Lodging REITs Look to Improved Fundamentals

11/16/2011 | By Matthew Bechard

As the risk of a recession in the United States in 2012 has declined, it has benefited the lodging REIT sector, according to Ed Walter, president and CEO of Host Hotels & Resorts (NYSE: HST).

In a video interview with REIT.com at REITWorld 2011: NAREIT's Annual Convention for All Things REIT in Dallas at the Hilton Anatole hotel, Walter offered his take on the state of the lodging sector. Walter attributed the lodging downturn over the summer to the crisis in the European debt markets and political uncertainty in the United States.

"There was a great deal of uncertainty about where the economy was headed," Walter said. "A lot of that spilled over into lodging, because everybody knows we're so sensitive to how the economy performs."

However, looking ahead to 2012, Walter noted that projections for overall economic fundamentals are improving, including GDP growth. Also, Walter pointed that business investment is projected to increase, which is particularly important to the lodging sector.

"All of those things bode well for a recovery in 2012," Walter said.

In terms of deal-making, while the first half of 2011 was a strong period of transactions, Walter said he expects that has slowed in the second half. REITs currently don't have the capacity to re-stock their capital bases to the extent that they have in the past. Additionally, debt markets are more constrained than they were in the first six months of the year, which has culled the pool of potential buyers.

In 2012, Walter said he expects to see transaction velocity pick up. First, he pointed out that more properties will have debt coming due throughout the year. That means more properties going up on the market.

"While that hasn't been a huge driver in the market this year, I think there's a general sense that will be more of a factor next year," Walter said.

Trends in pricing also could encourage more transactions, according to Walter. With fundamentals improving, people will adjust their expectations in terms of what they're willing to pay. Furthermore, improved equity prices should boost their ability to pay for properties.

"Both contribute to a more active acquisition market."