Wave of REIT transactions has industry taking notice
07/04/07 21:26 Filed in: Article
Wave
of REIT transactions has industry taking
notice
There has been a recent flurry of announcements ushering in a new era of privatization of hotel REITs via private equity firms and joint ventures. The likely scenario is that this trend will continue through the remainder of 2007 and beyond.
This activity leaves us to wonder about the long-term repercussions of this ownership shift. Other asset classes saw tremendous merger and acquisition activity in 2006, with 14 deals involving a shift from public to private status totaling $55 billion. Then 2007 started off with a bang with a bidding war and the subsequent announcement that Blackstone would acquire Equity Office Properties for $39 billion. The significant players in that process are very familiar names to the hotel industry and it seems to have been a precursor to what was to happen in the following months.
It was also announced in early 2007 that CNL Hotels & Resorts was being acquired for $6.6 billion. On the heels of EOP and CNL, and within a month of each other, came the announcements that Winston Hotels, Highland Hospitality Corp., Innkeepers USA Trust and Eagle Hospitality were all being taken private. CNL and the other four companies combined own or owned more than 225 properties. The combined transactions are valued at well over $10.5 billion.
Driving forces
What are the factors encouraging these transactions? First, as we all know well, the industry continues to show outstanding performance. The lodging industry has experienced record profit growth for several consecutive years. 2006 saw strong RevPAR gains throughout the country in all lodging segments. Prognosticators are projecting additional growth in revenues at a bit of a more moderate pace, but the fundamentals remain strong.
Overall demand for real estate in the private market, combined with huge amounts of equity capital, boost transactions and have helped the continued compression in cap rates of all asset classes. For example, the current 1031 market appears to have lowered cap rates to the point that deals simply don’t pencil. This demand is spreading to the hotel industry, but it seems to be the last segment to be affected, as indicated by hotel cap rates remaining favorable compared with the other asset classes. However, as these individual assets become more difficult to source and acquire, REITs seem to have become the likely next target. The economies of scale, enhanced market share and geographic diversification that come with a larger portfolio are very attractive. The time it would take to create equivalent portfolios can be counted in years.
Is it possible that the public markets haven’t recognized the value of the REITs and thus their valuations may be lower than the underlying assets? From the sellers’ side, running a public company can be exhausting and perhaps even limiting for a hotel professional who may prefer to be in the trenches.
Additionally, meeting the requirements of the Sarbanes Oxley Act can be costly. The smaller public companies are the ones who can least afford the additional significant expenses associated with Sarbanes Oxley compliance. So by taking a company private, maximized shareholder value can be realized and ownership can pursue growth through higher leverage than can be achieved via the public arena.
As a lifetime hospitality veteran, I am curious as to how this all shakes out. What effects will these transactions have on the industry at the macro and micro levels? The REITs own everything from limited service mid-scale properties to luxury resorts. There may be a number of single asset or smaller portfolio transactions resulting from the above transactions, with the new owners selling assets while they have some life left available with the brands. Additionally we may see a spike in off-market transactions again as these newly private companies, which are potentially not as attached to specific properties, are approached directly by groups willing to pay a premium for a strategically located asset.
Finally, and perhaps the most significant industry issue affected by this phenomenon, is the perception that no deal is too big. All the pieces are in place and the privatization of these REITs may be a harbinger of bigger things to come along with a myriad of smaller by-products in the aftermath.
Daniel Beider founded and is a principal of Paramount Lodging Advisors in Chicago.
He may be contacted at dbeider@paramountlodging.com.
There has been a recent flurry of announcements ushering in a new era of privatization of hotel REITs via private equity firms and joint ventures. The likely scenario is that this trend will continue through the remainder of 2007 and beyond.
This activity leaves us to wonder about the long-term repercussions of this ownership shift. Other asset classes saw tremendous merger and acquisition activity in 2006, with 14 deals involving a shift from public to private status totaling $55 billion. Then 2007 started off with a bang with a bidding war and the subsequent announcement that Blackstone would acquire Equity Office Properties for $39 billion. The significant players in that process are very familiar names to the hotel industry and it seems to have been a precursor to what was to happen in the following months.
It was also announced in early 2007 that CNL Hotels & Resorts was being acquired for $6.6 billion. On the heels of EOP and CNL, and within a month of each other, came the announcements that Winston Hotels, Highland Hospitality Corp., Innkeepers USA Trust and Eagle Hospitality were all being taken private. CNL and the other four companies combined own or owned more than 225 properties. The combined transactions are valued at well over $10.5 billion.
Driving forces
What are the factors encouraging these transactions? First, as we all know well, the industry continues to show outstanding performance. The lodging industry has experienced record profit growth for several consecutive years. 2006 saw strong RevPAR gains throughout the country in all lodging segments. Prognosticators are projecting additional growth in revenues at a bit of a more moderate pace, but the fundamentals remain strong.
Overall demand for real estate in the private market, combined with huge amounts of equity capital, boost transactions and have helped the continued compression in cap rates of all asset classes. For example, the current 1031 market appears to have lowered cap rates to the point that deals simply don’t pencil. This demand is spreading to the hotel industry, but it seems to be the last segment to be affected, as indicated by hotel cap rates remaining favorable compared with the other asset classes. However, as these individual assets become more difficult to source and acquire, REITs seem to have become the likely next target. The economies of scale, enhanced market share and geographic diversification that come with a larger portfolio are very attractive. The time it would take to create equivalent portfolios can be counted in years.
Is it possible that the public markets haven’t recognized the value of the REITs and thus their valuations may be lower than the underlying assets? From the sellers’ side, running a public company can be exhausting and perhaps even limiting for a hotel professional who may prefer to be in the trenches.
Additionally, meeting the requirements of the Sarbanes Oxley Act can be costly. The smaller public companies are the ones who can least afford the additional significant expenses associated with Sarbanes Oxley compliance. So by taking a company private, maximized shareholder value can be realized and ownership can pursue growth through higher leverage than can be achieved via the public arena.
As a lifetime hospitality veteran, I am curious as to how this all shakes out. What effects will these transactions have on the industry at the macro and micro levels? The REITs own everything from limited service mid-scale properties to luxury resorts. There may be a number of single asset or smaller portfolio transactions resulting from the above transactions, with the new owners selling assets while they have some life left available with the brands. Additionally we may see a spike in off-market transactions again as these newly private companies, which are potentially not as attached to specific properties, are approached directly by groups willing to pay a premium for a strategically located asset.
Finally, and perhaps the most significant industry issue affected by this phenomenon, is the perception that no deal is too big. All the pieces are in place and the privatization of these REITs may be a harbinger of bigger things to come along with a myriad of smaller by-products in the aftermath.
Daniel Beider founded and is a principal of Paramount Lodging Advisors in Chicago.
He may be contacted at dbeider@paramountlodging.com.