US hotel sector gains popularity with investors, leading to take-private deals

The U.S. hotel sector has seen deal volumes tick up throughout 2021, signaling a recovery from the hefty impact of the coronavirus pandemic.

Improving fundamentals have attracted more investors to the sector, including private capital. The demand has resulted in two separate, pending transactions this year, where publicly traded U.S. hotel REITs have been acquired by a private firm or entity.

In September, Blackstone Real Estate Advisors LP agreed to acquire Condor Hospitality Trust Inc.'s entire portfolio of 15 hotels for $305 million. Less than two months later, Highgate Hotels LP and Cerberus Capital Management LP announced that a joint venture of the two firms would acquire CorePoint Lodging Inc. for $1.5 billion.

Baird Senior Research Analyst Michael Bellisario noted that in both deals, the hotel REITs had faced challenges over the last few years, and had divested large numbers of their noncore assets.

"Public company stocks get rewarded for growing," he said.

The CorePoint announcement raised some eyebrows, as the company's shares were valued at $15.65 in the transaction, 12% lower than the price at market close the prior trading day.

However, CorePoint's stock price had been rising steadily since July 13, when the firm announced that it was exploring strategic alternatives to maximize shareholder value. The deal represents a premium of 42% to CorePoint's closing share price that day, before the announcement was made.

For Highgate, the CorePoint deal represents an opportunity to acquire 121 midscale hotel assets, while also acquiring the management agreements of those properties.

"They're probably going to put a bunch of debt on it," Bellisario said. "And the cash-on-cash returns are going to be attractive. So that is a driving factor for them and Cerberus to pay a premium to acquire the hotels, because not only are they acquiring hotels, they're acquiring the management contracts."

Take-private deals have not been common in the publicly traded U.S. hotel REIT sector in recent years, according to Bellisario. Prior to the pandemic, the last take-private hotel deal occurred in 2015, when Blackstone Inc. acquired the portfolio of Strategic Hotels & Resorts Inc.

He added that the two recent deals do not suggest the start of a trend involving public hotel REITs being taken private. Instead, they are a reflection of pent-up investor demand.

"There is a ton of money on the sidelines looking for a home. Hotels are more interesting to people today, they're financeable, and fundamentals are getting better. That's the driver of transactions. And if happens to be a take-private deal, so be it," Bellisario said.