Hotel Dealmakers Are Finding Plenty to Like

Investor interest in the hotel industry and deal making is ramping up as the US continues to emerge from the pandemic and the potential for business travel is accelerating.

Lone Star Funds announced Wednesday that a Lone Star affiliate has acquired five luxury and upper upscale hotels from Host Hotels & Resorts for an aggregate purchase price of $551 million, including approximately $11 million for furniture, fixtures, and equipment (FF&E) replacement funds.

The hotels are: The Whitley, A Luxury Collection Hotel, Atlanta Buckhead in Georgia; The Westin Buckhead Atlanta in Georgia; The Westin Los Angeles Airport, located at the Los Angeles International Airport in California; San Ramon Marriott, located in Santa Clara, Calif.; and the Westfields Marriott Washington Dulles, located in Chantilly, Va.

Upgrades and renovations are underway within this deal and more such action is on the horizon.

“We are looking forward to completing the program of renovations already underway at these terrific properties, which are located in strong markets with an attractive mix of industry exposure and corporate and leisure demand,” said André Collin, President, Commercial Real Estate Funds, Lone Star.

In another deal, Summit Hotel Properties this week announced that it has entered into a definitive agreement to acquire a 27-hotel portfolio totaling 3,709 guestrooms, two parking structures and various financial incentives through its existing joint venture with GIC for $822 million from affiliates of NewcrestImage.

The deal breaks down accordingly: $776.5 million, or $209,000 per key, for the 27-hotel portfolio, $24.8 million for the two parking structures and $20.7 million for the various financial incentives.

Active Deal-Searching Underway

Gilda Perez-Alvarado, Global CEO of JLL Hotels & Hospitality, tells GlobeSt that all of the major players are actively seeking deals. “Strong fundamentals, the reopening of the market and the expectation that the US will continue to outperform across all segments will continue to fuel investor demand.”

Sellers, for their part, have amply reason to come to the market now, Steen Petri, Senior Vice President, Investments at HEI Hotels & Resorts, tells GlobeSt. “More owners are encouraged to sell, either due to financial fatigue after the last 18 months of operating losses, or in some cases emboldened by the recent uptick in trades at strong pricing.”

He said this is partially driven by greater certainty and optimism for the future than at the same time last year when a vaccine was not yet available and the outlook was bleak and uncertain.

“It’s also been driven by large amounts of capital raised in anticipation of distressed hotel real estate in the wake of COVID-19,” Petri said. “Fewer distressed sales materialized than expected, and still a lot of capital looking to get deployed has driven up pricing, but also the relative attractiveness of hotels compared to other types of real estate has pushed down the cap rates on hotels.

Brand-Familiar Hotels Should Benefit 

He said that well located, newer built hotels in fast growing markets are and will be more attractive to investors. 

“Branded hotels within powerful brand families will be at a premium as both equity investors and lenders like the comfort of strong reservation systems and brand familiarity, which historically has proven helpful as demand recovers and RevPAR rebounds. These brand familiar hotels offer a great value proposition to travelers, whether leisure or corporate, and should benefit disproportionately from the recovery.”

Some Distress on the Horizon 

As the recovery continues to materialize, investors will have ever more increased confidence in values, Petri concludes. “A few years of reduced supply pipeline will help existing hotels recover further. I don’t think values have peaked, but good deals will be harder to find as distressed situations get resolved.”

To be sure, not all distressed loans will be resolved, offering some opportunities for frustrated opportunistic investors.  

Ann Hambly, founder and CEO of 1st Service Solutions, tells GlobeSt that repayments that are coming due for those operators with CMBS debt are facing challenges.

“The typical structure of COVID relief was a period of payment deferral (3, 6, 12 months),” Hambly said. “That relief proved to be very helpful to hotel owners, as they struggled through the worst period of COVID.”

For owners that have traditional bank debt, the deferred amount was added to the principal balance of the loan and due at maturity, she said. For owners that have CMBS debt, the deferred amount had to be paid back over the same period as the deferral.

“For instance, the payments deferred were April 2020 through March 2021 with full payments beginning in April 2021,” Hambly said. “On CMBS loans, the deferred payments also had to be repaid during a 12-month period, starting in April 2021. This means that many hotel owners were forced to pay two full payments, effective April 2021—and most of these hotels couldn’t support two full payments pre-COVID.

This caused owners to find alternative ways to fund this shortfall. Some were forced to bring in preferred equity, some sold their properties, while others took more drastic measures.”