• Reits calling the peak?

Host Hotels & Resorts was reported to be mooting the sale of a portfolio of non-core hotels, with a possible value of USD2bn.

The rumour came as Blackstone Group was expected to buy LaSalle Hotel Properties for close to USD5bn.

Host’s shares rose by 2.1% on the news of the possible sale, with the market also enlivened by speculation that Anbang Insurance was set to sell Strategic Hotels & Resorts, which it bought from Blackstone in 2016.

At Host’s first quarter call in May, the group said that it had no additional purchases planned this year. It was due to close on the sale of the W New York for USD190m and included one additional asset sale in its revised guidance for 2018.

Jim Risoleo, president & CEO, said: “We’re very comfortable with the portfolio that we have today.

We would certainly be opportunistic sellers if we could achieve pricing on an asset or group of assets that exceeds our hold value.”

In terms of acquisitions, Risoleo said: “We’re not seeing a large amount of individual or portfolio acquisition opportunities that fit our profile. We have the only investment-grade balance sheet in the lodging Reit space, which we are committed to maintain as [it] …provides flexibility to take advantage of value-creation opportunities throughout the cycle.”

At the end of March the Reit closed on the purchase of three properties from Hyatt Hotels Corporation for USD1bn. Host was also investing in its existing portfolio, spending approximately USD115m on capex in the first quarter, out of a plan to spend between USD475m to USD550m this year. The most included the completion at The Phoenician and the start of a comprehensive renovation at the San Francisco Marriott Marquis.

Host was not the only Reit to look to sell. Park Hotels & Resorts used its first-quarter results to announce a “second phase” of asset sales, having already cut its holdings outside the US.

The company said that, having sold 12 assets for USD379m, it was now looking to sell a further five to eight hotels, which were 33% to 35% below the portfolio’s average returns in addition to being capital intensive. The potential package accounted for USD30m to USD40m in Ebitda.

Following the sale of the Hilton Berlin, in which the group has a 40% stake, Park will have an ownership interest in just four hotels outside of the US, accounting for approximately 1% of  Ebitda, down from 14 hotels and 5% respectively, at the beginning of the year. The Hilton Berlin was expected to generate gross proceeds of around USD367m or 19.8x 2017 Ebitda multiple equating to a 4.5% cap rate before adjusting for CapEx requirements.

Tom Baltimore, Park’s chairman & CEO, told analysts: “We could use the opportunity to diversify both brand and by operator. And we certainly like the families of brands  – both Marriott and Hyatt come to mind among others. We want to grow and expand our relationships.

“We’re going to continue to improve our cost of equity that will allow us to go more aggressively on an offensive.”

At LaSalle Hotel Properties, the company has agreed to a bid from Blackstone Group, which recently exited its position in Hilton, beating competition from Pebblebrook and, it was reported, Starwood Capital and Northwood Investors.

In spite of the higher per share price that was ultimately offered by Pebblebrook, LaSalle’s board favoured the Blackstone all-cash offer, citing the failure of Pebblebrook’s proposal to address the significant price risks and uncertainties inherent in a stock transaction.

LaSalle chairman Stuart Scott said: “After careful consideration of multiple proposals received, the board determined that this transaction represents the most compelling opportunity for LaSalle’s shareholders, delivering a significant premium with immediate and certain cash value.”

Both Pebblebrook and LaSalle were founded by Jon Bortz, who said: “Our shareholders and LaSalle’s shareholders have long encouraged us to explore a combination to create a stronger industry leader.”

LaSalle owns four hotels in Manhattan: Gild Hall, Park Central New York, the Roger, and WestHouse. Pebblebrook responded by increasing its holding in LaSalle to 9%.

Blackstone’s success in this transactions came after its failure last year to acquire FelCor, with RLJ Lodging winning in the event.

 

HA Perspective [by Katherine Doggrell]: US hotel transactions rose with enthusiasm in the first half of this year, which LW Hospitality Advisors attributed to record low interest rates continuing to fuel a search for yield that was drawing capital into commercial real estate, particularly hotels, from other asset classes and global investor capital inflow to the US.

President & CEO Daniel Lesser said: “There has been a lack of new product for sale as vigorous debt markets offering stretch pricing and covenant light structures, provide existing sponsors refinancing opportunities and little motivation to transact a change of ownership. As interest rates increase, refinancing options become less attractive and current owners may seek to take advantage of current pricing to recycle assets.”

As the figures show, the pudding has recently been tucked into, proving all of the above. The Reits have been taking the chance shine up their holdings, favouring large, upmarket, urban properties. Calling the top of the market? Lesser thought not, describing it instead as the start of a new cycle.

It seems unlikely that Blackstone will stop with LaSalle and the Reit sector is likely to enjoy a taste of the consolidation that its operators have been feasting on in recent years.

 

Additional comment [by Andrew Sangster]: At every hotel investment conference the CEOs get asked where we are in the business cycle. Most resort to baseball analogies and start talking about which innings it is (this reflects the dominance of American business culture at senior levels of our corporates). Using this metaphor, does the Host deal indicate we are now in the ninth innings (or the afternoon of the fifth day in a Test Match of the far more sensible game of cricket)?

The answer is: definitely maybe. We are now 10 years into the current business cycle and some form of inflexion point is becoming overdue. It may be the case that because of the weird monetary conditions, global economies will do no more than pause for a while and then resume the (very) slow recovery.

There seems to be more macro upside risks than downside risks economically. But the opposite is true for politics where there are some clear areas of concern: Brexit, Trump trade wars, eurozone instability, the rise of populism and so on.

Looking at fundamentals, it seems highly unlikely that we will see sharp rises in interest rates. This means that the gap between property yields and bond yields will not close rapidly as a result of bond yields rising. And right now, there is not huge momentum towards further compression on property yields. In fact, everything looks a bit Goldilocks-like, not too hot or too cold.

It must be time to worry.

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