Chesapeake Lodging Trust, a publicly traded real estate investment trust based in Annapolis, spent 2010 raising money — and then spending it.
After raising $148.7 million in an initial public offering at the beginning of the year, the firm made $457.3 million in high-end hotel acquisitions. Analysts said they expect the buying spree to continue in 2011.
“Their strategy is to own urban or first-string suburban high-end hotel assets,” said David Loeb, managing director and senior real estate research analyst at RW Baird. “It’s what they know and what they’re good at.”
Some of Chesapeake’s six acquisitions this year, which were also funded through additional public equity offerings, loans and revolving credit facilities, have included Le Meridien San Francisco, which was the firm’s most expensive acquisition at $143 million. The REIT also bought the Boston Marriott Newton for $77.3 million and the Homewood Suites by Hilton Seattle Convention Center for $53 million.
The firm was formed by James L. Francis, who was a principal at McLean, Va.-based Highland Hospitality Corp., which was sold to JER Partners in September 2007 for $2.1 billion. Chesapeake was launched in 2009 and raised money through an IPO without a portfolio of real estate assets. Investors in the IPO were told that the strategy would be to go after high-end hotels that need little to no renovation work and upgrades.
“Investors like to invest money in companies where they understand the assets, meaning hotels where they would stay,” Loeb said. “Those hotels tend to have the fastest earnings growth in up cycles.”
Company executives did not respond to requests for an interview. Analysts who follow REITs say Chesapeake Lodging is following a smart strategy of buying hotels that will only go up in value as the economy improves.
The market for high-end hotels has been an attractive one for REITs because they’ve been able to get good prices on properties that sold for too much during the real estate bubble in 2005 through 2007. Hotel acquisitions reached $13.5 billion last year, with publicly-traded REITs making up 23 percent of those acquisitions, according to Real Capital Analytics, a New York-based market research firm. At the height of the market in 2007, REITs had only made up 9 percent of hotel acquisitions.
Chesapeake Lodging’s stock, which trades on the New York Stock Exchange, has hovered near $19 a share for the last several weeks. Its lowest point since going public was at the end of June when it was dipped to $15.14. But it’s been steadily on the rise since then. The shares closed Tuesday at $18.73.
“Across the commercial real estate industry, it’s a time that’s terrific for acquiring high-quality assets at good prices,” said Brad Case, vice president of research and industry information for the National Association of Real Estate Investment Trusts, based in Washington. “The opportunity is even greater in hotels because there was such a frenzy of buying in the peak.”
When the economic downturn hit in 2008, business and vacation travel dwindled, and hotel buyers, many of whom bought hotels with a lot of debt equity, were forced to sell at low prices, Case added. Buyers like publicly traded REITs swooped in and were able to grab good deals.
Hotels have also been attractive to investors because not many new lodging properties have been built in the last few years, so the supply is low, making them substantial revenue generators. REITs don’t run hotels but make their money renting out the property to hotel management companies. Chesapeake’s third-quarter revenue was $18.2 million, with net income of $700,000, compared with second-quarter revenue of $11.8 million and $1.4 million in net income.
Hotels will continue to be an attractive acquisition opportunity for REITs in 2011, say analysts, as more and more investors try to unload properties they purchased during the real estate peak.
“Distressed owners will become distressed sellers,” Case said. “That means hotel REITs will have more opportunities to buy properties.”
Analysts said they expect Chesapeake to continue its buying spree into 2011, but its long-term future is a little fuzzier. Most hotel REITs tend to hold onto their properties for the long term, but Loeb, the RW Baird analyst, said Francis and Doug Vicari, Chesapeake’s chief financial officer and a former Highland executive, see the industry a little differently. They could be more willing to sell the firm if the acquisition opportunities dwindle.
“They don’t see it as a forever business,” Loeb said. “They see it as a cyclical business and they view their company as a cycle play. So they’re open to selling but that doesn’t mean they will sell.”