The opportunity coming out of the downturn is going to
be that well-positioned properties that are well run should
see very significant improvements in cash flow. There will be
opportunities to buy assets, and while the cap rates on those
assets will probably be in line with traditional cap rates that
we have seen in the industry, the reality is the cost per room
or cost per unit is going to be far lower than it was two or
three years ago, because the NOI is a lot lower right now.
hat creates a significant opportunity for enhancement in
value as the economy and cash flow recovers.
T
REIT: How do you expect the major macroeconomic factors
currently impacting your company to play out in 2010?
Walter: Our industry is clearly tied to the economy. We
have to sell our rooms every single night of the week and
until GDP starts to improve, you’re not going to see an
improvement in lodging demand.
Looking at some other indicators, we also closely monitor business investment (when capital spending is increasing that ties directly into business transient demand) and
employment (as employment rises we tend to see corporate
group activity pick up as well).
REIT: What steps has Host Hotels taken to stabilize its balance sheet, and are you satisfied with your company’s balance
sheet as it stands now?
Walter: We have had a very busy year on the balance sheet
front. We issued $500 million of equity in late April. A week
or two after that, we completed a $400 million senior notes
issue, which essentially took care of all the debt maturities
we had for 2009 as well as providing the funds for maturities
we had in 2010 and 2011. Earlier in 2009, we also closed a
$120 million secured mortgage loan on one of our assets in
Washington, D.C.
Since that initial wave of activity, we also announced a $400
million continuous equity offering plan, and we issued about
$130 million under that program in the third quarter. We finished the third quarter with over a billion dollars in available
cash, which represent almost double the amount of debt we
feel will mature over the course of 2010 and 2011. As a result,
we are in great shape from a capital and balance sheet position.
REIT: Do you foresee having to raise additional capital, possibly for acquisitions?
Walter: I would expect that over the course of the next 12
to 24 months we will complete acquisitions and access the capital markets in order to fund those deals. The continuous equity
offering program we put in place is designed, in part, to accomplish that goal. So while cash is obviously fungible, we are generally looking at the capital that we are raising pursuant to that
program as capital for investment, either in new acquisitions or
for expansions or augmentations of some of our existing assets.
While I think it is going to take longer than some investors
hoped, the reality is that we should see over the course of 2010
and 2011 a fairly good stream of properties coming to market.
Our expectation is that we are in a really great financial position and we have the corporate infrastructure to be able to take
advantage of those acquisition opportunities and we intend to.
REIT: Do you expect those opportunities to be entire portfolios or individual assets?
Walter: I suspect what we will generally see is individual
assets or maybe two or three assets coupled together. Our
focus has generally been on building our portfolio one or
two assets at a time. As we look at the acquisition landscape,
our primary focus is on that type of a transaction as opposed
to broader M&A.
REIT: What has been the delay in seeing more deals take
place?
Walter: We are at the point where we would feel very comfortable investing in assets, and we have been looking carefully at the few assets that have come on the market. Again,
the acquisition activity is probably not going to be the flood
that some people might have sensationalized it to be six
months ago. But is there ultimately going to be a steady
stream of deals? I would really be surprised if there wasn’t.
REIT: And we should expect to see this starting in 2010?
Walter: I think the second half of 2010 and into 2011.
REIT: What do you feel was the main lesson that was reinforced during this recession?
Walter: You have to remember that our business is volatile.
There are wonderful ways to make money off of that
volatility, but you can’t lose the respect or slight fear of
that volatility as part of your business environment.
I think that guides you to assets that, in theory, will
perform better through periods of volatility. It also, more
importantly, guides you to structuring your balance sheet so
that it is capable of withstanding the volatility that is inherent in the business.
REIT: Speaking of lessons, do you think institutions learned
anything about the value of REITs in the past year?
Walter: I think there is a new respect for liquidity. At some
points in time, the fact that REIT shares price everyday was
a bit of a problem for some institutional investors and you
would hear comments that they felt more secure being in
less-liquid investments. The reality is that the liquidity of a
REIT, the lower leverage of a REIT and the business platform that a REIT represents is perfectly positioned for the
environment that we are going to see over the course of the
next four to five years. F
