National Report–The United States hotel industry broke deal records in late 2013 by achieving the largest sales price on a nongaming hotel and several deals with price per room exceeding $1 million. Six months later, has this trend continued?
Indeed it has. Both with deals announced in late 2013 that have since closed this year and newly disclosed big-ticket deals, the U.S. hotel transactions market has seen improved pricing and record-low cap rates. All signs point to a new level of industry vitality.
Brokers and analysts shared similar sentiment that the market is ripe for investors wanting marquis properties that fetch high sums.
DON'T CALL IT A COMEBACK
Million-dollar rooms are persisting throughout the recovery and are becoming less rare, according to Evan Weiss, executive managing director and principal with LW Hospitality Advisors.
“We are going to continue to see it taking place in the United States in the major markets, and then internationally we’ll see even more of it in major markets like London, Paris and some in Italy,” he said. Weiss added that it’s interesting to hear some of the recent offers being made for hotels in Manhattan.
The biggest deal to close in the first half of 2014 in that market was the Constellation Barclay Holding US acquisition of an 80-percent interest in a joint venture with IHG to own and refurbish the InterContinental New York Barclay. The 80-percent interest was acquired for $240 million, which values the hotel at $300 million. IHG holds the remaining 20-percent interest.
However, the most active market for the first half of the year was Hawaii, according to Real Capital Analytics. The market saw $2.12 billion in volume during that time. Notable transactions during the first half include the 644-room Aston Waikiki Beach in Honolulu, which was sold to Inland Real Estate Group for $183 million.
“The investment activity in the sector continues to be extremely active,” said Kevin Mallory, senior managing director and global head for CBRE Hotels. “We are projecting a record year of activity close to $20 billion in volume, which is the highest mark since 2007 and it’s back to and exceeding the previous peak.”
Real Capital Analytics reported that volume in the second quarter of 2014 was $8.0 billion, which is the highest figure since 2007 and represents a 25-percent increase over the same period last year. For the first half of 2014, deal volume totaled $15.4 billion, which represents a 26-percent increase year over year.
The second quarter also saw price per room reach previous-peak levels. The average price per room in the second quarter—$207,000—represents a figure last seen in 2006, according to Real Capital Analytics.
The activity is being driven by high liquidity in the equity and debt markets, Mallory said.
Recent resort deals have contributed to that high volume.
The St. Regis Bal Harbour in Miami Beach, Fla., transacted in the first quarter at a sales price of $213 million or $1.03 million per room. Starwood Hotels & Resorts Worldwide sold the 207-room resort property to Al Rayyan Tourism Investment Company, the international hospitality subsidiary of Al Faisal Holding Company.
Within the same brand, St. Regis Monarch Beach in Dana Point, Calif., was the largest individual transaction by price during May and the second-largest transaction of the first half, according to Real Capital Analytics. The hotel sold for $316.9 million or $792,250 per key, according to Real Capital Analytics.
Denver-based private equity firm KSL Capital Partners acquired the 400-room resort from an affiliate of Seattle-based Washington Holdings.
If this property sounds familiar, it’s because this is the hotel where “the AIG effect,” the great flee from corporate travel, was born after AIG employees held an ill-timed retreat here just days after its government bailout in 2008.
SUNNY INVESTOR SENTIMENT
Recent research backs up the anecdotal evidence: Investor sentiment for trading globally has surged during the past six months, according to the “Hotel Investor Sentiment Survey June 2014” by JLL.
JLL reports that investor short-term expectations are up 26.4 percentage points to 57.8 percent and are up medium term 27.5 points to 66.6 percent.
Geographically over the next six months, investors have the most favorable view on San Francisco, Houston and Miami. For the next two years, San Francisco and the Caribbean received the most positive investor interest, according to JLL. However, all major American markets surveyed are expected to have a more positive performance outlook within the two-year window.
What makes them optimistic?
Weiss said there are a confluence of factors, including strong fundamentals and lots of people focusing on the space.
“The private-equity firms are still active and there are new players in the space: foreign capital, sovereign wealth, hedge funds, it’s all here,” he said. “They are competing for major markets for limited deals. Hotels are considered by most as a specialty-asset class with a higher risk-adjusted rate of return.”
“The foreign capital interest in U.S. assets is not in itself new but the level of penetration of foreign capital into our market is increasing,” Mallory said. “We’ve identified that approximately 15-20 percent of activity in the sector involves foreign capital and that is two to three times more than the long-term average. That’s a fairly strong change in composition.”
There is an expectation that there will be a gradual easing of underwriting standards as the competitive landscape increases, according to CBRE’s “National Hotel Markets Report.” This will include higher loan-to-value ratios, more interest-only components and increased lending activity in secondary markets.
Investor cap rate expectations are now at record lows—lower than levels recorded in late 2006, according to JLL. Targeted cap rates declined 20 basis points to 7.4 percent, according to JLL investor survey respondents. Expectations are 40 basis points below the most recent three-year average.
KEY WEST ASSETS
One of the most recently announced deals that points to the hotel industry’s healthy acquisition market is Parrot Key Hotel & Resort in Key West, Fla., which is considered one of the U.S.’s highest-barrier-to-entry markets.
Announced by Hersha Hospitality Trust in May, the company plans to acquire the property for $100 million, or approximately $676,000 per key. The price represents a 7.2-percent and 7.5-percent capitalization rate on trailing and forward 12-month net operating income as of April 2014, respectively, according to Hersha’s investor presentation.
Weiss commented that for its market, it is still a high price that the owners didn’t even anticipate, but it shows the robustness in a market with a high barrier to entry. “It was smart money in the hotel space looking for yield.”
And this is on the heels of the March transaction in which the 142-room Pier House Resort and Spa was purchased by Ashford Hospitality Prime for $92.7 million or $653,000 per key. The company also assumed the existing $69-million property level debt financing that Ashford Trust closed in September 2013.
Average sales price per room
Between 2010 and 2013, the average sales price per room for full-service hotels in the U.S. rose from $163,306 to $198,303 in 2013.
The average sales price per room for limited-service hotels increased from $58,046 to $78,956 during the same period.
Source: CBRE Hotels