It behooves hotel investors to have a long-term horizon when placing bets on an asset. This perspective comes in handy in the current environment of uncertainty as the delta variant increases the number of COVID cases. Hotel sales volume in the second quarter speaks to this ability of buyers to underwrite future earnings based on a longer historical perspective, disconnected from the poor results of the last 18 months.
With more than $13 billion in hotel properties trading hands, the second quarter of 2021 ranks as the most active second quarter for hotel asset trading activity on record. However, around half of the total sales activity can be attributed to the take-private transaction of Extended Stay America by Blackstone and Starwood. This deal points at the out-performance that the extended stay segment experienced during 2020.
The expected high number of distressed hotel sales has not materialized yet, and the few assets trading at steep discounts likely were forced to do so by special circumstances. For now, lenders appear to be willing to let owners of underperforming hotels limp along without foreclosing, but their patience may run out eventually. Lenders see this "extend and pretend" approach as the lesser of two evils, since the potential downside and cash outlay required for taking back the hotel asset are even less desirable.
Several other second-quarter deals of note took place at the top end. American consumers, most of them vaccinated and flush with cash from a collective $2.5 trillion in savings, took to leisure destinations and often splurged on accommodations to celebrate being able to travel safely again. Add to that the family reunions and postponed weddings that are once again taking place, and it follows that high-end hotels and resorts would be the clear beneficiaries of the recovery.
Investors noticed with high-end properties such as the Four Seasons at Disney World, the Montage Healdsburg and the Ventana Big Sur all trading during the quarter at low capitalization rates based on 2019 net operating incomes. The Ventana transaction between Geolo Capital and Hyatt yielded the highest price per room ever recorded, around $2.5 million per key.
Even though the current COVID case surge continues to infuse uncertainty for the fall, hotel investors remain flush with debt and equity. This likely will lead to further transactions, especially for hotels and resorts with a strong leisure appeal. One such transaction that took place recently and will not close until 2022 was Vici’s buying MGM assets for around $4.4 billion, making it the largest U.S. hotel owner by number of rooms and the largest triple net lease REIT company in the country, according to Vici.