Hotel Executive Commentary Highlights Busy Third Quarter for Transactions
Several Hotel REITs Announced Deals
The hotel industry transactions environment came back with a vengeance during the third quarter after an extended gridlock induced by the COVID-19 pandemic and an associated bid-ask gap.
A wave of deals were announced in conjunction with third quarter earnings, the highlights of which include:
A wave of deals were announced in conjunction with third quarter earnings, the highlights of which include:
- Pebblebrook Hotel Trust bought the Jekyll Island Club Resort for $94 million and the Margaritaville Hollywood Beach Resort for $270 million and sold the Villa Florence San Francisco for $87.5 million.
- MGM Resorts announced plans to sell the operations of The Mirage on the Las Vegas Strip, while a $17.2 billion deal for Vici Properties to Acquire MGM Growth Properties is pending.
- Park Hotels & Resorts sold the Hotel Adagio and the Le Meridien San Francisco for a combined total of $304 million.
- Hosts Hotels & Resorts made three off-market purchases, paying $415 million for Baker's Cay Resort Key Largo, Curio Collection by Hilton; the 223-room luxury hotel in downtown Houston formerly known as The Alessandra; and the Alila Ventana Big Sur, which was sold by Hyatt Hotels Corp.
- DiamondRock Hospitality Company bought the Bourbon Orleans Hotel and the Henderson Park Inn for a combined $108.6 million.
- Sunstone Hotel Investors announced agreements to buy the Four Seasons Resort Napa Valley for $177.5 million and sell the Embassy Suites La Jolla for $226.7 million while finalizing the sale of the Renaissance Westchester for $18.8 million.
- RLJ Lodging Trust sold the Fairfield Inn & Suites Chicago Southeast Hammond, the Courtyard Chicago Southeast Hammond and the Residence Inn Chicago Southeast Hammond for a combined $21.8 million and bought the Hampton Inn and Suites Atlanta Midtown for $58 million and the AC Hotel by Marriott Boston Downtown for $89 million with plans to purchase a newly build Fairfield Inn & Suites property in Denver.
- Apple Hospitality REIT sold a 20-hotel portfolio for $211 million and bought four hotels for a combined $186 million.
- A joint venture of Summit Hotel Properties and Singaporean wealth fund GIC announced a $822 million deal to acquire a 27-hotel portfolio from NewcrestImage.
Executives with both hotel branding companies and real estate investment trusts commented on how transactions are shaping up during their most recent earnings calls with investors. Here are the highlights of that commentary:
Mark Brugger, President and CEO, DiamondRock Hospitality Company
“We're comfortable with about $300 million of balance sheet capacity toward acquisitions. ... I think we've lost every bid in a broker deal this year as there is a ton of capital chasing hotels. So it is a highly competitive environment. Every private equity firm is chasing hotels. They like the recovery story, and some other REITs have stretched much more than we would have on certain acquisitions, which is different assumptions than outlook. Currently, we have, I think, five written offers out. Most of those are off-market deals. ... Of those five, four [are] resorts, one is not a resort, so they're kind of a unique lifestyle market, but we're spending most of our time on the off-market deal. This is a very competitive marketplace and trying to use our relationships and sometimes different visions for the properties repositioning to try to do deals that make sense for our shareholders.”
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“But these urban markets, I think, it's a little wait-and-see from the buyer's perspective. There is clearly appetite and people that want to play that thesis. But you need better trailing cash flows so that the private equity folks can get better debt and then you'll see NAVs recover more rapidly in the urban markets. So we anticipate that the gap starts shrinking over the next 12 months as you start seeing cash flows really return in the urban markets because the financing just gets better, which makes the acquisition work from a larger pool of buyers.”
“We're comfortable with about $300 million of balance sheet capacity toward acquisitions. ... I think we've lost every bid in a broker deal this year as there is a ton of capital chasing hotels. So it is a highly competitive environment. Every private equity firm is chasing hotels. They like the recovery story, and some other REITs have stretched much more than we would have on certain acquisitions, which is different assumptions than outlook. Currently, we have, I think, five written offers out. Most of those are off-market deals. ... Of those five, four [are] resorts, one is not a resort, so they're kind of a unique lifestyle market, but we're spending most of our time on the off-market deal. This is a very competitive marketplace and trying to use our relationships and sometimes different visions for the properties repositioning to try to do deals that make sense for our shareholders.”
…
“But these urban markets, I think, it's a little wait-and-see from the buyer's perspective. There is clearly appetite and people that want to play that thesis. But you need better trailing cash flows so that the private equity folks can get better debt and then you'll see NAVs recover more rapidly in the urban markets. So we anticipate that the gap starts shrinking over the next 12 months as you start seeing cash flows really return in the urban markets because the financing just gets better, which makes the acquisition work from a larger pool of buyers.”
Jeff Fisher, Chairman, President and CEO, Chatham Lodging Trust
“We have made fantastic strides solidifying our balance sheet and have the confidence to go on offense and grow our portfolio. In early August, we invested $71 million to acquire two incredible premium branded extended-stay hotels adjacent to the domain in Austin, Texas; a market that we all know is absolutely thriving and will generate meaningful RevPAR growth and EBITDA growth for us going forward. It also furthered our exposure to premium branded extended-stay hotels that we believe will continue to be brands of choice as we emerge from the pandemic. We still have an appetite and the financial flexibility to acquire more hotels. Cap rates for acquisitions remained close to 2019 valuations. And it's a difficult environment to find the kind of assets that fit I think are very strict criteria, particularly since we are trying to again increase our exposure even further to extended-stay hotels, but we are looking at a fair amount of deals and I would expect to be successful in that endeavor over the next six to 12 months.”
“We have made fantastic strides solidifying our balance sheet and have the confidence to go on offense and grow our portfolio. In early August, we invested $71 million to acquire two incredible premium branded extended-stay hotels adjacent to the domain in Austin, Texas; a market that we all know is absolutely thriving and will generate meaningful RevPAR growth and EBITDA growth for us going forward. It also furthered our exposure to premium branded extended-stay hotels that we believe will continue to be brands of choice as we emerge from the pandemic. We still have an appetite and the financial flexibility to acquire more hotels. Cap rates for acquisitions remained close to 2019 valuations. And it's a difficult environment to find the kind of assets that fit I think are very strict criteria, particularly since we are trying to again increase our exposure even further to extended-stay hotels, but we are looking at a fair amount of deals and I would expect to be successful in that endeavor over the next six to 12 months.”
Marcel Verbaas, Chairman and CEO, Xenia Hotels & Resorts
“We're looking at a number of opportunities, and we've certainly underwritten a good number of opportunities here in the last quarter or so. But I really feel like the pipeline is still relatively limited compared to where we think it will be in the quarters and years ahead.
“So I mentioned last quarter that we felt that expectations that sellers had on some of these assets were still a little bit beyond where we were comfortable stretching to get deals done and didn't really feel the need to go that far, particularly given the internal opportunities that we still have in our portfolio with some of the assets that we bought coming into this. So I'm not sure that I can give you a little bit more color than that, except for to say that what we continue to underwrite the assets, but haven't really found the type of deal and asset that we think is a great strategic fit for us at a price that we're comfortable transacting. And yeah, to your point as far as it relates to kind of our focus. No, we continue to look at what has worked well for us, obviously.
“We have a pretty significant Sunbelt presence. There are markets where we aren't in yet that we'd like to get in over time, but the time has to be right and the asset has to be right to get into those markets. And there are certain markets still where we have some presence where we wouldn't mind either upgrading our presence over time or increasing our footprint a little bit. So largely, we're going to clearly stick with the strategy that you've seen from us over the past few years as it relates to any new opportunities that we will pursue.”
“We're looking at a number of opportunities, and we've certainly underwritten a good number of opportunities here in the last quarter or so. But I really feel like the pipeline is still relatively limited compared to where we think it will be in the quarters and years ahead.
“So I mentioned last quarter that we felt that expectations that sellers had on some of these assets were still a little bit beyond where we were comfortable stretching to get deals done and didn't really feel the need to go that far, particularly given the internal opportunities that we still have in our portfolio with some of the assets that we bought coming into this. So I'm not sure that I can give you a little bit more color than that, except for to say that what we continue to underwrite the assets, but haven't really found the type of deal and asset that we think is a great strategic fit for us at a price that we're comfortable transacting. And yeah, to your point as far as it relates to kind of our focus. No, we continue to look at what has worked well for us, obviously.
“We have a pretty significant Sunbelt presence. There are markets where we aren't in yet that we'd like to get in over time, but the time has to be right and the asset has to be right to get into those markets. And there are certain markets still where we have some presence where we wouldn't mind either upgrading our presence over time or increasing our footprint a little bit. So largely, we're going to clearly stick with the strategy that you've seen from us over the past few years as it relates to any new opportunities that we will pursue.”
Mark Hoplamazian, President and CEO, Hyatt Hotels Corp.
"Well, I think we are paying attention to what's going on in the marketplace. So it will not surprise you to hear that the first couple of assets that we've taken to market are leisure-focused assets, one resort and one leisure-dominant hotel. And we are in discussions on a number of other projects at this point with interested parties. So I feel like there's going to be tremendous interest, and we will have a lot of options as to how we actually pursue this. We have mapped out several different scenarios as to how we will achieve this. And I can just tell you that our history and practice has been to deliver on our sell-down commitments earlier and better in terms of valuation and also total realization than we commit to. So I don't expect this to be any different than our history."
On the company's recent purchase and resale of the Alila Ventana Big Sur:
"We're not a long-term holder, and we didn't design to be. Secondly, we took really significant care and in-depth underwriting on that asset because it was obviously a very high price per key and very much lower multiple of current earnings because this year has been extraordinary. And so we mapped out a number of projects that we thought would really enhance the fundamental future for the property, which is going to require some capital. Not a huge amount of capital, but high-return investments that really have to be done in the very best way. And so what we thought was there is a lot of interest in this type of asset right now. We have built a really compelling plan for the hotel, including some enhancements with respect to how we're going to market with the hotel. And we also learned that Host, which is one of our biggest partners as an owner had interest in the hotel, and we ended up in discussions with them. And they actually saw the same opportunity that we did. They have experience executing on these kinds of property improvements, and we have confidence that they'll be able to do that. So we bought the asset, we earned a mid-teens return while we owned it, and we sold it for a profit despite keeping a very long-term management agreement. So from our perspective, we just ended up securing a very long-term presence in this impossible to replace asset with a partner who's going to put money in and enhance the proposition of the asset for our customer base and also the returns going forward. So it felt like a triple win to us, and that's really the whole story."
"Well, I think we are paying attention to what's going on in the marketplace. So it will not surprise you to hear that the first couple of assets that we've taken to market are leisure-focused assets, one resort and one leisure-dominant hotel. And we are in discussions on a number of other projects at this point with interested parties. So I feel like there's going to be tremendous interest, and we will have a lot of options as to how we actually pursue this. We have mapped out several different scenarios as to how we will achieve this. And I can just tell you that our history and practice has been to deliver on our sell-down commitments earlier and better in terms of valuation and also total realization than we commit to. So I don't expect this to be any different than our history."
On the company's recent purchase and resale of the Alila Ventana Big Sur:
"We're not a long-term holder, and we didn't design to be. Secondly, we took really significant care and in-depth underwriting on that asset because it was obviously a very high price per key and very much lower multiple of current earnings because this year has been extraordinary. And so we mapped out a number of projects that we thought would really enhance the fundamental future for the property, which is going to require some capital. Not a huge amount of capital, but high-return investments that really have to be done in the very best way. And so what we thought was there is a lot of interest in this type of asset right now. We have built a really compelling plan for the hotel, including some enhancements with respect to how we're going to market with the hotel. And we also learned that Host, which is one of our biggest partners as an owner had interest in the hotel, and we ended up in discussions with them. And they actually saw the same opportunity that we did. They have experience executing on these kinds of property improvements, and we have confidence that they'll be able to do that. So we bought the asset, we earned a mid-teens return while we owned it, and we sold it for a profit despite keeping a very long-term management agreement. So from our perspective, we just ended up securing a very long-term presence in this impossible to replace asset with a partner who's going to put money in and enhance the proposition of the asset for our customer base and also the returns going forward. So it felt like a triple win to us, and that's really the whole story."
Tom Baltimore, Jr., President and CEO, Park Hotels & Resorts
On selling hotels:
“I think the most likely scenario would be that we look to partner in [joint venture] on an iconic asset or two. Hawaii [Park owns two Hawaiian resorts] would not be included on that list, but others that we could sell in interest at private market valuations and which would then allow us and shield that with our [net operating losses], that gives us optionality to go on offense whether that's embedded opportunities within the portfolio or whether that's opportunities externally. We will be thoughtful. I don't know that we have a need to buy an asset today or tomorrow, particularly given the fact that we've been so active in the recycling in the last few years … selling assets and, of course, bolting on the Chesapeake portfolio.”
On buying hotels:
“We will continue to follow the demand patterns. … If you look at what's happening for us in Orlando, in Hawaii and certainly Key West, we're seeing really aggressive performance there, and we will continue to look. There are markets that we're underrepresented — Phoenix comes to mind, parts of Texas. Clearly, we'd like to continue to expand our footprint into Florida.
“At the same time, that's an overbought trade right now. I think some of the pricing is quite aggressive. I intellectually have a hard time with whether you can generate the scale and the return and the cash flow on some of the resorts, but we'll see how that unfolds over time. This does remind me 10-plus years ago — I've been around for a long time — when the focus was on lifestyle hotels in New York, and I've cited this example, but I think it's a real example.
"There was this excessive focus on buying those lifestyle hotels in New York, and as we now fast-forward and look back, I don't think that trade really worked out for a lot of people, particularly at the prices that people were paying. And so we will continue to evaluate the portfolio. We are confident in upper-upscale and luxury hotels in top 25 markets in premium resort destinations. We have a great footprint on resorts now. We'll look to expand that selectively, but I think it's got to make economic sense.”
On selling hotels:
“I think the most likely scenario would be that we look to partner in [joint venture] on an iconic asset or two. Hawaii [Park owns two Hawaiian resorts] would not be included on that list, but others that we could sell in interest at private market valuations and which would then allow us and shield that with our [net operating losses], that gives us optionality to go on offense whether that's embedded opportunities within the portfolio or whether that's opportunities externally. We will be thoughtful. I don't know that we have a need to buy an asset today or tomorrow, particularly given the fact that we've been so active in the recycling in the last few years … selling assets and, of course, bolting on the Chesapeake portfolio.”
On buying hotels:
“We will continue to follow the demand patterns. … If you look at what's happening for us in Orlando, in Hawaii and certainly Key West, we're seeing really aggressive performance there, and we will continue to look. There are markets that we're underrepresented — Phoenix comes to mind, parts of Texas. Clearly, we'd like to continue to expand our footprint into Florida.
“At the same time, that's an overbought trade right now. I think some of the pricing is quite aggressive. I intellectually have a hard time with whether you can generate the scale and the return and the cash flow on some of the resorts, but we'll see how that unfolds over time. This does remind me 10-plus years ago — I've been around for a long time — when the focus was on lifestyle hotels in New York, and I've cited this example, but I think it's a real example.
"There was this excessive focus on buying those lifestyle hotels in New York, and as we now fast-forward and look back, I don't think that trade really worked out for a lot of people, particularly at the prices that people were paying. And so we will continue to evaluate the portfolio. We are confident in upper-upscale and luxury hotels in top 25 markets in premium resort destinations. We have a great footprint on resorts now. We'll look to expand that selectively, but I think it's got to make economic sense.”
Justin Knight, CEO, Apple Hospitality REIT
“The upside in our portfolio is further strengthened by our recent acquisitions and dispositions activity, which has lowered the average age and improved the quality of our portfolio, reduced our exposure to near-term [capital expenditure] and adjusted our market mix and positioning to elevate future performance. During and subsequent to the third quarter, we acquired four hotels for a combined total of approximately $186 million. In August, we acquired the existing AC Hotel and in September, we acquired the newly constructed Aloft Hotel, both ideally located in downtown Portland, Maine, along the city's working waterfront for a combined total of approximately $118 million.
“We have been net acquirers of assets since the onset of the pandemic and have at the same time avoided dilutive capital raises or over-encumbering our balance sheet. Our strategy has been tested and consistently yielded compelling results for our investors.
“If you look at our total acquisitions activity since the beginning of the pandemic last year and this year, roughly 50% — actually, exactly 50% of the hotel that we purchased have been high-density suburban and 50% have been in these smaller urban markets, generally speaking. Looking at Portland, Oregon specifically, I had highlighted in some of our earlier calls the fact that pricing had consistently been against 2019 numbers. And as a result, we hadn't seen an opportune entry point to get into some of these markets that we think long term will be good markets. I think because of the way the market was pricing assets, we prioritized markets that we felt would be on the leading edge of the recovery.
“During the quarter, we also successfully completed the portfolio sale we discussed on our last call, which included 20 hotels for a gross sales price of approximately $211 million. Since the beginning of the pandemic, we have purchased nine hotels for a combined total of $347 million and sold 24 hotels for a combined total of $245 million.”
“The upside in our portfolio is further strengthened by our recent acquisitions and dispositions activity, which has lowered the average age and improved the quality of our portfolio, reduced our exposure to near-term [capital expenditure] and adjusted our market mix and positioning to elevate future performance. During and subsequent to the third quarter, we acquired four hotels for a combined total of approximately $186 million. In August, we acquired the existing AC Hotel and in September, we acquired the newly constructed Aloft Hotel, both ideally located in downtown Portland, Maine, along the city's working waterfront for a combined total of approximately $118 million.
“We have been net acquirers of assets since the onset of the pandemic and have at the same time avoided dilutive capital raises or over-encumbering our balance sheet. Our strategy has been tested and consistently yielded compelling results for our investors.
“If you look at our total acquisitions activity since the beginning of the pandemic last year and this year, roughly 50% — actually, exactly 50% of the hotel that we purchased have been high-density suburban and 50% have been in these smaller urban markets, generally speaking. Looking at Portland, Oregon specifically, I had highlighted in some of our earlier calls the fact that pricing had consistently been against 2019 numbers. And as a result, we hadn't seen an opportune entry point to get into some of these markets that we think long term will be good markets. I think because of the way the market was pricing assets, we prioritized markets that we felt would be on the leading edge of the recovery.
“During the quarter, we also successfully completed the portfolio sale we discussed on our last call, which included 20 hotels for a gross sales price of approximately $211 million. Since the beginning of the pandemic, we have purchased nine hotels for a combined total of $347 million and sold 24 hotels for a combined total of $245 million.”
Jim Risoleo, President and CEO, Host Hotels & Resorts
“Turning to our most recent transaction. In September, we closed on the off-market acquisition of Alila Ventana Big Sur for $150 million.
“This ultra-luxury resort is one of the most uniquely located hotels in the United States and benefits from extremely limited supply and high barriers to entry due to strict land-use regulations by the California Coastal Commission. We purchased the property at a 9.3 times EBITDA multiple on 2021 forecast. The RevPAR is expected to be $1,320. The TRevPAR is $1,870, and the EBITDA per key is $273,000 based on 2021 forecast.”
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“The deals that we've been able to get done this year have been off-market transactions, and that's where we continue to stay focused right now. Because there is a fair amount of competition out there, given that the debt markets are flushed with cash, the CMBS market, in particular flushed with cash and a lot of the private equity firms were sitting on the sideline waiting for the CMBS markets to come back. So we are starting to see more competition.”
“On the dispositions front, subsequent to quarter end, we sold five hotels totaling 2,323 keys for $551 million, including FF&E [furniture, fixtures and equipment] reserves at a 14.2 times EBITDA multiple, including forgone [capital expenditures] based on 2019 results.”
“Turning to our most recent transaction. In September, we closed on the off-market acquisition of Alila Ventana Big Sur for $150 million.
“This ultra-luxury resort is one of the most uniquely located hotels in the United States and benefits from extremely limited supply and high barriers to entry due to strict land-use regulations by the California Coastal Commission. We purchased the property at a 9.3 times EBITDA multiple on 2021 forecast. The RevPAR is expected to be $1,320. The TRevPAR is $1,870, and the EBITDA per key is $273,000 based on 2021 forecast.”
…
“The deals that we've been able to get done this year have been off-market transactions, and that's where we continue to stay focused right now. Because there is a fair amount of competition out there, given that the debt markets are flushed with cash, the CMBS market, in particular flushed with cash and a lot of the private equity firms were sitting on the sideline waiting for the CMBS markets to come back. So we are starting to see more competition.”
“On the dispositions front, subsequent to quarter end, we sold five hotels totaling 2,323 keys for $551 million, including FF&E [furniture, fixtures and equipment] reserves at a 14.2 times EBITDA multiple, including forgone [capital expenditures] based on 2019 results.”
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