NEW YORK--(BUSINESS WIRE)--American Realty Capital Hospitality Trust's (ARCHT) announced $1.925 billion acquisition of the former Equity Inns portfolio could signify the initial stage of consolidation within the lodging REIT sector, according to Fitch Ratings.
REITs that own select service hotel properties could be logical targets given the overlap with ARCHT's strategy. Consolidation could create another industry giant to rival Host Hotels & Resorts, albeit with a differentiated portfolio focus. At a minimum, the transaction further evidences the widespread capital availability for hotels.
American Realty Capital (ARC), an affiliate of ARCHT's external advisor, has sponsored several private REITs with a history of consolidation in their respective sectors, most notably . American Realty Capital Properties (ARCP). ARCP has quickly become the largest publicly-traded owner of triple-net lease properties, primarily through corporate mergers and large portfolio acquisitions. Examples include a triple net lease portfolio bought from GE, the purchase of two other ARC-sponsored private REITs (ARCT III and ARCT IV), and the acquisitions of Cole Real Estate Investments, Inc. and CapLease, Inc., both publicly traded REITs. ARCP's asset base has grown from $220 million at its IPO in late 2011 to $20.5 billion at March 31.
ARC founder Nick Schorsch recently announced that he will step down as CEO of ARCP. Fitch considers Mr. Schorsch the principal architect and driving force behind the acquisition-led growth strategies of the ARC-advised investment vehicles. The change in ARCP leadership, viewed against the backdrop of Ventas' announced $2.6 billion purchase of ARC-sponsored REIT American Realty Capital Healthcare Trust, should provide Mr. Schorsch with more time to concentrate on growing ARCHT.
ARCHT has cast a wide net with respect to its targeted investments, including limited and full service hotels. The company has highlighted the limited service segment as being especially attractive. Examples of publicly traded REITs with significant ownership of limited service hotels include RLJ Lodging Trust, Ashford Hospitality Trust, Hersha Hospitality Trust, Chatham Lodging Trust and Hospitality Properties Trust. Fitch notes that the latter's external advisor (REIT Management and Research [RMR]) 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.
Many investors have questioned the need for so many lodging REITs with such similar strategies. Moreover, Fitch believes that REIT equity investors would welcome another investment option with a market capitalization and liquidity profile similar to Host Hotels & Resorts. Nevertheless, corporate M&A within the lodging REIT space has historically been rare, which Fitch attributes to limited differentiation within lodging REIT trading multiples and, to a lesser extent, a lack of willing sellers.
The prior cycle's lodging REIT M&A activity was dominated by private equity firms taking advantage of the CMBS debt as a low cost source of merger financing relative to the more leveraged loan and high yield bond markets that traditionally fund LBO activity. Select transactions that relied on CMBS financing include Whitehall's 2007 purchase of Equity Inns and Apollo's 2007 purchases of Eagle Hospitality and Innkeepers USA Trust. The privatization of asset heavy lodging C-corps such as Hilton, Extended Stay America and LaQuinta also fall into this category.
ARCHT highlighted the availability of attractively priced capital in the form of seller financing as a key driver that facilitated its purchase of the Equity Inn portfolio. Indeed, just this week two single borrower hotel deals priced in the CMBS market, including the $635 million J.P. Morgan Chase Commercial Mortgage Securities Trust, 2014-INN and the $1.4 billion COMM Mortgage Trust, 2014-KYO - a deal previously noted by Fitch's CMBS team for its liberal underwriting.
Fitch is monitoring closely its lodging related credits in the context of further progression in the lodging and broader credit cycles, as well as recent comments from our CMBS group highlighting the increased availability in hotel construction financing. However, we remain comfortable with the credit profiles of our rated issuers, which are generally benefiting from strong industry fundamentals.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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