GLOBAL REPORT—Cash-laden hotel investors are once again willing to pay upward of (or more than) $1 million per key for the right asset, as some recent high-profile deals illustrate. And with the hotel industry continuing to perform at boom levels, insiders say more of these big-ticket trades are on the way.
According to JLL, there has been an 80% increase in the number of high-value deals thus far in 2015. Based on year-to-date trends, 2015 is expected to see the highest amount of big-ticket sales ever, according to its research.
The most recent deal of this scale was InterContinental Hotel Group’s $938-million sale of the InterContinental Hong Kong to Supreme Key Limited, a consortium of investors advised and managed by Gaw Capital Partners. At 503 rooms, that deal penciled out to about $1.9 million per room.
Many of these iconic sales have been concentrated in New York’s Manhattan market. For example, Hilton Worldwide Holdings sold the 1,413-room Waldorf Astoria in February to Anbang Insurance Group Company of China for $1.95 billion or about $1.4 million per room. Additionally, Starwood Capital sold the 114-room Baccarat Hotel in February to Sunshine Insurance Group Company, also a Chinese firm. Sunshine paid more than $2 million per key for the Baccarat, which sources say isn’t all that laughable considering the market and asset.
“High per-room values are not as much market related as they are asset driven,” explained Steve Hennis, director of STR Analytics, sister company of Hotel News Now. “Generally, the pool of assets that would garner million-dollar-per-key prices are luxury properties that have high revenue streams. Certainly, with New York having one of the highest average rates in the country of any market and many luxury hotels, it has more properties that would potentially reach that price level based on their performance.”
According to experts, the industry simply is seeing a return to pre-recession levels of activity, rather than some radical recent spike in valuations.
“Pre-recession we saw several million-dollar-plus per-key transactions, and so I think it is an indication that the market is back; it’s not the first time in history that we’ve seen that occur,” said Prem Devadas, president of Salamander Hotels & Resorts.
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“But I do believe the commonality in those deals is they really center on irreplaceable assets. Certainly with the Waldorf and Baccarat, these are unique assets in terms of location, quality and history. I think we will continue to see that occur,” Devadas said.
Other cities that enjoy high average daily rates, such as Miami Beach and San Francisco, could start to see assets trade at similar price levels, according to Hennis. Likewise for high-end resort locations such as Hawaii, Southern California, the Central California Coast, the Florida Keys, Napa Valley and the Florida Coasts. With the overall industry performing well, virtually any major gateway boasting a trophy property can potentially see a similarly high sales figure, he said.
“Certainly the hotel investment climate is very strong,” Hennis said. “We are at a record occupancy level nationwide; demand is continuing to grow—particularly on the group side, which is important for larger hotels—and supply growth is still relatively low.”
Hoteliers familiar with the high-end luxury market agreed that $1 million per key and up is a feasible price for the right hotel, especially with new-build costs now relatively even with the price of acquiring existing assets. Salamander Hotels, for example, built the 340-acre, 168-room Salamander Resort & Spa in Middleburg, Virginia, (just outside Washington, D.C.) in 2013.
“You cannot get the entitlements to do this kind of thing almost anywhere in the country,” said Devadas, regarding his company’s flagship resort. “I think properties like this—which are that special and of course, are also performing—warrant a million-dollar-plus per-key investment. We will continue to look for those types of opportunities and will continue to work with developers and investors to identify those kinds of opportunities, and help to develop those assets.”
The other side
Others, though, question how many other million-per-key hotels are actually available for potential buyers, especially outside New York City. Aside from Strategic Hotels & Resorts’ $360-million acquisition of the 250-room Montage Laguna Beach resort in January, there haven’t been many others as of late. So for some institutional investors, there are cheaper, more plentiful deals to be made elsewhere.
“The transaction pool for million-per-key assets is small,” said Dan Hansen, CEO of Summit Hotel Properties, a real estate investment trust that focuses on upscale select-service hotels. “There aren’t that many hotels to which you could ascribe a million per-key value, as opposed to premium select service, where at $200,000 to $300,000 per key, there’s a lot of high-quality institutional-grade assets out there at those levels.”
That’s not to say the big-ticket deals won’t keep happening, at least to some degree. For starters, the high level of interest in these assets remains strong among foreign buyers, who typically covet iconic hotels in key markets. This could be a long-term trend that finds well-capitalized offshore investors seeking value in the relative economic stability within the United States.
“Internationally there’s always the potential,” Hansen said. “I think the foreign investors will always have a bias toward these luxury assets in gateway cities. Their return expectations may not be the same as others, so they might be able to pay up.
“But I would be surprised to see many million-per-key trades outside of Manhattan and the gateway cities, for sure.”