REPORT FROM THE U.S.—Hotel owners are leaving their preconceived notions in the past and are more frequently looking at auctions when considering their exit strategy, hotel brokers report.
According to data compiled by Auction.com, hotel auction sales have doubled since 2011 and sale prices have also increased by 33% since that time.
“The market appears to be getting more competitive,” Auction.com Executive VP Rick Sharga said in an email. “Purchase price as a percentage of the reserve amount has increased from 92% in 2011 to 113% (year to date) in 2013. And the number of bidders registering for the auctions has increased by 24% between 2011 and 2013.” Sharga declined to identify specific auction sales data.
While there was a time when auction sales were associated with the disposal of distressed assets, that’s no longer necessarily the case, Sharga said.
“The mix of properties is changing significantly,” he said. “Over half of the hotels we auction today are from natural holders of real estate (i.e., not servicers), which is an indication that less of the properties are distressed.”
Doug Johnson, managing director of CBRE’s Auction Services Group, said his firm is selling more hotels at auction today than any other asset class. The buyers and sellers comprise a wide swath of entities.
He said buyers typically are attracted to auctions because of the open and transparent method in which deals are transacted.
Meanwhile, sellers like, for example, that the auction process serves to provide some clarity around a transaction date. Johnson said auction deals typically close within 30 to 45 days.
Also for sellers, taking a hotel to auction can expand the total number of prospective buyers looking at the property, said Bill Murney, a senior VP at Hospitality Real Estate Counselors.
“The auctions are proving to be a very viable disposition method,” Johnson said.
Auction stigma
There remains a certain attitude displayed by buyers to hotels that are on the auction chopping block, Murney said.
“There’s certainly a buyer’s perception: ‘We’re not going to deal with it,’” he said.
That negative association, however, is not as strong as it once was, brokers said.
“The stigma of an auction is going away,” Johnson said. “People are no longer looking at it as a method of last resort.”
Distressed deals
Still, while the universe of the types of hotels auctioned off is broadening, the bread and butter remains the distressed property, Murney said. Auction environments usually see a lot of hotels that, for instance, have lost their brand, need to catch up on their property improvement plan, are having financial issues and so on.
He said a lot of the auction sales he’s seen range in price from $5 million to $10 million. If the sale price for an auction property gets too high, Murney said buyers have a tendency to pull back because they don’t want to risk putting too much money into a hotel that might go south.
“The bigger the deal, the harder (taking a risk) becomes,” he said.