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Ken Cruse, president of Sunstone Hotel Investors, is quite succinct about how hotel investors need to act as the industry claws its way back from the depths of the worst recession in 70 years: There needs to be more discipline and less emotion when it comes to making deals.

“The biggest mistake during the last cycle was that if you liked an asset you (could) always tweak the numbers a little more to make that asset work in a deal,” Cruse said during a general session panel at the 33rd annual New York University International Hospitality Industry Investment Conference. “We all say we’re going to have discipline as much as we can, but if the lending providers don’t have the same discipline, it’s a recipe for disaster.”

Cruse, and the three other leaders of publicly traded real-estate investment trusts on the panel moderated by Lou Plasencia of The Plasencia Group, agreed there’s not a lot that keeps them up at night.
“Nothing keeps me up at night, but the nightmare I have occasionally is a worn-out sign swinging in the wind and tumbleweeds rolling by,” said Dan Hansen, president and CEO of Summit Hotel Properties. He said keeping the average age of Summit’s portfolio reasonable is a high priority.

“We have to have the same discipline on the sell side as we do on the acquisition side,” said Hansen, whose company went public in February and has a market cap of just under US$300 million.

Rick Smith, president and CEO of FelCor Lodging Trust, sleeps well at night knowing his company is on the back end of a metamorphosis that includes shedding additional properties from its portfolio.

“If I thought we had the wrong strategy or we were not executing the strategy that would keep me up at night,” he said.

Cruse said executing the business plan is essential for any company’s success.

“My biggest worry is that somehow we revert back to the sins we committed in the past,” he said.

Meanwhile, Monte Bennett, CEO of Ashford Hospitality Trust, is bothered by the U.S. national debt and other sovereign debt issues around the world.

“These debt problems will have to be addressed,” he said. “It’s a question mark on how they will be addressed and if they will be addressed in a good way.”

Let’s make a deal
The deals REITs are making have made headlines throughout 2011. Plasencia said initial public offerings and secondary offerings are easily on pace to exceed 2010 levels. REITs sold US$594 million of hotels from January 2010 through March 2011. Meanwhile, REITs acquired US$7.7 billion in hotel assets during the same period. Sunstone acquired about US$900 million of those assets, according to Cruse.

“The majority of those acquisitions are heavily weighted in states with major gateway markets,” Plasencia said.

A sample of some of the acquisitions shows that FelCor acquired the Fairmont Copley Plaza Hotel in Boston for US$275,000 per key, and it recently closed on the Royalton and Morgans hotels in New York for about US$496,000 per key. Sunstone acquired the DoubleTree Guest Suites in New York’s Times Square for US$621,739 per key and the Hilton San Diego Bayfront for US$399,160 per key. Sunstone will reflag the DoubleTree property to a Hilton Suites property within the next six to nine months and will co-operate it with the Hilton Times Square about two blocks away that it already owns. “It’s going to be a very powerful consolidated asset,” Cruse said.

Bennett said REITs require less leverage to make a deal, and debt is available for those kinds of transactions.

“Some REITs have a lower cost of capital,” he said. “That lower cost of capital enables them to take advantage of opportunities.”

Bennett said that trend should remain intact for the next year or so before overall debt markets completely return to full speed.

Ashford, FelCor and Sunstone are focusing on acquiring hotels in the top 25 metropolitan statistical areas—particularly Boston, New York and Washington, D.C. Summit will focus on the top 50 MSAs.

“We’re one of the few companies that will go outside the top 25 MSAs and see a lot of value there,” Hansen said

More transactions coming
When Plasencia asked if the panel expected a waterfall of assets to hit the market, the leaders said they do anticipate action to pick up.

“I don’t know if it will be a dam bursting, but there will be an acceleration,” Bennett said. “As assets perform better and better, there’s more interest in buying and selling. The fundamentals in the industry are as strong as I’ve ever seen.”

Cruse pointed to the large number of commercial mortgage-backed securities coming due during the next 18 months as one indicator that the number of transactions could increase.

“It’s a very target rich environment right now,” he said. “The REITs themselves will be primary beneficiaries.”

The panelists said they don’t feel pressure from Wall Street analysts to employ a specific type of growth strategy, but there has to be a believable approach that investors buy into.

“When the Street wants apples, you don’t give them oranges,” Cruse said. “That’s why you see us executing a basic strategy.”

Tags:  hotel reits real estate investment trusts nyu investment conference ken cruse sunstone hotel investors monty bennett ashford hospitality trust dan hansen summit hotel properties rick smith felcor lodging trust jeff higley