National Report – Note to potential hotel sellers: You might be better off bringing multiple properties to market as part of a portfolio, rather than selling off hotels piecemeal. That’s if you find validity in a recent HVS study and subsequent article written by Yoshihiro Kanno, a senior associate with HVS
The article’s rather unexpected conclusion is that the sale of hotel portfolios may be more than the sum of each individual hotel—something that has ramifications for both buyers and sellers. It also flies in the face of convention. A portfolio, tantamount to bundling, should be a method wherein a buyer has the advantage. Think bundling cable/Internet services. Not in this case, Kanno said.
“Yes, it is a bit counterintuitive because people usually assume that bundling gives you a good deal just like other commodities,” he told Hotel Management.
How did Kanno come to his conclusion? 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 exhibit a trend that is favorable or unfavorable for portfolio sales. The study focused on limited-service hotels.
The relationship between price per room (y-axis) and RevPAR (x-axis) were then illustrated in a scatter plot figure (represented here), which exhibits how price per room shifts as RevPAR changes. The author then developed a regression analysis separately for individual sales and portfolio sales to measure the price difference of the two types of sales and various RevPAR levels. As the figure shows, the regression line of the portfolio-sale data runs above the regression line of the individual-sale data—an indication that a portfolio-sale price is generally higher than an individual-sale price of the same RevPAR levels.
WHAT IT MEANS
With the data in, that said, what are the implications for hotel sellers and buyers? “The research demonstrates that industry participants may be able to create value by assembling portfolios in a strategic manner,” Kanno said. “If an investor can assemble a portfolio that fits the investment strategy of certain buyers, then the investor may be able to realize this value premium.”
And does it also mean that whenever possible, sellers should look to bundle hotels as part of a portfolio when it comes time to sell? Frankly: Is it more advantageous for sellers to sell hotels as a portfolio rather than as single-asset offerings?
“This is a complex issue,” Kanno remarked. “It depends not only on market conditions but also the characteristics of who the most probable buyers are, at a given time, and in a given market. While our research demonstrates that portfolio sales, on average, produce a higher sale price per asset, after performance adjustments, there are numerous complexities that affect whether such a strategy would be advantageous for a seller.”
One of the more active recent buyers and sellers of portfolios is RLJ Lodging Trust, a REIT based in Bethesda, Md. In February and March of this year, RLJ sold an 11-hotel portfolio (reportedly for $85 million) and closed on a portfolio of Hyatt-branded hotels, with a reported acquisition price of $313 million. According to Kate Henriksen, SVP of investment analysis and portfolio management at RLJ, assembling and selling portfolios in the current market is opportune. It’s not always the case, however.
“Depending on where we are at in the lodging cycle, selling hotels in a portfolio can be very advantageous,” she said. “Due to the large number of private equity groups chasing hotels right now, bigger is currently better when it comes to portfolio sizing. Given the scarcity of product on the market, certain groups are willing to pay a premium for large portfolios in order to place a significant amount of capital.”
Other recent large portfolio sales include American Realty Capital Hospitality Trust’s acquisition of the Equity Inns lodging portfolio for close to $2 billion from affiliates of the Whitehall Real Estate Funds, real estate private equity funds sponsored by Goldman Sachs.
Like any study, however, HVS’ had its limitations. In this case, as Kanno explained, “Due to constantly changing market conditions, we believe this sort of research needs to be ongoing. We also concede that adjusting for RevPAR is not the only adjustment that might be relevant between data sets that include portfolio-sale and individual-sale pairs of data.
“How the portfolio premium changes as the size of a portfolio becomes smaller or larger would be a topic that I am interested in for the future research.”
In Yoshihiro Kanno’s HVS article, “Hotel Portfolio Values,” he makes 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.