Analysts Say Limited Supply, Strong Hotel Financial Performance Should Bring Increasing Sales Through Year End
A summer heat wave has left many sweltering through much of the nation this summer, but the hotel investment market is generating some July heat of its own during the peak month for vacations, as evidenced by a pair of blazing hotel acquisitions and financings at the outset of the third quarter.
Major deals announced just this week include DiamondRock Hospitality Co.'s blockbuster $495 million portfolio acquisition
from Blackstone, and Pebblebrook Hotel Trust's purchase of two hotels in Seattle and Portland for a total $63 million this week.
The deals appear to confirm forecasts of industry analysts that the second half of 2012 will bring a steady stream of investor capital into the hospitality and lodging space.
REITs such as Pebblebrook and DiamondRock are also teeing up on public offerings despite tepid overall stock market performance of late, a sign of confidence in a hotel market prospects despite the ongoing unevenness of the economy.
The national hotel sector has shown steady improvement in room demand and revenue, while average daily rates and RevPAR are steadily closing in on previous peaks, according to Marcus & Millichap's second-quarter Hospitality Research report. U.S. RevPAR (revenue per available room) growth was up a strong 8% in second-quarter 2012, according to Smith Travel Research (STR), following 7.9% growth in the first quarter.
Analysts' expectations for solid leisure travel and business traveler volume in coming months are based partly on lower prices for gasoline. And revitalized asset performance with little new hotel stock being added continues to push investors to acquire properties, according to the report authored by David Luther, national director for M&M's National Hospitality Group.
"With almost no supply growth and if the economy actually shows improvement, we believe these figures could remain in the mid-high single-digits for some time," said William C. Marks, REIT analyst with JMP Securities.
Following positive sentiments the June NYU Lodging Conference and given recent Smith Travel Research trends, Marks expects lodging companies to report in-line quarters and strong outlooks for the second half of 2012.
Industry forecasts predict that overall U.S. hotel transaction activity is expected to accelerate during the second half of 2012. That's in addition to some fairly hefty deals during the second quarter, including the following:
- Oaktree Capital Management partnered with Woodridge Capital Partners to purchase the storied Fairmont Hotel in San Francisco from Maritz, Wolff & Co.for close to $200 million;
- Loews Hotels & Resorts last month closed the acquisition of the 632-room Renaissance Hotel & Spa in Hollywood, CA from CIM Group in a deal valued in media reports at around $165 million;
- RJL Lodging Trust acquired the 226-room Courtyard by Marriott NY in the Upper East Side from Madison Equities LLC for $82 million.
The second-quarter deal volume doesn't include an agreement by French hotelier Accor SA to sell the Motel 6 division to an affiliate of Blackstone Real Estate Partners VII for a total value of $1.9 billion, a deal that hasn't yet closed.
Also last month, Marriott International revealed an aggressive plan to invest $2 billion in hotels globally
over the next few years, followed by an announcement by rival Starwood Hotels & Resorts Worldwide Inc. to double its presence in China.
Transaction volume will only increase through the end of the year, with buyers including both REITs and private equity companies, analysts said.
"It is our belief that with continued improvement in equity valuations and limited supply growth, hotel REITs, which were responsible for a large portion of 2010/2011 transaction activity, may be back at the negotiating table soon," Marks said in a report to investors on the hotel and resorts sector.
For example, a key strategy for Starwood Hotels & Resorts is potential asset sales to unlock value in an "asset light" strategy.
"Until recently, market turbulence has slowed down transaction activity as buyers and sellers remained cautious. However, dispositions are becoming more and more likely and [Starwood] management has specifically referred to the potential for 'non-trivial' levels of asset sales," Marks said.
The luxury segment had RevPAR growth of about 10% in the second quarter, with other segments posting growth ranging from 6.1% to 8.2%. Every one of the top 25 markets may have registered positive RevPAR growth during the quarter, including Dallas and Washington, D.C. that were negative in the first quarter, with 11 markets posting double-digit RevPAR gains.
San Francisco, Houston, St. Louis, and Los Angeles all posted greater than 14% RevPAR growth during the quarter.
According to preliminary month-end data released by STR last week, positive trends continued during June, with average U.S. RevPAR growth up 8-10%, with 3-5% percentage point increase in occupancy. The luxury segment had RevPAR growth of 10-12%, with other segments ranging from 7-10%.
The continuing trend of low supply makes it a seemingly good time to be a net buyer, Marks said. Citing Host Hotel management comments at the NYU conference, Marks said hospitality companies do not need debt markets to return to 2006 levels to get deals done.
"We do know from our covered companies that many REITs are focusing on identifying individual assets to pick off, rather than portfolio deals, to avoid competing with private equity money," Marks said.
Marcus & Millichap reported that investors generally remain focused on hotels in major markets, which typically benefit from stronger local economies and a broader, more diverse array of demand drivers. "Nationally, investors’ appetites for troubled properties also remains keen, but opportunities are dwindling as more lenders work out distressed situations," the report said.
On the financing front, funding from the Small Business Administration (SBA) continues to support additional investment activity, especially for select- and limited-service properties selling for less than $10 million. Deals involving larger full-service assets, however, may be held in check in the coming months due to widening spreads in the CMBS market, Marcus & Millichap said.