The hotel transactions landscape is quite active as macroeconomic factors bring more sellers to the table.

Among the public hotel real estate investment trusts, some companies have made moves in the third quarter or as the quarter ended to capitalize on the environment. On Nov. 3, Host Hotels & Resorts acquired the 125-room Four Seasons Resort & Residences in Jackson Hole, Wyoming, for $315 million in an all-cash deal. On Nov. 1, Braemar Hotels & Resorts entered into a definitive agreement to purchase the 210-room Four Seasons Resort Scottsdale at Troon North for $267.8 million.

Both resorts were part of Strategic Hotels & Resorts' portfolio, which included 15 properties that Blackstone sold to China-based Anbang Insurance Group in 2016 for $5.5 billion. In 2020, the Chinese government dissolved Anbang to curtail foreign investment outside of China and formed Dajia Insurance Group to administer the former Anbang's assets.

A third Strategic resort, the Montage Laguna Beach Resort Hotel, transacted on Nov. 14. Texas-based billionaire Tilman Fertitta paid an estimated $650 million for the property, according to Bloomberg.

These deals made some big waves in the hotel industry, and during third-quarter earnings calls, REIT executives discussed their transactions outlook and strategy for the near term as recession appears likely.

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October 31, 2022 03:39 PM

Third Quarter 2022: Full-Year Performance Begins To Take Shape for Hotel Industry's Public Companies

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“Despite recent choppiness in the debt markets, interest in hotel real estate remains high, and we expect to execute on additional non-core asset sales, including potential deals in excess of $100 million, and these would bring our total net amount of closed and pending dispositions for the year to over $500 million.”

“We’d love to make an acquisition at the right time. … We’ve been a net acquirer; it’s just been silent as we work through the pandemic. … Part of the reason why we want to continue to build tremendous liquidity is that there will be a time when pivoting to go on offense makes sense and Park will be ready and active at that time. We don’t think that is necessarily today or this quarter. … There will come a time when we will be a buyer. We just don’t think that time makes sense right now for Park.”

"It's just hard to see the transaction market getting too aggressive until the debt markets at least show some trajectory of recovery, which they aren't quite yet."

...

"We've got a handful of assets that we are contemplating [selling]. ... Let's call it seven to 10 assets... The issue we have is just that some of them are crossed in other pools and other loans. And so because of the way that our loans are crossed, to sell some of these assets would require the ability to extract them.

"But given that current debt yield ... you're still amidst the recovery, it's a little bit more difficult to extract the assets than kind of in typical times. And so we don't quite have as much flexibility as we wish we had to sell off some of these assets.

"So the answer is ... as operations continue to improve, it gets easier to potentially extract those assets. And I think it's something we'll be looking at more aggressively. And hopefully, if the debt markets have improved, it can make those transactions a little bit easier as well. So it's definitely on the table."

"Looking back on our transaction activity since 2018, we have acquired $3.5 billion of assets at a 13.7 times EBITDA multiple, and disposed of $4.9 billion of assets at a 17 times EBITDA multiple including $954 million of estimated capital expenditures. Comparing all owned hotel 2019 results for our current portfolio to 2017, we have increased the RevPAR of our assets by 12%, EBITDA per key by 26%, EBITDA margins by 190 basis points, and avoided considerable business disruption associated with capital projects."

...

"Suffice it to say, we underwrote all three of the [Strategic Hotels & Resorts] properties that were brought to market and we just couldn't get our arms around pricing for the other two assets, and that's why we pursued the Four Seasons Jackson Hole. ... With respect to the other 12 [Strategic Hotels & Resorts] properties, it's TBD whether or not or when they bring those assets to market. But again, given our balance sheet, and given our relationships and given our performance on this transaction, we think we are really in a strong position to be a buyer of choice for some of these other assets."

“During the quarter, we sold a 55-room independent boutique hotel in Richmond, Virginia, for $8.5 million, resulting in a gain-on-sale of approximately $1.8 million. The sale enabled us to forgo more than $4 million in planned capital expenditures and transact at a meaningful premium to our original investment. In October, we acquired the AC Hotel Louisville Downtown for $51 million and the AC Hotel Pittsburgh Downtown for $34 million.

“Given additional ramp in the individual assets and the robust performance of their respective markets, we anticipate that both will produce stabilized returns in excess of 8%. Recent numbers for both properties have been strong with September RevPAR for the Louisville AC, up 8% to 2019 and the Pittsburgh AC up 36%. These acquisitions increased our ownership of AC Hotels, a brand with strong appeal for both business and leisure travelers and provide exposure to Louisville and increase our presence in Pittsburgh, both of which have seen strong post-COVID recovery.

“As we have built and refined our portfolio over time, we have intentionally sought to create exposure to markets that benefit from a mix of business and leisure demand and to concentrate our ownership in markets that have been and will be beneficiaries of macroeconomic and demographic shifts. Since the onset of pandemic, we have invested approximately $558 million in 14 hotels. Excluding the two ACs acquired subsequent to the end of the third quarter, these recent acquisitions exceeded our original underwriting by more than $9 million in hotel EBITDA during the first nine months of the year, contributing meaningfully to our year-to-date outperformance. On a trailing 12-month basis through September, these 12 hotels produced an 8% return on our investment after CapEx despite COVID impact on first quarter numbers and with meaningful upside remaining as assets continue to ramp and markets improve. A third of these hotels continue to produce yields in excess of 10%.

“Higher interest rates and disruption broadly in debt markets continue to impact the transaction market. We expect total transaction volume to be somewhat muted between now and the end of the year, but we continue to underwrite deals and engage with potential sellers. Given our outperformance since the onset of the pandemic, the strength and flexibility of our balance sheet and the additional borrowing capacity under our amended credit facility, we are incredibly well-positioned as assets come to market and in conversations with ownership groups about potential off-market deals. With just 3.3x net debt to EBITDA, extended and staggered maturities, a relatively young portfolio and over $700 million in total liquidity, we are able to be both patient and flexible as we work to capitalize on dislocations in the market. We have been and will continue to be highly selective and intentional in the build-out of our portfolio pursuing assets that are additive to those that we currently own where we can achieve attractive pricing. Future acquisitions will be consistent with our strategy of investing in high-quality rooms-focused hotels located in strong RevPAR markets with attractive cost structures and meaningful growth potential.”

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“We continue to be active in dialogue with potential sellers of assets and feel that a number of those conversations could yield fruit over coming months. But ... our expectation going into 2023 is that we will see a meaningful uptick in industry transaction volume with sellers coming to market as a result of refinancings and increased pressure from the brands around capital improvements. I think acquiring assets in an environment where sellers are motivated to sell assets is always a better place for us to be. And we have been very disciplined and targeted in our acquisitions throughout the pandemic and maintained our balance sheet capacity to become more aggressive at a point in time when deals were better priced and we could acquire assets in scale in a way that would further drive the performance of our shares over time.”

“Our most efficient cost of capital has been realized by asset sales at or near [net asset value]. … We are now in a strong financial position with an attractive leverage profile and the runway to create substantial value. The assets we sold and the timing of our dispositions have been strategic and aligned with our vision of minimizing the public-to-private market value disparity within our portfolio while maximizing shareholder value.

“The initial round of dispositions in 2021, which totaled approximately $215 million, reduced our exposure in each of our markets, consisted of some of our older, slower growth assets with capital needs in the near to medium term that did not meet our return requirements. Our decision to hold the next tranche of dispositions into 2022 allowed us to benefit from the increased hotel cash flows in the first half of the year as market valuations approached our internal NAV.

“We sold our seven-hotel urban, select-service portfolio to a single buyer in the first half of the year, and then transacted on the Pan Pacific Seattle and the Hotel Milo with two different investors through the summer and early fall. In each case, the high quality of our hotels and the improving cash flow profile allowed us to transact at or near our internal NAV for the assets.”

"Looks like urban markets, there's very few [hotels] on the market, it's not a terrific time to sell those. Decent leverage is so key to [urban hotels] and I think people are having trouble handicapping where business transient ultimately settles out on account of their underwriting pro formas. People still like leisure, they still believe in resorts. There's a wall of capital still available for real estate acquisitions out there from a variety of sources. And there are some of those properties on the market, and they are getting lots of bids when they bring those to market. It's still the place where the investment community has the most level of confidence and belief in the future. So it's still a pretty active market for those.

"Our experience over the last, I'll say, particularly three to five months as rates have gone up is that the broadly marketed deals, particularly the larger ones, seem to be getting a lot of attention and pricing at levels that aren't attractive for us. So we continue to try to focus our efforts on these owner-operator assets between really $50 million and $150 million where we think we have an advantage by dealing mostly off-market with these relationships and buying a property at 100 to 200 basis points better yields than the broadly marketed luxury resorts."

"In the third quarter, we entered into two separate agreements to sell two of our assets for a combined sale price of nearly $100 million. In late October, we sold Bohemian Hotel Celebration in Celebration, Florida, for $27.75 million, or approximately $241,000 per key. We believe it was an opportunistic time to sell this hotel given its small size, the current investment appeal for the leisure markets and a significant upcoming required renovation. We also entered into an agreement to sell Kimpton Hotel Monaco Denver for $69.75 million, or approximately $369,000 per key. This transaction is expected to close before the end of the year.

"These two dispositions are consistent with our strategy of monetizing assets that we do not believe to be long-term strategic drivers for our company, while continually improving quality and growth profile of our portfolio. We maintain a strong presence in both the Orlando and Denver markets with existing high-quality assets. And we may make additional investments in these markets if appealing opportunities arise, including through internal ROI investments, such as the comprehensive renovation we are currently undertaking at Grand Bohemian Orlando.

"Meanwhile, the nearly $100 million in proceeds will improve our already strong liquidity position and provide us with increased balance sheet flexibility. We initiated both of these disposition processes earlier in the year and are pleased with the pricing in both transactions, despite the recent uncertainty in overall economic conditions in general and financing markets in particular."

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