REITs continue to ride stock roller coaster

NATIONAL REPORT—Eighteen months ago, lodging real estate investment trusts were a dominant force in the U.S. transactions market. The rebound in demand was just beginning, but asset values hadn’t yet stabilized. So the REITs—with cash in hand—saw an opportunity to grab a number of trophy properties in strong locations in gateway cities at advantageous prices.

By late summer of 2011, however, the market had shifted. Stock prices on Wall Street were fluctuating widely, causing the share price of many REITs to decline. Other buyers, including private equity funds and institutional investors, saw an opportunity to enter the market in a significant way.

With the start of 2012 and continuing into May, stock prices have mostly stabilized and the REITs have reemerged as a force to be reckoned with once again. This time around, however, they’re proceeding in a much more measured and deliberate way than was the case a year-and-a-half ago.

In hindsight, the REITs paid high prices in early-2011, noted Daniel Lesser, president & CEO of LW Hospitality Advisors, LLC, but “having left the market, are now slowly coming back in.”

Added Lesser: “The REITs are hardly going away. But there’s also a significant amount of private equity money available for deals.”

Among the most active REITs this year have been LaSalle Hotel Properties and Hersha Hospitality Trust. LaSalle within the first few days of 2012 closed on its acquisition of the 934-room Park Central Hotel in New York for $396.2 million from Highgate Holdings, LLC. The hotel’s location, across the street from Carnegie Hall and near Rockefeller Center, puts it right in the middle of various business and leisure travel demand generators. Highgate will continue to manage the asset.

Two months later, LaSalle came to the market again, acquiring the 335-room Hotel Palomar in Washington, DC, for $143.8 million from a Kimpton Hotels & Restaurants-sponsored discretionary equity fund. The hotel is well situated near Dupont Circle and Embassy Row. Kimpton is staying on in the role of manager. LaSalle president & CEO Michael Barnello commented on the strength of the Washington, DC, market. In fact, both New York and Washington, DC, have outperformed the nation as a whole in occupancy, ADR, and RevPAR growth.

In their recent purchases generally, the REITs have shown a strong preference for gateway cities like New York and Washington, DC, preferably on the East and West Coast. In the case of Hersha, its recent purchases have been in its headquarters city of Philadelphia and Boston. In fact, Hersha has identified six such markets it considers core to its growth strategy: New York, Washington, DC, Los Angeles, and Miami in addition to Philadelphia and Boston. “Their barriers to entry are among the highest in the country,” CEO Jay Shah noted.

In March, Hersha acquired the 111-room Rittenhouse Hotel in Philadelphia for $23.9 million from the Rittenhouse Development Corp. investment group. Located on historic Rittenhouse Square, the hotel is walking distance to the city’s corporate office district, major retail corridor, and convention center.

Then last month, the REIT agreed to acquire the 80-room Bulfinch Hotel in Boston for $18.2 million from an affiliate of the locally based Cresset Group. The Bulfinch is Hersha’s eighth asset in the Boston market, it’s the first in the city’s central business district. The deal is expected to close later this month.

A third REIT, FelCor Lodging Trust, has been in the midst of repositioning its portfolio, having identified 39 properties it considers to be non-strategic. FelCor, in fact, agreed to sell six of these assets in April for $103 million to a buyer it didn’t identify. As part of its repositioning, however, FelCor is still looking to build distribution in those high-barrier-to-entry markets like New York.

Consequently, two months before the six-property sale, FelCor acquired the former Knickerbocker Hotel at the prime intersection of Seventh Ave. & 42nd St., in Times Square for $115 million from Highgate Holdings. Opened in 1906, the Beaux Arts-style Knickerbocker only functioned as a hotel for 15 years. Most recently, it has housed garment showrooms and offices.

But FelCor plans to restore the building to its former glory. The 330-room luxury hotel will feature a rooftop lounge and destination restaurant. Highgate retained a sliver equity position in the project and will manage the hotel. FelCor president & CEO Richard Smith cited the property’s “marquee location” and price below replacement cost as the rationales behind the deal.

Looking to the second half of the year, LW Hospitality Advisors’ Lesser said he anticipates “a tremendous amount of activity coming down the pike and the REITs as well as other players will almost certainly be involved.”

Anthony Falor, managing director for hospitality at Rockwood Real Estate Advisors, noted that the present market is in the midst of a supply and demand imbalance. “From a transactions perspective, we have seen very little institutional quality product that a lot of people are chasing,” he noted. “There’s a lot of liquidity in the market and people are chasing that.”

For institutional clients, the lack of product has increased the bids. “When that product does sell—and it has sold at a premium—we think other sellers who perhaps have inferior locations or inferior product come to think that their product is now worth more,” Falor explained. 

“When we actually do valuations of their products and they find that the values for the assets are not what they’re thinking, they realize there’s still that discount in the spread between the bid and the ask price,” he concluded.