An interesting piece from HVS concludes that the sale of hotel portfolios may be more than the sum of each individual hotel. And that has ramifications for both buyers and sellers.
The article was authored by Yoshihiro Kanno, a senior associate with HVS, who made his hypothesis based on three advantages a portfolio buyer is assumed to have:
1) Economies of Scale – Under the portfolio-sale scenario, a portfolio buyer may benefit from economies of scale associated with transaction costs and management fees due to increased negotiating power.
2)Geographic Diversification – Portfolio investors may perceive reduced risk for an investment based on cross-collateralization of multiple properties in various locations due to the geographic diversification of these properties. A negative economic trend or valuation factor occurring in one geographic location may not be repeated in all geographic locations represented by the portfolio.
3)Physical Condition Diversification – Portfolio investors may also perceive reduced risk for an investment based on a diverse range of properties that have different ages, brands, designs, and physical condition characteristics. Customer preferences can change and aspects of one property’s age, branding, design, or physical condition could represent physical or functional obsolescence; however, the subject portfolio of properties provides a degree of diversification to protect an investor against such risks.
The author goes on to write that if these assumptions prove true, portfolio-sale hotel buyers could afford to outbid individual hotel buyers, all else being equal. As a result, portfolio values should be higher than comparable individual-sale hotel values with similar performance.
The study included the review of more than 200 transaction files pertaining to sales of individual hotels and hotel portfolios between 2012 and 2014 and compared the sale prices of portfolio hotel transactions with individual hotel transactions of similar quality, as measured by RevPAR, to determine whether recent market transaction data exhibits a trend that is favorable or unfavorable for portfolio sales. The study focused on mid-scale and economy hotels.
The author then performed regression analysis, using $40 as the RevPAR variable, and came up with the following:
Portfolio Sale Price at RevPAR of $40 = $43,025
Individual Sale Price at RevPAR of $40 = $40,153
The results indicate a price difference of approximately 7.2 percent between the portfolio and the individual sales, with the portfolio-sale price being higher.
For a futher look at the study, click here.