By Daniel Lesser
Economic growth, record low unemployment, relative low inflation, rising government spending, and tax reform have combined to produce one of the longest periods of sustained growth ever in the United States. 2018 was another record-breaking year for the U.S. hotel industry with new all-time high operating metrics including: annual occupancy, average daily rate, revenue per available room, room night demand, and available room nights. Results of the U.S. mid-term election are not likely to produce any immediate government policy changes and the American economy is now more than a decade into a growth cycle which has been slowing. Generally, investor sentiment appears to have reached a fork in the road giving rise to some offering a bearish outlook while others remain bullish. Trade and tariff regulations remain a hot topic as the stock market has rallied on news of a deal with China and/or NAFTA, and then has plunged when the details of these agreements have been disclosed. External factors including Brexit, areas of global economic weakness, and declining oil prices represent underlying longer-term themes. For now, the threat of rising interest rates appears to have eased as the Federal Reserve System is reacting to signals like a slowdown in the housing market and a relatively strong dollar. The government shutdown, which began on Saturday, December 22, has begun to impact various lodging markets throughout the country.
The LW Hospitality Advisors (LWHA) 2018 Major US Hotel Sales Survey includes 208 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled $18.3 billion and included approximately 51,100 hotel rooms with an average sale price per room of $357,000. By comparison, the LWHA 2017 Major US Hotel Sales Survey identified 183 transactions totaling roughly $13.6 billion including 51,000 hotel rooms with an average sale price per room of nearly $267,000. By further comparison, the LWHA 2016 Major U.S. Hotel Sales Survey identified 173 transactions totaling roughly $12.7 billion including 42,400 hotel rooms with an average sale price per room of nearly $300,000. Comparing 2018 with 2017, the number of trades increased by approximately 14 percent while total dollar volume rose roughly 35 percent and sales price per room increased by 34 percent. Comparing 2017 with 2016, the number of trades increased by approximately 5 percent while total dollar volume rose roughly 7 percent and sales price per room declined by 11 percent.
Notable observations from the LWHA 2018 Major U.S. Hotel Sales Survey include:
- Eighty-six or 41 percent of the total number of 2018 sale transactions occurred in three states;
- With thirty-eight 2018 hotel sales, Florida has been the most active transaction market followed by California and New York with twenty-five and twenty-three trades respectfully;
- Forty eight of the 208, or almost one quarter of 2018 U.S. hotel sale transactions, were for greater than $100 million each;
- Thirty of the 2018 hotel trades were between $100 and $199 million.
- Eight of the 2018 hotel sales were between $200 and $299 million;
- Xenia Hotels & Resorts, Inc. sold the 645-unit Aston Waikiki Beach Hotel in Honolulu, HI for $200 million or $310,000 per room;
- A joint venture between Andrew and Peggy Cherng, founders of Panda Restaurant Group, and investor Tiffany Lam acquired from MGM Resorts International the 392 key Mandarin Oriental Las Vegas for $214 million or $545,000 per room. The property is now operated by Hilton Worldwide as the Waldorf Astoria Las Vegas;
- Starwood Capital Group (SCG) acquired from the Los Angeles County Employees Retirement Association the 251-unit St. Regis Princeville Resort & Makai Golf Club on the island of Kauai in Hawaii for $225 million or roughly $900,000 per key. SCG intends to invest more than $100 million to transform the property into the 1 Hotel Hanalei Bay;
- At the very beginning of 2018, the 805-unit Fairmont San Jose, CA sold for $233.5 million or $277,000 per room;
- Brookfield Asset Management acquired the 339-unit PGA National Resort & Spa in Palm Beach Gardens, FL for $233 million, or $687,000 per key from Walton Street Capital who procured the property in 2006 for $170 million, and purportedly spent $89 million on renovations, for a total basis of $259 million;
- Extell Development Company purchased the 405 room Four Seasons Resort and Club Dallas at Las Colinas for $235 million, or $580,000 per unit from Blackstone who acquired the asset in 2014 for $150 million from CW Capital Asset Management. The previous owner, who had defaulted on a $175 million loan, had a reported basis of $290 million in the property;
- A joint venture between Marriott International & TLG Investment Partners & Concord Wilshire Capital, LLC acquired the 1000 room Sheraton Grand Phoenix, AZ for $255 million, or $255,000 per unit from the City of Phoenix. Phoenix spent $350 million to build the hotel, which opened in 2008 and subsequently the City spent $47 million to cover operating losses. In addition to selling the hotel at a loss, the Phoenix City Council agreed to provide the new ownership with a $97 million in property tax savings and the transfer of $13 million to use for repairs
- A joint venture between Ares Management LP, SMW Hospitality LLC (JV Square Mile Capital Management LLC & Wafra Inc.), & Trinity Real Estate Investments LLC sold to Blackstone the 297 key Ritz Carlton Kapalua on the island of Maui, HI for $275 million or $925,000 per room;
- Four of the 2018 trades were for between $300 million and $499 million;
- Host Hotels & Resorts, Inc. sold to Davidson Kempner Capital Management the 774-unit Westin New York Grand Central New York, NY for $300 million or $388,000 per key;
- The 395-unit Margaritaville Resort Casino Bossier City, LA sold for a total of $376 million, or $952,000 per room with VICI Properties Inc. having purchased the land and real estate assets for $261 million and Penn National Gaming, Inc. having acquired the operations for $115 million;
- Blackstone purchased the 740 room Arizona Biltmore Phoenix, AZ from the Government of Singapore for $403 million, or $545,000 per room;
- A joint venture which includes GFI Capital and Elliott Management acquired the 729 room Parker New York hotel for $405 million, or more than $550,000 per key from The Jack Parker Corporation who originally developed and opened the property in 1981;
- Four of the 2018 trades were for between $500 million and $999 million dollars;
- MSD Capital acquired the 426 room 1 Hotel South Beach for $500 million, or roughly $1.2 million per key from a partnership that included Starwood Capital Group, Invesco, and the Lefrak Organization;
- Gulf State of Qatar owned Katara Holding purchased NYC’s iconic 282 room Plaza Hotel for $600 million, or more than $2.1 million per room from a partnership between Sahara U.S. Corp., Ashkenazy Acquisition Corp., and Kingdom Holding Co. The sale marked the final chapter in a multi-year global saga surrounding the Plaza Hotel’s ownership;
- Blackstone acquired the 1,002 room JW Marriott San Antonio Hill Country Resort & Spa for $650 million, or roughly $650,000 per unit from a joint venture between Miller Global Properties & Principal Real Estate Investors that reportedly spent $565 million to develop the project during the mid-2000’s;
- A joint venture between Elliott Management and Trinity Investments acquired from Blackstone, the 1,580 room JW Marriott & Ritz-Carlton Grande Lakes Orlando, FL for $900 million, or nearly $560,000 per unit;
- Two 2018 hotels trades were for $1.0 billion and over;
- VICI Properties in a joint arrangement with Penn National Gaming acquired the 400-unit Greektown Casino Hotel in Detroit, MI for $1.0 billion or $2.5 million per room;
- Wind Creek Hospitality purchased the 302 rooms Sands Casino Resort Bethlehem, PA for $1.3 billion, or over $4.3 million per unit from Las Vegas Sands Corp;
- Six U.S. hotel sales occurred at more than one million dollars per room including:
- Cavallo Point: The Lodge at the Golden Gate Sausalito, CA – $1.1 million
- 1 Hotel South Beach Miami, FL – $1.2 million
- The Plaza New York, NY – $2.1 million
- SoHo House Chicago, IL – $2.4 million
- Greektown Casino Hotel Detroit, MU – $2.5 million
- Sands Casino Resort Bethlehem, PA – $4.3 million
- Hotel centric investment entities that were active purchasers and sellers of lodging assets include:
- Braemar Hotels & Resorts Inc. (formerly known as Ashford Hospitality Prime);
- Brookfield Asset Management;
- Hersha Hospitality Trust;
- Hyatt Hotels Corporation;
- MCR Development;
- Noble Investment Group;
- Pebblebrook Hotel Trust;
- Procaccianti Group;
- Starwood Capital Group;
- Summit Hotel Properties;
- Wheelock Street Capital;
- Woodbine Development, and
- Xenia Hotels & Resorts, Inc.
During 2018, an abundance of capital fueled robust activity with lodging sector mergers, acquisitions, and spinoffs. Significant transactions included:
- Pebblebrook Hotel Trust’s $5.2 billion takeover of LaSalle Hotel Properties;
- Hyatt Hotels Corporation acquisition of Two Roads Hospitality;
- AccorHotels purchase of Mövenpick Hotels & Resorts;
- Spin-offs of La Quinta Holdings Inc. (NYSE: LQ) with the La Quinta hotel brand and management business acquired by Wyndham Hotels and Resorts (NYSE: WH) and the creation of CorePoint Lodging Inc. (NYSE: CPLG), a publicly-traded real estate investment trust (REIT) with more than 300 LaQuinta affiliated properties situated throughout the U.S., and;
- LVMH Moët Hennessy Louis Vuitton SE’s $3.2 billion acquisition of hotel and leisure company Belmond Ltd.
Foreign investment in U.S. commercial real estate including hotel properties has been robust, as America continues to be the largest recipient of overseas direct investment in the world. Expansion in the U.S. economy has outpaced that of other nations, and investment risk here is relatively low in comparison to other nations. In addition, the U.S. offers higher returns as well as liquidity, which provides foreign investors the ability to exit relatively quickly if they choose to move capital.
The U.S. lodging sector is facing some headwinds led by rising costs and shortage of labor, as well as property tax and insurance expenses increasing at levels well above underlying inflation. Thus far the one-month long U.S. government shutdown has negatively impacted government dominant markets such as Washington, D.C. and San Diego. If the stalemate in Washington, D.C. endures, the impact of any potential delay in tax refunds will have a disruptive negative effect on Q1 and Q2 2019 consumer spending. Furthermore, recent U.S. airline guidance regarding anticipated reduced demand will contribute to cautious investor sentiment.
While worldwide financial markets were very reactive to any whiff of geopolitical turbulence just a month ago, the headlines today seem to be better digested by investors, as instability has been subdued. The hotel sector has always and will continue to be quite volatile and highly dependent on the strength and weakness of the economy. Barring any black swan event(s), the near-term outlook for lodging remains positive with strong sector investment activity, despite muted growth expectations.