By Daniel Lesser
The U.S. economy is expected to grow roughly six percent for the year, however with one quarter to go in 2021, this year has done its best to be as tumultuous and volatile as the last. It feels like we’ve been on this road for a while, with the same kinds of bumps to navigate including COVID, deepening supply chain issues, higher energy prices, a recent cutback in consumer spending, and the scarcity of materials. What everyone had hoped would be a more normalized environment has turned out to be anything but that.
After a rapid rebound in U.S. economic growth during Q2 2021, news of the fast-spreading Delta coronavirus variant created a cloudier outlook. Today there are two perspectives from which to dissect the near-term future, namely glass half empty or glass half full. On the one hand, although the U.S. has achieved months of steadily declining case counts, the fight against the pandemic appears far from 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, less than 60 percent of all Americans are fully vaccinated. On the other hand, the recent swift U.S. economic recovery is unlike any in recent history as 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 S&P 500 and tech-heavy Nasdaq are both up approximately 30% compared to the same period a year ago, and the Dow Jones Industrial Average has risen more than 20%. 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.
The Delta variant led several large companies to push back their return-to-office plans, among them Amazon and Apple announcing that they will delay their workplace returns until at least January 2022 heightening risk for hotels with a trickle through negative effect on business travel. Additionally, major corporate and consumer events with thousands of attendees continue to cancel and/or shift to virtual executions.
Despite the pandemic placing hundreds of thousands of hotel employees out of work, the U.S. lodging 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 persistent 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.
Generally, the commercial real estate market in the U.S. is flourishing, as asset values declined far less than during the Great Recession of 2008/2009 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 have avoided widespread foreclosures. Copious amounts of all types of debt and equity are available from domestic and offshore entities that currently perceive U.S. hotels as desirable acquisition and investment opportunities, particularly due to the notion of being able to continuously raise rooms rates during an inflationary environment. Furthermore, rescue capital to provide needed liquidity for hotel owners to retain their assets is competing with opportunistic investors seeking distressed investment plays.
Debt markets for hotel financing continue to expand as capital is more readily available, spreads continue to compress, and terms are improving. This favorable financing backdrop has continued to support higher underlying real estate values and increasing transaction activity, particularly for cash-flowing and better-performing hotels.
The LW Hospitality Advisors (LWHA) Q3 2021 Major U.S. Hotel Sales Survey includes 90 single asset sale transactions over $10 million. These transactions totaled $14.4 billion and included approximately 27,000 hotel rooms with an average sale price per room of $532,000. Net of The Cosmopolitan of Las Vegas and the Aria Resort & Casino and Vdara Hotel & Spa also in Las Vegas, both of which trades skew the data given their relative size, the Q3 2021 statistics equate to 88 trades totaling $4.8 billion, roughly 18,500 hotel rooms with an average sale price per room of $261,000. By comparison, the LWHA Q3 2020 Major U.S. Hotel Sales Survey included 12 single asset sale transactions totaling $829 million including approximately 2,700 hotel rooms with an average sale price per room of $306,000. Comparing Q3 2021 with Q3 2020, the number of trades increased more than sevenfold while total dollar volume rose nearly six times and sales price per room decreased by roughly 15 percent. By comparison, the LWHA Q3 2019 Major U.S. Hotel Sales Survey identified 40 transactions totaling roughly $3.725 billion including 13,100 hotel rooms with an average sale price per room of nearly $283,000. Comparing Q3 2021 with Q3 2019, the number of trades increased by 120 percent while total dollar volume rose 30 percent and sales price per room decreased by 8 percent. After several quarters of limited sales volume, the flood gates opened in Q3 2021.
Noteworthy Q3 2021 observations include:
- Sixteen trades or roughly eighteen percent of the national Q3 total occurred in the State of Florida, followed by eleven sales in California, eight in Washington State, and seven each in Georgia and New York.
- Seven of the sixteen Florida major hotel sales occurred in the Miami metropolitan area.
- Six of the eleven California major hotel sales occurred in the San Francisco Bay Area.
- Seven of the eight Washington State major hotel sales occurred in the Seattle metropolitan area.
- Six of the seven Georgia major hotel sales occurred in the Atlanta metropolitan area.
- All seven of the New York major sales occurred within the New York metropolitan area, including six trades within the City of New York.
- Twelve trades or roughly fourteen percent of the national Q3 total were reported to be predicated upon alternative use redevelopment opportunities and represent permanent deletions from hotel supply.
- Two blockbuster multibillion dollar deals were announced in Las Vegas, NV.
- Blackstone Real Estate Partners VII L.P. (Blackstone) revealed a $5.65 billion sale ($1,863,000 per unit) of the 3,032 key Cosmopolitan of Las Vegas. A joint venture between the Cherng Family Trust (founders of Panda Express), Stonepeak Partners and Blackstone Real Estate Income Trust, Inc. paid $4.025 billion for the real estate, and MGM Resorts International (MGM) paid $1.6 billion for the operations. In turn, MGM entered into a 30-year lease agreement, with three 10-year renewal options with an initial annual rent of $200 million, escalating annually at 2% for the first 15 years and the greater of 2% or the increase of the consumer price index, capped at 3% thereafter. Deutsche Bank sold The Cosmopolitan for $1.7 billion in 2014, less than half of what it cost to build the property. Blackstone invested more than $500 million to renovate nearly 3,000 guest rooms, build 67 new rooms and suites, enhance the food and beverage offerings, and dramatically improve the gaming amenities and common areas. According to a Blackstone letter to fund investors, total profits after the sale will be roughly $4.1 billion, including cash flow from the property’s operations. Earning nearly ten times the amount of invested equity, the deal results in the firm’s most profitable property venture ever.
- Blackstone Real Estate Income Trust acquired the Aria Resort & Casino and Vdara Hotel and Spa within the Las Vegas CityCenter project for $3.89 billion ($707,000 per unit) in a sale-leaseback transaction with MGM Resorts International (MGM). Just prior, MGM purchased Infinity World’s 50 percent interest in CityCenter Holdings giving them full ownership of the two hotels. MGM will pay $245 million per year to rent the real estate as the firm continues to execute an “asset light” strategy.
- Six Q3 2021 sales were consummated for between $100 million and $200 million each.
- JGB Smith Properties sold the dual brand 625 room Renaissance Arlington Capital View Hotel and Residence Inn by Marriott Arlington Capital View to Blackstone Group for $171.6 million or $275,000 per unit.
- McSam Hotel Group sold the 520 room Hyatt Place New York City/Times Square to an unknown buyer doing business as NY 39th Street LLC for $166 million or $319,000 per unit
- The recently renovated 466 room W Atlanta-Midtown Hotel was purchased by Schulte Hospitality Group for $160 million or $343,000 per unit and rebranded Hotel Midtown Atlanta, Curio Collection by Hilton.
- Earlier this year, Wardman Hotel Owner LLC, an affiliate of Pacific Life Insurance Company (PacLife) filed for Chapter 11 bankruptcy and terminated its management contract with Marriott International in connection with the century old 1,152 room Washington Marriott Wardman Park hotel. PacLife permanently closed the property during 2020 due to the COVID-19 pandemic. Multifamily investor Carmel Partners was the winning bidder to acquire the shuttered property for $152.25 million or $132,000 per unit.
- Westbrook Partners sold the 221 key Four Seasons Hotel Miami hotel in Brickell for $130 million or $588,000 per unit. The buyer, Fort Partners now controls all four Four Seasons properties in South Florida including Palm Beach, Fort Lauderdale, and Surfside.
- The 288-room dual branded AC Hotel by Marriott Atlanta Midtown and Moxy Atlanta Midtown was acquired by TPG Real Estate Partners for $100 million or $347,000 per unit. The seller, Noble Investment Group, developed this first-ever combination of the AC Hotels by Marriott and Moxy Hotels brands under one roof which opened during 2019.
- Five Q3 2021 trades transacted for between $200 million and $300 million each.
- The Woodlands Resort; The Westin at The Woodlands; and Embassy Suites by Hilton, The Woodlands at Hughes Landing were purchased by Lowe Enterprises Inc. (Lowe) for $252 million or $277,000 per unit from Howard Hughes Corporation. The assets will continue to be managed by Lowe’s management subsidiary, CoralTree Hospitality, which assumed operations of the properties in 2020.
- EBCI Holdings, a company operated by the Eastern Band of Cherokee Indians tribe, paid $250 million or $497,000 per unit to acquire the 503 room Caesars Southern Indiana in Elizabeth, IN across the Ohio river from Louisville, KY.
- Park Hotels & Resorts Inc. (NYSE: PK) sold the 360 room Le Méridien San Francisco for $221.5 million or $615,000 per unit to KHP Capital Partners. PK purchased Le Méridien via its acquisition of Chesapeake Lodging Trust (NYSE: CHSP) during 2019.
- The 104-year-old 326 room W Washington D.C. was sold by Investment Corp. of Dubai to a joint venture that includes Pacific Investment Management Company, LLC (Pimco) and Schulte Hospitality Group for $220 million or $675,000 per unit. The buyer terminated the W brand affiliation, and the historic property reverted to its original identity as the Hotel Washington.
- Host Hotels & Resorts, Inc. (NASDAQ: HST) acquired the 200-room Baker’s Cay Resort Key Largo, Curio Collection for $200 million or one million dollars per unit. The seller, KHP Capital Partners, recently completed a $63 million renovation to repair damage from Hurricane Irma.
As the U.S. hotel industry continues to emerge from the carnage induced by the global pandemic, an abundance of capital continues to fuel increasing activity with lodging sector mergers, acquisitions, and spinoffs. Significant Q3 2021 transactions include:
- Blackstone Real Estate Partners acquired Condor Hospitality Trust, Inc. (NYSE American: CDOR) portfolio of 15 limited-service hotels for $305 million, or roughly $160,000 per room.
- Pyramid Hotel Group and Benchmark Global Hospitality, two of the largest third-party U.S. hotel management companies with 210 hotels combined, are merging and will operate under the moniker Benchmark Pyramid.
- Terrapin Hospitality acquired K Partners and increased its portfolio from 35 managed properties to 70, with 7,335 rooms spanning across 13 states.
Institutional investment entities that have been recent active investors of U.S. lodging assets include:
- Apple Hospitality REIT
- Arbor Lodging Partners
- Apollo Global Management
- AWH Partners
- Concord Hospitality Enterprises
- Diamondrock Hospitality Company
- Fort Partners
- Hilton Grand Vacations
- Host Hotels & Resorts Inc.
- JMI Realty
- KHP Capital Partners
- KKR & Co.
- KSL Capital
- Linchris Hotel Corp.
- Lowe Enterprises
- Magna Hospitality Group
- Noble Investment Group
- Oxford Capital Group
- Peachtree Hotel Group
- Pebblebrook Hotel Trust
- Procaccianti Hotel REIT
- RLJ Lodging Trust
- Schulte Hospitality Group
- Songy Highroads
- TPG Real Estate Partners
Generally, hotel properties are trading at strong prices as investors look past the below average occupancy rates and generated income which remain below pre-pandemic levels. Investors with long-term horizons are betting that U.S. hotels will once again fill with guests as the recovery from the pandemic continues to unfold. In addition to traditional lodging sector focused investors, first-time hotel buyers are interested in hotels given the record-high pricing in other real estate sub-sectors. Although distressed deals have been few and far between, with many prospective buyers frustrated with elevated pricing levels there remains an expectation that more of these opportunities will come to market during the next twelve months.
An inflection point will soon be reached where both lenders and borrowers have no more to “give”, and loan defaults and foreclosures are expected to increase as forbearance periods end particularly in connection with large and/or old full-service hotels. Furthermore, an uncertain recovery trajectory coupled with looming capital expenditures and property improvement plans may force owners to finally capitulate, as many lenders will ultimately lose patience and demand recapitalization and/or enforcement of their remedies. During the remainder of this year, and well into 2022, expect more hotel sale transactions, as well as more deployment of rescue capital for troubled lodging deals. Working out distressed hotel assets will take time beyond even when sector supply and demand metrics stabilize, which could be several more years. Savvy investors who deploy capital into U.S. hotels at market pricing, and if need be, are ready, willing, and able to hold for ten years, will invariably achieve superior risk adjusted returns when compared with other asset classes.