Nationalism and isolationism are on the rise in the West. Terrorism continues to wear on the global psyche. Interest rates are edging up in the United States. Commercial property values are high around the world. China is trying to stanch the outbound flow of capital in a bid to stabilize the yuan. Does the swirling combination make it a bad time for buying and selling hotels?
Not necessarily, said Bjorn Hanson, clinical professor at the Preston Robert Tisch Center for Hospitality and Tourism at New York University. In fact, Hanson said in April, “the market is more favorable for M&A transactions than it was six months ago or even three months ago for major companies around the world, and for all levels in the U.S.”
RevPAR growth in the U.S. proved a bit better than anticipated in the 4Q 2016 and then “much stronger than any forecast I had seen” in 1Q 2017, Hanson said.
According to STR, RevPAR grew 3.4% year-over-year in the first quarter, a gain it attributed in large part to a strong March caused by the Easter calendar shift and to the inauguration and the Women’s March in January. Both consumer confidence and the stock market turned higher in the U.S. in the first quarter, boosting investor sentiment. Hanson notes that many hotel brands have been more successful than anticipated at regaining share from online travel agencies, boosting average daily rate performance and leaving hotel owners more optimistic—and with more money to spend.
Richard Stockton, the recently installed CEO of Ashford Hospitality Prime, a real estate investment trust headquartered in Dallas, is nearly as sanguine as Hanson. “I’ve seen a number of market cycles throughout my career, and I don’t feel like right now is a particularly difficult time to acquire assets,” he said. In March, Ashford agreed to buy the Hotel Yountville in Napa Valley for US$96.5 million. In April, it closed on the acquisition of Park Hyatt Beaver Creek Resort & Spa in Beaver Creek, Colorado, for US$145.5 million, or a local record US$766,000 per room.
“Those are very high RevPAR assets that we were able to acquire at a trailing 6% cap rate, both on an off-market basis,” Stockton said, “and they are deals we believe are accretive to our total shareholder returns.”
Ultimately, it’s deals like that — and perhaps some modest portfolio acquisitions — that will likely constitute the core of hotel M&A activity in 2017. Largely, that’s because there aren’t many giant targets to be had following Marriott International’s blockbuster acquisition of Starwood Hotels & Resorts Worldwide last year for US$13 billion.
“If there were other Starwoods, I’m sure the likes of InterContinental, Hilton, Hyatt and HNA Hospitality Group would be looking at them,” said Simon Turner, president of global development for Starwood prior to its sale. “But there really isn’t another Starwood that somebody could relatively neatly plug into their operations. So I think we’ll see more bolt-on transactions where some of the other aspiring global players see a luxury brand or niche brand in a boutique sector and try to plug that into their system.”
What could slow the M&A train? Terrorism’s pall on leisure travel is a concern, of course, but thus far has been concentrated in a handful of markets, including Paris and northern Africa. Nationalism and isolationism are threats, too, especially if they lead to onerous travel bans. But Turner argued that the growing interdependence of world economies is an irreversible long-term trend. Meanwhile, he added, the benefits to hoteliers of scale and diversification, both by geography and price point, suggest that large multi-brand hotel companies will continue to seek a global platform.
China’s stepped-up efforts since December to moderate the outbound flow of capital also could dampen hotel deal-making, it would seem, given that mainland China accounted for about half of total outbound hotel investment in 2016, according to JLL. But industry experts and insiders expect the Chinese to remain major players nonetheless.
U.S. sees no end, yet
By the calendar, the hotel industry is at the tail end of a business upcycle that began in 2010. But Thomas Baltimore Jr., chairman and CEO of Park Hotels & Resorts Inc., the publicly traded REIT recently spun off from Hilton Worldwide Holdings, in April was cautiously optimistic that the cycle could run another two or three years in the U.S. — especially if the Republicans who control the White House and Congress make good on business-friendly promises to cut regulations and overhaul the tax code.
Baltimore also derived some optimism from improving consumer confidence figures, though he said he doesn’t yet see that translating into demand and growth in the lodging business. Rising interest rates could be a negative if the trend accelerates too quickly, he noted — the market is anticipating two to three more hikes in short-term rates this year — but they also signal a strong economic climate, which is a positive. Concerns, Baltimore said, include the potential negative impact of a strong dollar on international travel to the U.S., protectionist trade policies and the possibility of a U.S. stance on immigration that deters international travel to the country.
Although he’s not expecting Park to be a big player on the M&A front anytime soon — for now the company is focused primarily on internal growth — Baltimore contended the hotel industry is better positioned for deal-making than it has been in prior years, when embedded management teams were often reluctant sellers. Assuming larger hotel companies gain further cost-of-capital advantages, he theorized, it could entice some smaller, undercapitalized players to reassess their options and “perhaps be more open to M&A than they have been in the past.”
For those looking to finance acquisitions, the lending climate in the U.S. remains mostly favorable. “If you’re a reputable borrower who uses a conservative level of leverage, you can get attractive financing,” Stockton reported. In the case of the Park Hyatt Beaver Creek deal, he said, Ashford was able to secure a US$67.5 million interest-only loan at Libor plus 275 basis points, with an effective five-year term (two-year initial term plus options for three one-year extensions). Construction financing may be a little tighter, Stockton said, but he viewed that as a positive, suggesting that only the best and most feasible projects will get built and helping to keep new supply manageable.
EMEA’s broadened prospects
Anders Nissen, CEO of hotel owner Pandox AB in Sweden, said the European hotel market appears to be stronger than forecast so far this year, both on a performance and deal-making basis. He credited an improved economic environment and leisure travelers feeling safer moving about Europe, notwithstanding terrorist attacks in markets such as Paris, Brussels and Istanbul. “Brands had been anticipating RevPAR growth of 1% to 3%,” Nissen said. “Now they’re talking maybe 2% to 4%, or 3% to 4%, for Europe. That’s very positive.”
“Europe is a fundamentally peaceful and prosperous continent,” noted Nikola Reid, director and head of hospitality for Deloitte UK, “and investor appetite remains high.”
While market liquidity is generally good, prices in many major gateway cities are steep, and yields in some regions, including Pandox’s hometown of Stockholm, have gotten very aggressive. “People are buying hotels for a 4% yield, which for a big hotel is a crazy number,” Nissen said. “We are not doing that.”
Paris is a notable exception to trend. There, many hotel owners are reluctant to sell, recognizing that values have been depressed by recent performance, and buyers are looking instead to regional markets in France and other parts of Europe. Often, said Derek Gammage, chairman, EMEA, for commercial real estate services firm CBRE Hotels, hotels in secondary and tertiary markets represent “fantastic opportunities.”
Terrorist attacks also have dampened tourism and deal-making in North Africa, including Tunisia, Egypt and Morocco, Gammage said. Many people are traveling instead to Spain, Italy and other southern European destinations.
Jileen Loo, head of the Asia desk for CBRE in London, noted that Asian investors who’ve been increasingly active in Europe over the past few years, often cutting their teeth on U.K. properties, are starting to make acquisitions within continental Europe, too, including Germany, the Netherlands, and even some central and eastern European markets such as Prague. Germany has long been an active market, but the Netherlands is less liquid and so the buying there is perhaps more interesting. Loo theorized that buyers may simply be looking to escape the yield compression in the U.K. and Germany.
Reid calculated that the hospitality space in general is widening in Europe, with many investors broadening their portfolios to include new and differentiated types of properties in a bid to diversity their own demand base. She pointed, by way of example, to the March acquisition of Generator Hostels, a design-led hostel brand, by Queensgate Investments LLP, for €450 million (US$479 million).
Status quo in Asia
The Asia Pacific market traditionally sees fewer hotels deals than the U.S. and Europe, and that’s unlikely to change anytime soon. Having seen a number of significant transactions close over that last two years, “I’m not sure how many of those kinds of bigger deals are still around,” said Robert Hecker, the Singapore-based managing director in charge of the Asia arm of hospitality consultant Horwath HTL.
Japan and Australia typically account for 80% to 90% of all deals in the region, Hecker said, and Japan in particular was relatively active in the first few months of 2017. Buyers also view China and Indonesia as enticing markets, he said, but in many cases are being put off right now because targets there aren’t offering much yield.
Elsewhere in Asia, the Thai and Vietnamese hotel markets are performing well and Thailand in particular could see more deal-making activity this year, Hecker said. “Owners are likely to get the prices they want, and there are enough interested buyers to make that happen,” he explained. “The Thai REIT market also is picking up pace now that the royal succession is over and things are calming down.”
Hecker added that he also could foresee some transactions happening in the tropical nation of Maldives, “where there are some partially completed projects, and the owners, government and bankers are looking for ways to get those projects going again.”
Looking further ahead, Hecker suggested the Asia Pacific region holds great promise for the hotel industry thanks to a regional economy growing about three times faster than the rest of the world. “In terms of the outlook for growth and performance,” he said, “it’s probably the best you’ll find anywhere.”
Who’s buying and selling hotels these days?
In the U.S., said Ashford Hospitality Prime CEO Richard Stockton, those selling to his company are often private equity firms and family offices, while his competitors on the buy side tend to be non-public REITs and high-net-worth individuals. As has been widely reported, Asian investors have been active in acquiring U.S. properties, too.
In northern Europe, Derek Gammage and Joe Stather of CBRE Hotels said many of the sellers are U.S. investors that bought when prices were distressed, worked their assets, and are now cashing out at a profit. Some are now casting about in southern Europe, where opportunities are being hotly contested but still offer favorable yields. In northern Europe, departing American investors often are being replaced not by Europeans but by Asian investors, or, in some cases, Middle Eastern investors. One relatively new group to the ranks of buyers in Europe, Stather added, are pension funds that are starting to view hotels as long-dated, income-oriented, hands-off investment opportunities.
In Asia, Robert Hecker of Horwath HTL said buyers and sellers alike tend to come from within the region, as outsiders often can’t compete in terms of cost of capital. China’s recent efforts to stem outbound capital flows also may be scaring some foreign investors away from that country over fears it could be hard to get their money out of the country when it’s time to sell.
Contributed by Randy Myers