activity will pick up in the second half of 2011 and become even more active in '12 and '13."

LaSalle Hotel Properties announced that it was fully-committed to buying, after raising $223m at the end of last month with an offering of seven million shares, which it said it would use to pay down debt and acquire further properties to add to its 35-strong estate. The group is reported to be negotiating a deal to buy a hotel worth over $400m in the US. "We have identified and are in various stages of either reviewing, bidding on and/or negotiating several potential hotel acquisition opportunities," LaSalle said.

At Strategic, the group is restructuring its balance sheet in addition to making acquisitions in the US, while exiting Europe. The Reit has cut its net debt to Ebitda ratio from nearly 14 times at the beginning of 2010 to around seven times.

In an earnings call Laurence Geller, CEO, said that, looking at the sale of its London hotel, the Marriott Grosvenor Square, "there are selected conversations going on with incredibly well qualified and appropriate buyers. We are very disciplined in our pricing of this. We have a clear understanding of what value is. We are not rushing to sell this. We will stick by what we said completely. We have a 2012 number in mind and when we get that, we will sell the property".

The group has $400m of liquidity available but, although Geller has previously spoken of the Reit growing its way out of debt, he remained cautious, commenting: "We don't need to be on the buying bench … we've been through that in the past and we have suffered with leverage. We've learnt our lessons very well and ours is a very disciplined and methodical process. "Unless the opportunity is exceptional, I do not have buying envy."

When asked if the group would consider selling any assets outside the current strategy to move out of Europe, Diane Morefield, CFO, said it would be hard to find an opportunity for the cash received that could match the growth potential of assets already in the Strategic portfolio.

Geller added: "If we get a number that we think is really off the charts…we'll take the dollar and run."

 

HA Perspective: The transformation at Strategic has been truly remarkable. At the depths of the recession, most commentators thought it would go bankrupt. Perhaps in a normal down cycle, it would have done.

But this has not been a normal recession and nor is it a normal recovery. In many ways, a long, drawn out recovery suits Reits. They found it tough to compete with private equity during the previous boom as they are restricted by how much leverage they can put into a transaction. Probably just as well for Strategic as it would not otherwise still be here.

In a world of low leverage, private equity is disadvantaged against the lower cost of equity capital that Reits have access to.

The danger ahead for Reits, however, is being carried away by revpar growth expectations. Wall Street has already pencilled in some ambitious numbers which would make sense in a normal recovery. It looks far less sensible if we have the bumpy road that seems most probable right now.

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