The transaction market in the United States is slowly starting to pick up with REITs like Sunstone Hotel Investors spending US$265 million (more than US$2 million/key) to acquire the Montage Healdsburg in California’s wine country. But what is not happening, at least not yet, is wholesale deals for distressed assets. As Sean Hennessey of Lodging Advisors and the NYU Tisch Center for Hospitality told HOTELS, “This will not be RTC 2.0.”
HOTELS recently asked Hennessey four questions about the state of the transaction market in the United States. Here is what he had to say.
HOTELS: What is your outlook for increased M&A and what will drive it?
Sean Hennessey: It is clear to me the pace of hotel investment will pick up as investors sense that hotel market conditions have bottomed out and the transition to recovery has begun. Six months ago, it looked like the recovery might be long and uneven, but recent demand data suggests robust leisure demand for the summer season, with corporate travel swinging into gear in the fall.
There have been a number of transactions showing value reductions during COVID – but relatively few. There will be some discounts relative to pre-COVID pricing, but this will not be RTC 2.0.
H: How will improving performance fundamentals impact transactions?
SH: Hotels have high operating leverage. This underpins rapid recovery on the upturn (as well as rapid deceleration on the downside). Sensing a turnaround, investors want to “get in early” to maximize their claim on improved profitability. I think you’ll see the biggest and smartest investment groups at the forefront of buying activity this year and next.
H: How will current pipeline expectations impact transactions?
SH: It takes a good deal of time for capital to flow into new construction after a downturn, since development is typically the riskiest part of hotel investing. And pipeline growth usually begins with smaller, lower-priced hotels where the bets/risks are smaller. This suggests that there will be fewer opportunities at the high end of the market until confidence is fully restored.
In terms of a pipeline for potential M&A transactions, we expect smaller hotel companies and brands looking to merge, particularly since unit growth is harder to achieve in a nascent recovery.
H: Any further comments on issues like bid-ask spread, etc.?
SH: Look at hotel equities: stock values have recovered nicely not because earnings are strong today but because of strong expectations of revenue and profit recovery as the economy turns the corner. This will embolden sellers to hold out for fulsome pricing. And while buyers may have hoped for discounted opportunities, there is such a tremendous amount of dry powder looking for investments that my bet is buyers will dive in without the inducement of significant discounts.
In this regard, I think the recent deals for the Four Seasons at Disney World and the Montage Healdsburg are illustrative of buyers’ intentions: jump in now because prices are likely to only accelerate for the foreseeable future.