After trading at a blistering pace last year, high-dollar hotel investment sales cooled off considerably in the first half of 2012. However, early third-quarter transaction activity suggests that lodging sales should finish the year on a strong note, according to CoStar sales data and comments from leading hospitality CEOs.
Total volume of sold hotel transactions valued at $25 million and above was $2.5 billion in the first six months of 2012 -- well below the strong $6.4 billion recorded in the first half of 2011, according to preliminary sales transactions analyzed by CoStar. Thanks to a handful of hotels that sold for top dollar, sales volume has already surpassed second-quarter 2012 and about equaled first-quarter figures just a month into the third quarter. The average price per key remained strong at around $233,500 at midyear.
The uptick in sales in recent weeks come as the U.S. hotel industry heads into the Labor Day weekend, traditionally one of the busiest travel and vacation periods of the year, and reflects what lodging analysts say is the continuing and growing strength in fundamentals in spite of this year’s slow economic growth and fiscal uncertainty.
In an updated lodging forecast released this week, PwC (PricewaterhouseCoopers) expects the recovery in revenue per available room (RevPAR) to continue through the end of the year, with slightly stronger gains in both demand and room pricing than previously anticipated.
Despite the slow economy, U.S. business and leisure travel continues to recover, including stepped-up corporate meetings and a greater number of international visitors, with hotels experiencing solid demand and room rent gains in the second quarter.
Along with year-over-year gains in group bookings in place for the balance of the year, these improvements have resulted in an expected RevPAR increase of 7.2% in 2012 and 5.6% in 2013. Overall, PwC expects lodging demand in 2012 to increase 3%, while the still-restrained supply of rooms will grow at just 0.5%, boosting occupancy levels to 61.5%, the highest since 2007.
Buyers, Sellers Get Off the Sidelines
Such numbers are prompting sellers to get off the sidelines. Evident of the boost in third-quarter sales activity has been a pair of large sales in recent days of W branded hotels by Starwood Hotels and Resorts Worldwide, Inc. (NYSE: HOT
Annapolis, MD-based Chesapeake Lodging Trust last week acquired the W Chicago Lakeshore, a 520-room property at 644 N. Lakeshore Drive, from Starwood for $126 million, or $242,308 per room. Two days later, Starwood announced the sale of the 258-room W Los Angeles at 930 Hilgard Ave. in the Westwood submarket, to Pebblebrook Hotel Trust for $125 million. That's a whopping $484,500 per key.
Also this week, a GE Capital affiliate sold the 472-room Sheraton Nashville in downtown for a reported $47.5 million to private owner/developer JRK Hotel Group.
The sales activity at the high end of the market mirrors especially strong fundamentals for luxury properties. While hotels across the spectrum are benefiting from the recovery, those in the higher-priced tiers are expected to see the strongest gains, according to PwC.
Occupancy levels at hotels in the luxury, upper-upscale and upscale segments are expected to meet or exceed each segment's 2007 peak. Hotels in the lower-priced segments have not experienced as solid of a recovery in occupancy but are still expected to realize increased room rates as demand gradually strengthens.
"With occupancy surpassing recent prior peak levels in the luxury, upper upscale, and upscale segments, the lodging recovery is intact," said Scott D. Berman, principal and US industry leader, hospitality & leisure, PwC.
Starwood Pursues 'Asset-Light' Strategy
Starwood has pursued an "asset-light" strategy in recent years, opting to focus on fee income from hotel operations and management. During a recent call with investors, the company laid out plans to unlock $4 billion to $5 billion in cash by selling its hotels and Bal Harbour condominium residences.
The majority of that cash will come from eliminating most of Starwood’s owned hotel portfolio, said Frits van Paasschen, CEO, president and director.
"We'll continue to bring our own hotels to market, either one at a time or all at once, depending on demand," van Paasschen said. "It's important also to note that after generating all that cash, we're left with a global high-end fee business, which is an investor's dream as the business model.
"The fee business is built on long-term contracts, low variable costs, but absent the capital needs and volatility of owned real estate."
Compared with three to six months ago, "We have more [properties] on the market and we're having more discussions than we were prior to that. And that reflects a greater confidence among buyers and presumably some better financing conditions among buyers than we've seen for some time," van Paasschen said.
While Starwood may be poised to sell more hotels, it could pull back if the company doesn’t feel it’s getting the appropriate price for the asset, he said.
Strong Second Half of Year Expected
Jon Bortz, chairman, president and CEO of Pebblebrook Hotel Trust (NYSE: PEB
), one of the most active hotel buyers in recent years, predicts stronger overall investment activity in the second half of 2012.
"I think what we can say is that the activity level in the second half for the industry and hopefully for us will be significantly higher than it was in the first half," Bortz said in an investor call. "We've seen a very positive momentum in the number and quality of assets in the major gateway markets that we have an interest in, and we believe that we will continue to get at least our share in both on-market and off-market transactions."
"Right now we continue to be excited about making acquisitions. We think it's still very early in the recovery. We think in almost all markets except for select service in a couple of major cities, we are a long way from replacement cost, and capital availability for new construction, particularly in urban markets outside of New York, is very, very limited."
Earlier in the year, there was an anticipation that the second half of 2012 would be somewhat like the first half of 2011’s very high level of activity, noted W. Edward Walter, CEO and president of Host Hotels & Resorts.
"I'd say expectations have moderated a bit. But clearly, we're seeing more activity, more opportunity right now than we did in the beginning of the year, and I think that doesn't surprise me in some ways. I think conditions are better," Walter said.
"We certainly still are looking to be active," said Walter, adding he’s very confident Host will be a net acquirer of properties in the near term, depending on how asset pricing plays out.
In the last buying cycle in 2006 and 2007, Host Hotels started to see pricing that "was so strong that under the assumptions under which we were comfortable underwriting assets, we started to find that we just weren't competitive as the buyer," Walter noted.
"Not because we didn't have a low cost of capital, but I think others were just being very aggressive," Walter said. "We made a decision at that point that we were better off being a seller than a buyer. I clearly anticipate that we will find the same sort of dynamic happen at some point in this cycle.
"I don't see any real signs of it yet, so I suspect that even as we look at  we would still be active on the acquisition front, but it's hard to predict beyond that right now."
At least one other major chain doesn’t expect to see much acquisition activity in the next six months. Mark Hoplamazian, president and CEO of Hyatt Hotel Corp (NYSE: H), said the company is more focused on development and isn’t actively marketing any properties via third-party brokers. But Hyatt will likely sell "a property" before the end of the year, though it’s not likely to be a large transaction, Hoplamazian said.