NEW YORK CITY—Lodging REITs could be in for a wave of consolidation, Fitch Ratings said Friday. Specifically, the ratings agency cites American Realty Capital Hospitality Trust‘s agreement to acquire the former Equity Inns portfolio from affiliates of Goldman Sachs for $1.925 billion, thus making ARCHT a major player in the select service space and making other REITs in that space logical takeover targets.
“Consolidation could create another industry giant to rival Host Hotels & Resorts, albeit with a differentiated portfolio focus,” according to Fitch. At a minimum, though, the announced Equity Inns deal provides further evidence of “the widespread capital availability for hotels.”
Fitch’s report notes that American Realty Capital, an affiliate of ARCHT’s external advisor, has sponsored a number of private REITs “with a history of consolidation in their respective sectors, most notably American Realty Capital Properties.” The latter rose quickly to the number one position among publicly-traded owners of triple-net-lease properties, mainly through mergers and acquisitions which have been reported on GlobeSt.com over the past year.
Notable among these are a triple-net portfolio bought from GE Capital, the purchase of two other ARC-sponsored private REITs (American Realty Capital Trusts III and IV) and the acquisitions of Cole Real Estate Investments Inc. and CapLease Inc. Aa a result, ARCP’s asset base has grown from $220 million at its IPO in late 2011 to $20.5 billion at March 31.
ARC founder Nicholas Schorsch recently announced that he will step down as CEO of ARCP. Fitch views Schorsch as ”the principal architect and driving force behind the acquisition-led growth strategies of the ARC-advised investment vehicles.” With ARCP president David S. Kay succeeding Schorsch as CEO, the change in leadership, especially when viewed in light of Ventas‘ announced $2.6-billion purchase of ARC-sponsored REIT American Realty Capital Healthcare Trust, should provide Schorsch with “more time to concentrate on growing ARCHT,” according to the ratings agency.
Since its formation, Fitch notes, ARCHT has “cast a wide net with respect to its targeted investments.” Although it has targeted both limited- and full-service hotels, it has highlighted the limited-service segment as “especially attractive.” In that sector, other REITs with sizable ownership include RLJ Lodging Trust, Ashford Hospitality Trust, Hersha Hospitality Trust, Chatham Lodging Trust and Hospitality Properties Trust.
The latter, Fitch notes, is externally managed by REIT Management and Research, “which recently lost control of CommonWealth REIT through a proxy contest initiated by activist investors. Separately, Select Income REIT, another REIT externally advised by RMR, has faced criticism from an activist investor regarding that company’s corporate governance practices.”
As ARCHT stakes out potential acquisitions, Fitch reports that invesors have questioned the need for so many lodging REITs withsimilar strategies, suggesting that the market would support consolidation. “Moreover, Fitch believes that REIT equity investors would welcome another investment option with a market capitalization and liquidity profile similar to Host Hotels & Resorts.”
Up until now, corporate M&A within the lodging REIT space has been rare; Fitch attributes this to “limited differentiation within lodging REIT trading multiples and, to a lesser extent, a lack of willing sellers.” Much of the lodging M&A activity in the previous real estate cycle took the form of private equity firms taking hotel companies private, notably the Blackstone Group‘s 2007 acquisition of Hilton Worldwide, with PE firms taking advantage of CMBS debt as a low-cost source of merger financing. Capital for acquisitions, whether via securitization or other surces, is once again “attractively priced,” Fitch notes.