“The market is ripe for acquisitions,” said analyst Ryan Meliker of MLV & Co., a New York-based investment bank and institutional broker dealer. “A lot of 2007 CMBS loans that were originated at 85 percent loan-to-value levels, where the assets are in the black, are coming due. But you can’t refinance at that 85 percent LTV today, which is forcing owners to find an equity partner, put more capital in or sell.”
Eleven transactions have already been announced barely a month into the third quarter. Bethesda neighbors DiamondRock Hospitality Co. and Pebblebrook Hotel Trust, for instance, made headlines last week with separate portfolio deals.
DiamondRock agreed to pay private equity firm Blackstone Real Estate Partners $495 million for four full-service hotels — the 363-room Hilton Boston, the 406-room Westin Washington, D.C., the 436-room Westin San Diego and the 258-room Hilton Burlington in Vermont. The company plans to renovate all of the properties over the next 18 months.
Meanwhile, Pebblebrook snagged a pair of hotels from a joint venture of Westbrook Partners and Clearview Hotel Capital for a total $63 million. Managed by Kimpton Hotels, the Hotel Vintage Plaza Portland has 124 rooms, while the Hotel Vintage Park Seattle has 117 rooms.
“We’re expecting a wave of acquisitions over the next 12 to 18 months,” said Raymond Martz, Pebblebrook’s chief financial officer.
Sellers and buyers, he said, are narrowing their polarized price expectations. Recovery in room demand, led by corporate travel, has helped raise revenue and justify slightly higher sales prices. Still, Martz believes pending debt maturities will be the primary motivator for deals.
Pebblebrook, he added, is encouraged by the price of Vintage deals, which came at a 25 percent discount to replacement, or what it would cost to build similar properties. That discount shows that prices have not returned to the pre-recession highs.
Similarly, DiamondRock chief executive Mark Brugger said the company is still closing deals that are about 20 percent below replacement costs. He noted that securing financing for hotel deals has improved as the commercial mortgage-backed securities market is packaging more deals.
Real estate investment trusts, including DiamondRock and Pebblebrook, are also raising money through stock offerings. DiamondRock is funding the Blackstone deal with a combination of proceeds from a public equity offering, debt, cash and stock.
While there were a string of hotel trades in the first six months of this year, researchers at Real Capital Analytics said the sales volume was lower than a year ago because of fewer distressed properties on the market. According to their most recent data, the $6.3 billion in hotel sales recorded through May was off 16 percent from the same period 12 months earlier.
Some in the industry anticipate the majority of properties coming up for sale will be limited-service hotels in secondary markets, not full-service assets in top cities.
“Owners of the kind of hotels we like are not in a hurry to sell because they see a lot of upside in these assets,” said Brugger of DiamondRock. “There is a lot of capital chasing too few deals, so it is difficult to find high quality deals at reasonable pricing.”