By Daniel Lesser
The U.S. Lodging Industry has shifted dramatically over the past twelve months. Looking back to this time last year, the world was fiercely battling the Coronavirus pandemic, virtually weaponless without anything other than masks and social distancing measures. We are now roughly six months into the global vaccination campaign, with cases and death rates much lower in most parts of the world. Although the U.S. has achieved months of steadily declining case counts, unfortunately, every day we are reminded that the fight against the pandemic is not over. COVID-19 continues to loom large as new, more transmissible variants, and ongoing virus outbreaks in places like Australia, India, South Korea, and the continent of Africa highlight that the world remains vulnerable to the pandemic. Additionally, according to the Centers for Disease Control and Prevention, 47.9%, less than half of all Americans are fully vaccinated.
The recent swift U.S. economic recovery is unlike any in recent history. The COVID-19 recession was not caused by monetary factors, rather it has been a disruption akin to an unanticipated natural disaster which typically temporarily interrupts economic activity while leaving intact the underlying demand and supply of goods and services. When a catastrophic event sunsets’, the subject market areas economy tends to recover faster, as compared with a classic financial recession.
Currently in the U.S., startup businesses are launching at the fastest pace ever, household debt-service burdens in relation to after-tax income are at the lowest levels in decades, home prices are surging, and The Dow Jones Industrial Average has risen nearly 18 percent from its pre-pandemic peak in February 2020. Widespread vaccination during the first half of 2021, and over two trillion dollars in additional personal savings throughout the last year have provided American consumers the means to spend; specifically on discretionary items such as travel. This is all good news.
The bad news is that the speed of the current economic rebound is also triggering turmoil as high demand coupled with widespread shortages of raw materials, commodities, and labor along with supply chain challenges are driving up the cost of consumer goods and services. Many anticipate the recent relative rapid rise of inflation to be temporary, while many others are concerned that brisk price increases will endure for several years.
Generally, the commercial real estate market in the U.S. is flourishing as asset values declined far less than during the Great Recession and have already reversed course into a recovery. In addition to federal government support of the economy, thus far lenders have been flexible with forbearance terms and avoided widespread foreclosures.
The recovery in the U.S. hotel industry until now has been largely driven by leisure demand as lodging facilities that serve vacationers, weekend travelers and day trippers are performing very strongly and, in some cases, charging higher average daily rates and filling more rooms than prior to the pandemic. Demand drivers are anticipated to change during the second half of this year as post Labor Day corporate travel should increase, and with schools reopening leisure travel will slow down. Furthermore, the predicted death of urban centers is proving to be greatly exaggerated as the pendulum of outbound flight from 24/7 urban cores is swinging back. The availability of a vaccine has made city workers and dwellers less fearful of infection and anxiety to be in crowded environs.
The U.S. lodging industry is reemerging with dramatic transformations that may permanently alter the sectors pre-pandemic business model and create higher margin businesses. Owners and operators are touting potential savings and increased efficiency from reduced hotel workforce labor and costs on services such as housekeeping, food, and beverage. Similar to the airline’s ala carte approach, the hotel industry is attempting to move guests toward an opt-in choice for various services, such as daily room cleaning.
The LW Hospitality Advisors (LWHA) Q2 2021 Major U.S. Hotel Sales Survey includes 60 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $4.66 billion and included approximately 14,000 hotel rooms with an average sale price per room of roughly $331,000. By comparison, the LWHA Q2 2020 Major U.S. Hotel Sales Survey identified 6 single asset sale transactions totaling roughly $246 million and included approximately 1,500 hotel rooms with an average sale price per room of roughly $169,000. Comparing Q2 2021 with Q2 2020, the number of trades increased tenfold while total dollar volume increased nineteen-fold and sales price per room nearly doubled. By further comparison, the LWHA Q2 2019 Major U.S. Hotel Sales Survey identified 35 transactions totaling roughly $2.6 billion including 9,100 hotel rooms with an average sale price per room of $286,000. Comparing Q2 2021 with Q2 2019, the number of trades increased by approximately 71 percent while total dollar volume grew roughly 79 percent and sales price per room rose by 16 percent.
Noteworthy Q2 2021 observations include:
• During the first half of 2021, there have been four single asset hotel sales recorded with a per room transaction amount greater than one million dollars, two of which were for more than two million dollars per key. Considering the COVID-19 pandemic and subsequent downturn in lodging industry performance metrics, these sales transactions and record pricing are intriguing.
• Prior to 2020, there have only been six hotel trades ever in the U.S. with a price over two million per room, and a total of 35 hotel transactions for greater than one million per key. Therefore, more than 10 percent of the greater than one million dollar per room trades to ever occur, were consummated during the initial six months of 2021.
• The recent announcement of Hyatt Hotels Corporation (NYSE: H) acquisition of Ventana Big Sur, an Alila Resort in Big Sur, CA for over $2.5 million per unit, represents a new high-water mark in the U.S.
• The recent sale of Ventana Big Sur is roughly 85 percent greater than the $1.358 per room trade of the asset from 2015.
• Additional record submarket per unit pricing has been established with sales earlier this year of The Four Seasons Resort Orlando at Walt Disney World Resort in Orlando, FL and the Mountain Chalet Aspen in Aspen, CO for $1.374 million per room and $1.079 million per key, respectively.
• Furthermore, the $740,000 per key sale of Residence Inn by Marriott Maui Wailea hotel is the highest-ever price per unit paid for a U.S. select-service hotel.
• Twelve trades or roughly twenty percent of the national Q2 total occurred in the state of California, followed by eight sales each in Colorado and New York, and five in Washington State.
• Five of the twelve California major hotel sales occurred in the Greater Los Angeles region.
• Six of the eight New York major hotel sales occurred in the City of New York.
• All five of the Washington State major hotel sales occurred in the Seattle metropolitan area.
• Eight trades or roughly thirteen percent of the national Q2 total were reported to be predicated upon alternative use redevelopment opportunities and represent permanent deletions from hotel supply.
• Six Q2 2021 sales were consummated for between $100 million and $200 million each.
• Geolo Capital, the private equity investment arm of the John Pritzker family office, and its joint venture partner Wanxiang America Real Estate sold the 160-acre Ventana Big Sur Resort, an Alila Resort in Big Sur to Hyatt Hotels Corporation (NYSE: H) for $148 million. Reportedly H intends to evaluate a re-sale of the asset while retaining a long-term management agreement.
• The Church of Jesus Christ of Latter-day Saints has purchased the 200-unit Residence Inn by Marriott Maui Wailea hotel for $148 million or $740,000 per key, the highest-ever price paid for a U.S. select-service hotel. With $100 billion of diversified assets from tithing donations from 16 million world-wide members, the Mormon Church has reportedly amassed one of the world’s largest investment funds.
• Suffolk County Regional Off-Track Betting Corp. (SROTB) acquired the 228-room Jake’s 58 Casino Hotel in Islandia, NY for $120 million or $526,000 per key. The property formerly known as the Islandia Marriott Long Island hotel was acquired by Delaware North (DN) for $40.41 million in 2016 and renovated to include 1,000 video lottery terminals and an off-track sportsbook. DN operated the gaming facility for SROTB who exercised a purchase option in its original 50-year agreement.
• DiamondRock Hospitality Company (NYSE: DRH) sold the 725-room Lexington Hotel in New York City for $185.3 million or roughly $256,000 per key. DRH acquired the asset in 2011 for $335 million resulting in a 45 percent erosion in value over the ten-year hold.
• Yellowstone Real Estate Investments acquired the 600 room Watson Hotel in New York City for roughly $175 million or nearly $292,000 per key. In a simultaneous transaction, the buyer acquired a defaulted loan and a ground lease encumbering the property.
• Dreamscape Companies purchased the 482 room Sheraton Grand Nashville Downtown for $169.7 million or $352,000 per unit. The seller, JRK Property Holdings acquired the asst in 2012 for $47.5 million and reportedly invested a $35 million renovation of the hotel during 2017. On a cost basis of roughly $82.5 million the asset value more than doubled during the nine-year hold.
• Three Q2 2021 trades occurred for between $200 million and $300 million each.
• Sunstone Hotel Investors Inc. (NYSE: SHO) acquired the newly constructed 130-room Montage Healdsburg in California’s Sonoma County for $265 million or just over $2.0 million per unit from Ohana Real Estate Investors. It is worth noting that upon stabilization, SHO expects to generate a 6.0% to 7.0% net operating income yield on total invested capital.
• Pebblebrook Hotel Trust (NYSE: PEB) purchased the 369 room Margaritaville Hollywood Beach Resort in Florida for $270 million or roughly $732,000 per unit. The seller, KSL Capital Partners acquired the resort in 2018 for $190 million indicating an $80 million gain or 42 percent appreciation during the three-year hold.
• Ohana Real Estate Investors acquired the 491 room Hyatt Regency Lost Pines Resort and Spa in Cedar Creek, TX a suburb of the City of Austin for $275 million or $560,000 per unit. The seller, Hyatt Hotels Corporation (NYSE: H) entered into a long-term management agreement for the property upon sale. During 2014, H acquired Woodbine Development Corporation’s joint venture interest in the property for $143 million.
• Two Q2 2021 sales transacted for more than $600 million each.
• Host Hotels & Resorts, Inc. (NASDAQ: HST) acquired the 444-room Four Seasons Resort Orlando at Walt Disney World Resort for $610 million or $1.374 million per room. The property was developed/owned via a joint venture of Four Seasons Hotels & Resort, Dune Real Estate Partners and Silverstein Properties Inc.
• Red Rock Resorts, Inc. (NASDAQ: RRR), the parent company of Station Casinos sold the 703 room Palms Casino Resort in Las Vegas to the San Manuel Band of Mission Indians for $650 million or approximately $925,000 per unit. The seller reportedly purchased the property in 2016 for $312.5 million and completed a $690 million renovation during 2019 just prior to the pandemic. The transaction indicates a loss of $361 million or a 36 percent decline of the sellers $1.011 billion cost basis.
As the U.S. hotel industry continues to emerge from the carnage induced by the global pandemic, an abundance of capital is beginning to fuel increasing activity with lodging sector mergers, acquisitions, and spinoffs. Significant Q2 2021 transactions include:
• Blackstone and Starwood Capital Group’s recent joint venture $6 billion acquisition of Extended Stay America, Inc. (ESA) and its paired-share REIT, ESH Hospitality, Inc. (ESH) (NASDAQ: STAY) reflects perceived upside by astute institutional debt and equity sponsors with demonstrated historical success investing in lodging assets. The purchase of the 561-property (62,500 rooms) portfolio and the brand was financed with $4.65 billion in commercial mortgage-backed securities (CMBS) debt originated by a consortium including JPMorgan Chase, Citigroup Global Markets Inc., and Deutsche Bank, which is one of the largest single-asset, single-borrower CMBS loans of the last decade. Blackstone is no stranger to Extended Stay America as it first purchased the company for $3.1 billion in 2004, sold it three years later for $8.0 billion, and subsequently was part of an investor group that acquired the company out of bankruptcy in 2010 and took it public in 2013.
• As part of the bankruptcy process of Singapore based REIT Eagle Hospitality Real Estate Investment Trust (Eagle HT), Monarch Alternative Capital LP (Monarch) purchased a portfolio of ten full-service hotels located in four states for a total consideration of $360 million. In early 2021, Monarch initially assisted Eagle HT by providing financing in the form of a $100 million debtor-in-possession loan to help fund ongoing expenses related to hotels and the bankruptcy case. In March, Monarch was also named the stalking horse bidder for the 15 properties Eagle HT looked to sell, providing a floor bid for the Section 363 sale process. Following the auction, Monarch emerged as the ultimate buyer for 10 properties.
Institutional investment entities that have been recent active investors of U.S. lodging assets include:
- Braemar Hotels & Resorts Inc.
- Driftwood Capital
- Fortress Investment Group LLC
- GIC Private Limited
- Host Hotels & Resorts Inc.
- HRI Properties
- Hyatt Hotels Corporation
- Linchris Capital Partners
- Monarch Alternative Capital LP
- Ohana Real Estate Investors
- Pebblebrook Hotel Trust
- Rockpoint Group
- Starwood Capital Group
- Stockdale Capital Partners
- Summit Hotel Properties, Inc
- Sunstone Hotel Investors, Inc.
- Taconic Capital
- TPG Real Estate Partners
- Westmont Hospitality Management
Additional commentary on the U.S. hotel market based upon my observations:
• Risks for the U.S. hotel industry include:
• A resurgence of COVID-19 in the U.S. and/or other parts of the globe could threaten to derail the recovery.
• During the pandemic, most hotel companies relaxed brand standards. However, if recovery momentum endures, curing deferred maintenance and renovation requirements will be a challenge for those short on cash for capital expenditures.
• Owners will be pressured to replenish furniture, fixtures, and equipment reserves that were tapped into during the pandemic to cover other expenses.
• Despite the pandemic placing hundreds of thousands of hotel employees out of work, the industry is facing a massive labor shortage due in part to the availability of generous unemployment benefits and government funded stimulus checks, schooling and/or childcare challenges, and continued health concerns about workplaces.
• Continued permanent migration out of the hospitality industry to higher-paying employment is expected to render upward pressure on labor shortages and wage rates and benefits, placing travel providers at risk of not being able to bring sufficient capacity back in a timely manner to meet demand, resulting in lost profits.
• Hotel owners and operators may have to contend with remote work’s threat to the office market and a dearth of individual corporate business and group meeting/convention travel.
• Loan defaults and foreclosures are expected to increase as forbearance periods end. As more liquidity continues to emerge, some lenders will ultimately lose patience and demand recapitalization and/or enforcement of their remedies.
• Positives for the U.S. hotel industry include:
• Enormous sums of debt and equity capital earmarked for investment in U.S. hotels has been raised.
• An uncertain recovery trajectory coupled with looming capital expenditures and property improvement plans may force owners to place hotel assets for sale, resulting in a more fluid transaction market.
• Recent substantial increases in the cost of construction materials and labor should render many projects economically unfeasible thus limiting development financing providing a temporary reduction in the amount of new hotel supply during the near term.
• Copious amounts of all types of debt and equity are available from domestic and offshore entities that perceive U.S. hotels as desirable investment opportunities, particularly due to the notion of being able to continuously raise rooms rates during an inflationary environment.
• Economic and/or functionally obsolete hotels will continue to close, many of which will represent ripe targets for alternative use redevelopment opportunities and become permanent deletions from lodging supply.