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Fitch Ratings-New York-21 March 2016: Decelerating industry fundamentals and weakness in forward-looking equity market prices for hotel-related companies hasn't kept Chinese companies from dominating the hotel investment landscape recently, according to Fitch Ratings. 

Chinese investors have been aggressively bidding on mostly upper-tier hotel assets in core markets. Historically, this type of activity, rich property valuations paid by less-established (often international) market participants, has corresponded with U.S. CRE cycle peaks. This cycle could be shaping up to follow a similar path.

Last Monday, The Wall Street Journal reported that Chinese insurer Anbang Insurance Group, Inc. offered to purchase the former Strategic Hotels & Resorts assets from Blackstone for $6.5 billion - a $450 million premium to Blackstone's purchase price three months ago (closed in December 2015). Also last Monday, Starwood Hotels & Resorts disclosed the receipt of an unsolicited, highly conditional and non-binding indication of interest in purchasing the company from an Anbang-led investor consortium that includes U.S. private equity firm J.C. Flowers & Co. and China-based Primavera Capital Group. 

On Friday, Starwood announced that it determined Anbang's revised offer, of $78 per share, to be a superior proposal and notified Marriott that it intends to terminate the previous merger agreement; under the prior agreement, Marriott has until 11:59PM ET on March 28 to negotiate a revised offer with Starwood. Furthermore, in early February, Hersha Hospitality Trust sold a 70% joint venture interest in seven previously wholly owned limited service hotels in New York for $571.4 million to China-based Cindat Capital Management Limited. 

Hotels in non-core markets are unlikely to benefit from increased international investment, at least with respect to China. Several of the largest institutional Chinese investors have publicly discussed what Fitch views as a "core-at-any-cost" investment mentality with respect to hotel investments that generally dovetails with the recent Chinese-led investment activity. 

Separately, Anbang's purchase of Strategic will presumably delay (or scuttle) the planned large loan/single borrower (LL/SB) U.S. CMBS transaction related to Blackstone's acquisition of the company. We had been looking to the market's reception of that deal (and a few others) for a contemporaneous window into hotel lender appetites. 

Relatedly, hotels may have sidestepped some regulatory uncertainty/disruption relating to CMBS risk retention, which is set to take effect in December. On March 2, the House Financial Services Committee passed H.R. 4620 (aka the Preserving Access to CRE Capital Act of 2016), which modified Dodd-Frank's risk retention requirements for "prudently underwritten, low-risk commercial real estate loans." LL/SB CMBS transactions, an important financing avenue for hotels during this recovery, generally fit this description. 

Absent risk retention relief, we believe the common one-year term with multiple-year extension options for hotel loans may have proven unpalatable to B-Piece buyers, resulting in less available and more expensive debt capital for hotels.

Fitch made widespread downward revisions to growth forecasts in its latest Global Economic Outlook published on March 7. We lowered our 2016 growth outlook for advanced emerging economies to 4.0% from 4.4% in December, due primarily to large downward revisions for emerging market commodity producers such as Brazil, Russia and South Africa. We also lowered our 2016 growth outlook for advanced economies to 1.7% from 2.1%, a level that remains above global recession territory. 

Nevertheless, by most measures, this cycle looks long in the tooth. Indeed, the US is in its seventh year of economic expansion, making this the fourth-longest post-war recovery based on recession dating by the National Bureau of Economic Research. Concerns are mounting: major equity indices have declined during the past year and credit spreads have gapped wider. 


Stephen Boyd, CFA
Senior Director
+1 212 908-9153 
Fitch Ratings, Inc. 
33 Whitehall Street
New York, NY

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