There is a renewed sense of optimism surrounding the hotel industry’s recovery, spurred by an increasing proportion of the population being inoculated, loosening COVID-19 restrictions and strong domestic consumer travel sentiment in the United States.
While hotel REIT stock prices concluded 2020 down approximately 25% for the year (after falling approximately 69% between January and March 2020), recent performance reflects the positive momentum observed in lodging fundamentals, with stock prices rising 81% since Pfizer’s announcement of the successful phase 3 COVID-19 vaccine results on November 9, 2020.
Contributed by Jeffrey Davis, JLL’s Hotels & Hospitality Group, managing director and head of U.S. Full-Service Investment Sales, and Chris Shea, managing director, JLL Capital Markets, M&A and Corporate Advisory
Throughout 2020, sector REITs dependent on consumer mobility, such as retail, office, and hospitality, drastically underperformed relative to REITs with an industrial, data centers and life sciences focus. However, those formerly underperforming sectors, including hospitality, are showing significant gains against these darlings, with hotel REIT stock prices as of late June rising 21% since the turn of the year.
With recovery in near sight, public hotel REITs are now providing forward earnings guidance. Further, as with most REIT sectors, which continue trading at premiums to net asset value (NAV), several publicly traded hotel REITs have experienced a strong, positive change in their cost of capital this year, and have access to public equity and the debt markets to fuel growth, according to JLL’s latest M&A and Strategic Transactions Monitor.
Other factors encouraging the hotel REIT story, include appreciating real estate values due to cap rate compression, the physical return into offices and retail coupled with debt refinancing happening at lower rates. Early on during the pandemic, the industry expected that distress would lead to a number of recapitalizations and potential M&A transactions. However, such activity has failed to materialize as recovery occurred quicker than anticipated. The recent improvement in performance has not been overlooked, with hotel REITs attracting interest from equity investors focused on industries with exposure to rebounding consumer demand in the post pandemic world.
Review of pandemic-era activity
Similar to other major hotel owners across the industry, at the onset of the pandemic, REITs were forced to shift priorities and acutely concentrate on cash preservation and strategic asset management of their existing portfolios.
As the “new normal” set-in and leisure travel rebounded during the summer months of 2020, it became evident that consumer travel preferences benefited drive-to, resort destinations or less dense markets. This dynamic provided a much-needed boost in performance for REITs with greater exposure to leisure-focused markets, at a time when all hotel owners were starving for demand. To capitalize on this emerging trend and to continue weathering the storm, REITs are being strategically creative and intentional in driving value for their portfolios. Notably, REITs are:
- Amending existing management agreements to help lift EBITDA margins
- Identifying revenue enhancement opportunities across hotels in their portfolios
- Converting hotels to lifestyle or leisure-oriented brands
- Leaning in on JV partnerships as a way to acquire attractive assets to add to their portfolios
- Disposing of assets that no longer fit the strategic direction of their portfolios
A deeper dive into REIT M&A
With the industry on firmer footing and a clear shift in travel preferences to leisure markets and lifestyle brands over the short-term, REITs have embraced the opportunity to right-size their portfolios and boost liquidity levels by disposing of assets.
Over the past 18 months, REITs, such as Xenia Hotels & Resorts, Park Hotels & Resorts and Ashford Hospitality Trust have been net sellers, disposing of assets situated in larger urban centers or hotels with a heavy reliance on transient business travel. Since 2020, hotel REITs have disposed of US$5.6 billion worth of hotel assets, representing 37% of all hotel sales activity during the analyzed period and making them the largest disposer of assets among all hotel owners.
Nevertheless, in tandem with recent stock pricing recovery, the pace of hotel REIT acquisition activity has accelerated. In fact, in YTD June 2021, REITs were the acquirer on nine transactions, as compared to all of 2020, where the buyer group was the acquirer on only six transactions.
Host Hotels & Resorts (Host) and Pebblebrook Hotel Trust (Pebblebrook) are especially active. Host is seeing improvements in RevPAR, according to a report in Nasdaq and achieved hotel-level profitability in Q1 2021 for the first time since the beginning of the pandemic, which has spurred the REIT’s acquisitions. Some of Host’s high-profile transactions this year, include the Hyatt Regency in Austin, which was acquired for US$161 million and the Four Seasons Resort Orlando at Walt Disney, which was acquired for US$610 million, according to the company’s recent press announcements.
While Pebblebrook has disposed of approximately US$545 million of hotel assets from 2020 to YTD June 2021, the REIT will soon close on the Margaritaville Hollywood Beach Resort, which it acquired for US$270 million.
We expect REIT acquisition activity to continue picking up pace as the lodging industry’s recovery strengthens. Moreover, with the hotel debt market open, hotel REITS have access to all forms of credit, including mortgage capital, public bonds and equity. It is true that REITs will remain selective when purchasing hotel assets, but with more cash on-hand and access to the debt market, REIT acquisition activity will increase.