A portfolio of luxury hotels is on the market, and another may emerge for sale in the coming months, but some major traditional buyers for lodging properties may find themselves watching from the sidelines as the bidding unfolds.

Several private equity firms and hotel operators are reported to be considering offers for Belmond Ltd., which owns and manages about three dozen properties around the world and is reviewing a possible company sale. At the same time, buzz has built around the former Strategic Hotels & Resorts portfolio, which Chinese insurer Anbang Insurance Group Co. Ltd. is said to be considering selling.

Both portfolios are made up of the kind of irreplaceable properties that draw strong investor interest even when the medium-term outlook for hotel fundamentals is uncertain, as some market participants believe it is now.

Yet real estate investment trusts, often a strong contender for property investments, may be out of position to make strong offers — partly because of increased competition from private bidders, and partly because of a mandate to maintain relatively low leverage.

Even before October's stock market selloff, most publicly traded hotel REITs were trading at discounts to their consensus net asset values — an awkward position for companies seeking to raise equity capital to make a deal. And, while debt capital markets have been open to hotel investors for much of 2018, public REIT shareholders and the rating agencies typically do not tolerate the high leverage ratios that competing bidders, including private equity funds, often use to make big purchases.

Hotels, which tend to perform better in periods of economic growth, have attracted a wave of new and nontraditional investors over the last year, Robert W. Baird analyst Michael Bellisario said in an interview. That has supported property values, but has caused a headache for the public REITs, he said: "They're having trouble buying assets."

Crowded market

Executives at two of the largest hotel REITs, Host Hotels & Resorts Inc. and Park Hotels & Resorts Inc., have hinted in recent months that their companies could shift their strategies to become more active buyers. Host, in particular, has raised cash with a series of high-profile New York City asset divestitures, including the sale of its stake in the Marriott Marquis - New York Times Square to Vornado Realty Trust.

Evercore ISI analyst Rich Hightower said Host realized a "very large" gain on the $442 million sale, since it owned the property for decades. But while the transactions have raised cash that Host theoretically could use to make a run at a large portfolio, two of the deals — the REIT's sales of the W-New York and W-New York Union Square — also illustrate the depth of interest among other property buyers.

According to published reports, the buyers for the former W Hotel New York on Lexington Avenue were Capstone Equities, a private equity firm, and Highgate Hotels Inc., an investment and property management firm, backed by Dune Real Estate Partners LP, an investment firm with an opportunistic strategy. The buyer for the W New York Union Square was Westbrook Partners LLC, an investment and management company, with a loan from HSBC that covered about 60% of the $165.6 million purchase price.

Host put the capitalization rate on the combined sales at 1.3%, which implies that the buyers were prepared to accept very little present property income relative to the prices they paid. Bellisario said the figure likely represents both weak current operating income at the hotels and continued high demand among buyers for the underlying real estate.

Teague Hunter, president of property broker Hunter Hotel Advisors, said in an interview that multiple relatively new hotel-oriented private equity funds are contending for properties that, a few years ago, might have been snapped up by giants like Blackstone Group LP or Starwood Capital Group.

Those larger private equity firms are still in the mix for acquisitions, Hunter said. Blackstone was prepared to spend $4.8 billion from its Blackstone Real Estate Partners VIII fund on acquiring LaSalle Hotel Properties, until that transaction fell apart. Yet Hunter added that the private equity giants, like the REITs, have been stepping back to prune their portfolios of weaker assets at a time when valuations are high. Those selective sales, in turn, have created more deal volume for the smaller and newer funds.

In one recent transaction, the management and development firm Hotel Equities Inc. received a series of investments totaling more than $500 million from real estate private equity firm Virtua Partners as part of a plan to pursue acquisitions.

"Everyone is showing up with a new $200 million to $500 million that they've raised," Hunter said. "And they're the guys that have ancillary motives. They need to show that they can put capital out ... so those are the guys that stretch a bit."

Uphill climb

Whether Anbang eventually will put the Strategic Hotels portfolio up for sale remains an open question: Observers say the portfolio is not yet being marketed and may not yield any news until 2019 if it is. Blackstone is considered a logical potential buyer — having taken Strategic Hotels & Resorts private in 2015 before flipping it to Anbang the following year — as are other large private equity firms and international investors.

For the REITs, competing for large deals may be a difficult proposition — even for those, including Xenia Hotels & Resorts Inc., DiamondRock Hospitality Co. and Sunstone Hotel Investors Inc., that have raised capital at favorable valuations in recent months.

Besides their aversion to leverage, REITs tend to take a more conservative view of capital spending on renovations for acquired properties, which affects their underwriting of purchases, Bellisario said. Even more significantly, he added, "There are other, different buyers out there today competing with them that weren't here 24 months ago or 36 months ago."