Hotel Real Estate Rebounds Amid M&A

By Aaron Levitt | June 07, 2012 AAA

As the economy has begun its slow recovery, the commercial real estate sector continues to be a hotbed of activity. Driven by the Federal Reserve's low interest rate policies and investor's need for higher yields, the sector has rebounded sharply over the last few years. Funds like the Wilshire US REIT ETF (ARCA:WREI) have surged since their 2009 recessionary lows as rising activity in the apartment, office and medical/hospital real estate subsectors have returned to their former pre-crash glories. One subsector, which has seen stellar performance over the last two years, could see higher gains as merger activity increases. For investors, betting on the hotel industry could represent a great real estate play.

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Rising Deal Making
Despite concerns about debt troubles in Europe and economic uncertainty in the United States, the lodging industry is getting a huge bump from increased merger and buy-out activity. According to Jones Lang LaSalle Hotels unit, the pace of lodging transactions has been steady and strong with the volume U.S. deals reaching $5.1 billion through May. That's lower than last year's total of $6.4 billion. However, the industry group expects the remaining six months of the year to be robust with deal activity. Nearly half of the 6,000 hotel investors and owners it surveyed showed that they intended to acquire properties.

Already there have been some recently announced mega-deals in the sector. Private equity firm Blackstone Group (NYSE:BX), which already owns Hilton, La Quinta and Extended Stay Hotels brands, recently paid $1.9 billion to France's Accor for Motel 6 and Studio 6 chains. Likewise, Marriott International (NYSE:MAR) recently announced a $210 million deal to assume management of Gaylord Entertainment's (NYSE:GET) convention focused hotels.

There are still plenty of reasons to be bullish on the hotel/lodging sector. Jones Lang LaSalle reports that the average price per room for single hotels that were bought so far this year reached $194,000. That's 5% higher than levels seen last year. Slowed new construction rates coupled with the business-led recovery has lifted occupancy rates and RevPAR numbers. Analysts estimate that revenues per available room will climb 5.5% this year and another 5.4% in 2013.

SEE: The Wonderful World of Mergers

Booking a Room
With analysts predicting that hotel values will rise 17% this year based on rising M&A and increased occupancy/RevPAR rates, investors may want to give the sector ago. Unfortunately, unlike many real estate subsectors, the hotel/lodging industry does not have its own broad ETF representing it. Investors need to go with individual picks.

Both Sunstone Hotel Investors (NYSE:SHO) and Strategic Hotels & Resorts (NYSE:BEE) could represent turnaround plays in the industry. The REITs both cut their dividends during the global real estate crisis in order to preserve capital and pay down debt incurred at the height of the real estate bubble. That process continues. Sunstone recently sold its Marriott Del Mar hotel for $66 million as well as the Wyndham Chicago for $88.4 million. The first transaction will reduce its debt by $47.2 million and increase its full-year adjusted FFO by $4.1 million. Meanwhile, Strategic recently reported RevPAR gains of 9.7% and continues to reduce its overall debt load.

Red Lion Hotels (NYSE:RLH) could be an interesting choice for investors as well. The upscale chain hasn't really caught on with investors or potential franchises, but recently reported good first quarter earnings. Analysts predict that Choice Hotels International (NYSE:CHH) could be a possible suitor for the firm and Red Lion would make a great fit with Choice's stable of brands.

Finally, for those investors looking for more of an income play from the sector, Ashford Hospitality Trust (NYSE:AHT), Hospitality Properties Trust (NYSE:HPT) and Summit Hotel Properties (NYSE:INN) yield 5.5%, 8.1 and 5.9%, respectively. All three firms could be used to give a REIT portfolio an income boost.

SEE: Invest in Real Estate With $1,000 (or Less)

The Bottom Line
The lodging industry is quickly becoming a hotbed of acquisition activity in the commercial real estate space. Increasing RevPAR, occupancy and real estate values all bode well for the sector and analysts predict more M&A going forward. For investors looking for one of the few real estate values left may want to consider the sector. The previous picks, along with Hyatt Hotels (NYSE:H), make ideal choices.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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