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The New REIT Landscape

Competition Increases In Sector As Pair Of Franchisors Spin-Off Real Estate Holdings

Wednesday, August 16, 2017
Dennis Nessler
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The lodging REIT landscape looks significantly different than it did just a year ago, largely as the result of a couple of major brand companies choosing to go to an asset-light business model and spinning off their real estate holdings into entirely new companies.

Following Hilton’s official creation of Park Hotels & Resorts earlier this year, La Quinta Holdings last week filed a Form 10 with the U.S. Securities and Exchange Commission (SEC) to execute a ‘reverse spin,’ which would effectively split the company into two. The result would be two publicly traded firms; a franchise and management organization, known currently as “new La Quinta,” and a REIT that will go under the name of CorePoint Lodging.

In addition to these franchise company transactions, the REIT sector was also impacted by some measure of consolidation in April when RLJ Lodging Trust agreed to acquire FelCor Lodging Trust.

Addressing the aforementioned spin-offs, RW Baird analyst Michael Bellisario—who officially follows Hilton and RLJ among a handful of hospitality firms that does not include La Quinta—noted the similarities end there for the two companies.

“Hilton had three resulting pieces [including a publicly traded timeshare entity] that have size, scale and relevance. The issue with La Quinta is that it’s a lot smaller than Hilton. You’re splitting a small company into two smaller companies. You got to ask ‘how do each of those companies grow?’ Are they more valuable on a stand-alone basis? The answer is probably yes, but the answer might not be yes in the form of a publicly traded company,” he said.

Bellisario elaborated on other potential outcomes for either entity. “I think there are still people out there that think that La Quinta the brand might be more valuable as a tuck-in for a bigger company. Or the real estate might be an interesting acquisition opportunity once it’s separated from the brand company for a private equity company, for example, to lever up and make a levered bet on real estate,” he said.

Bellisario went on to later add, “It’s still to be determined that La Quinta today as we know it will be two publicly traded separate entities, because there’s a lot of time between now and then [closing],” he added.

Bellisario also maintained he didn’t see widespread consolidation becoming an issue among REITs, as he emphasized that RLJ’s acquisition of FelCor was somewhat atypical. “The Felcor/RLJ transaction was very unique in that FelCor was for sale and looking for a buyer. People didn’t expect it to be RLJ, but there weren’t a lot of parties that were interested in acquiring [FelCor] other than RLJ and Ashford [Hospitality Trust],” he said.

Bellisario further downplayed the market for major acquisitions going forward. “With public-to-private transactions you might see something here or there that’s unique, but nothing like we saw in ‘06 or ‘07’ he said. Bellisario further added that the public-to-public side “is challenging” as well. He wondered, “if there were value to be had in a public-to-public transaction why hasn’t that happened already?”

In addressing the company’s expectations of industry performance going forward, Bellisario acknowledged that RevPAR growth has been slowing since 2015. “Things aren’t getting better but they’re not getting worse. I would sum it and say we expect more of the same in the second half. [In terms of] forecasting we’re not seeing any trends that would suggest that RevPAR growth is going to reaccelerate. I know everyone’s hoping for that and thinking it’s going to happen, depending on the policy changes that get put in place in Washington, DC, but those seem to be taking longer than initially expected. If they do get put it in place it’s not going to be for a while…We don’t see a lot changing in next 6-12 months that would cause us to deviate from this slow growth environment,” he said.
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Dennis Nessler    Dennis Nessler
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