GLOBAL REPORT—Hotel investors are more apt to buy in bulk these days.
Buyers and sellers of hotels are finding the most efficient way to transact is via trades involving portfolios of hotels, hotel transaction experts said. The sources identified several reasons for the trend, including the ability of a buyer to beef up a portfolio immediately, while sellers are able to maximize returns as hotel values climb back from the bottom hit during the Great Recession.
Mark Fraioli, senior VP with Jones Lang LaSalle’s Hotels & Hospitality Group, said during the past six months 11 portfolio deals comprising approximately 19,000 rooms have transacted. These deals represented a dollar volume of $2.3 billion and 160 individual properties.
The deal activity during the timeframe stands in stark contrast to what took place during the downturn, when there was little to no portfolio trading occurring, he said. The ability to instantly diversify a portfolio is a big selling point for buyers.
Private-equity firm and real estate investment trusts have led the buying activity, sources said. Private-investment firm Wheelock Street Capital last year acquired two separate hotel portfolios for $221 million total: a portfolio of 12-property select-service hotels acquired from affiliates of Inland American Real Estate Trust and a three-hotel portfolio of full-service properties from affiliates of Sunstone Hotel Investors.
“It’s very difficult to put capital out in $2 (million)-to-$5-million slugs,” said Patrick Campbell, a Wheelock principal. “A much more efficient way to do it is in a portfolio deal with one buyer. It’s easier to put out $30 (million) to $50 million in one portfolio deal.”
It’s also convenient for sellers, Campbell said. “Likewise, it’s a very efficient way to dispose of properties with one buyer and not have to write and negotiate 12 individual purchase-and-sale agreements,” he said.
Vancouver-based American Hotel Income Properties REIT has been one of the players jumping in on the portfolio buying. The REIT earlier this year acquired a portfolio of 32 former Lodging Enterprises economy and extended-stay properties located in 19 states in the U.S. The amount was not disclosed. The transaction included the Oak Tree Inn brand as well as a development pipeline of hotels under construction and long-term guaranteed roomnight contracts with three of the largest U.S. freight railroad companies.
CEO Robert O'Neill said the railroad roomnight contracts helped make the portfolio deal a “unique opportunity.”
AHIP could enter into future portfolio acquisitions, O’Neill said. During the 35th Annual New York University International Hospitality Industry Investment Conference earlier this month, he said he talked to many brokers and owners about potential deals involving hotels in secondary and tertiary markets. The reaction to those talks was positive.
“Absolutely, we continue to look and (consider) additional portfolios,” O’Neill said.
He added: “There are a lot of quality portfolios … and a lot of competition for them.”
Select-service deals
Michael Medzigian, chairman and managing partner of Watermark Capital Partners, said there is a “healthy volume of portfolio opportunities in the market.” Carey Watermark Investors, a REIT managed by affiliates of Watermark Capital Partners and W.P. Carey & Company, in February acquired a 632-room U.S. portfolio of five Hilton-branded hotels from entities managed by Fairwood Capital for approximately $104 million.
“While a tough question to answer with a degree of precision, I would think that both the availability of capital and the market’s recent increased interest in select-service assets would support a higher volume of portfolio opportunities, given that its somewhat more typical for select-service assets to trade as portfolios than would be the case with full-service assets,” he said via email.
Carey Watermark’s portfolio buy included three Hampton Inn & Suites hotels along with a Hampton Inn and a Hilton Garden Inn.
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Michael Medzigian Watermark Capital Partners |
Fraioli agreed that many portfolio deals taking place today involve select-service assets.
“The ramp-up of a newly built Courtyard (by Marriott) or Hilton Garden Inn is now measured in months rather than years,” he said.
Portfolio challenges
There are challenges in acquiring portfolios of hotels, however, sources cautioned.
Sue-Lin Heng, a senior VP with Jones Lang LaSalle’s Hotels & Hospitality Group office in London, said one potential roadblock is in the size of the deal itself. She said it can be difficult to get debt to cover a large group of hotels.
“The ability to find financing might be constrained by lot size,” she said.
However, AHIP’s O’Neill said the REIT does not believe financing will be an issue in its portfolio deals search. He said the debt markets are as open as they have been since 2008.
“We have a fair amount of cash in hand from our very successful (initial public offering of $93 million), and we believe we have money available throughout the Canadian financing market to raise such funds,” he said.
Mitchell Hochberg, president of The Lightstone Group, said another issue could be in the quality of product that is available.
“It’s getting harder and harder to find good deals,” he said. “It takes a lot of legwork and a lot of tenacity.”
Wheelock’s Campbell said the time needed to close on portfolio deals, when dozens of properties could be in play, is another challenge buyers and sellers face. Property condition reports, environmental reports and titles have to be run on each hotel included in the portfolio. “There are just a lot more diligence boxes to check,” he said.
Going forward, sources said they expect the market for portfolio deals to continue to strengthen.
“I would venture to say that there will be more portfolio activity when markets are viewed as being healthier, which generally coincides with an increased availability of debt capital for larger transactions—as is the case today,” Watermark’s Medzigian said.