The lodging industry is riding the tailwinds of low supply, increasing demand, rising hotel values, higher average daily rate, and healthy transaction volume. To date this year, U.S. hotel values have surpassed the 2006 peak and will continue to grow. In July, the industry sold a record of 108.5 million rooms and achieved an all-time high average daily rate (ADR) of $108.72. With such positive hotel industry metrics to speak of, a higher level of optimism was evident at this year’s Lodging Conference, which brought a record number of 1,500 attendees to the Arizona Biltmore in Phoenix Sept. 17-20.
Increasing transaction volume was a hot topic during the industry expert panel “A View from the Top (Part II).” Douglas Kessler, president of Ashford Hospitality Trust, said the industry is still in the sweet spot of the cycle, and buyers and sellers have a lot more room to roam. “For owners there’s an opportunity to potentially cash out, take some chips off the table, and redeploy—hopefully not to develop,” Kessler said. “The other option is for them to hold, because the [revenue per available room] forecasts are quite strong, so they may be leaving chips on the table by selling today. It’s clearly a seller’s market.”
In cases where assets are undervalued or not properly positioned in the market, a wide variety of buyers are interested in development, said Joel Eisemann, chief development officer, the Americas for IHG. “That’s a great opportunity to acquire the asset and reposition, rebrand, and relaunch that property,” he says.
In the past three years, Starwood Hotels and Resorts has sold about $1.5 billion worth of assets, said Simon Turner, president of global development, with a lot of transaction activity in the REIT market. The company currently has $5 billion of owned real estate, down from $10 billion five years ago. “We’ve been positioning those assets and waiting for a cost of capital environment where we can sell for a price we feel is fair for our shareholders,” Turner said.
When it comes to its owned assets, Starwood moves very methodically and only sells when the market is right. Turner said the company is willing to convert from company-managed to franchised upon sale. “Five years ago, we might not have been as open to that, but with the right franchisee, the right operator, and the right [property improvement plan], putting an asset in the hands of a good franchisee is as effective and as good from a brand and operating standpoint as running it ourselves, particularly in the select-service space,” Turner said.
A more diverse buying pool—comprised of international buyers, private equity fund buyers, sovereign wealth funds, non-traded REITs, and public REITs—has created a fairly efficient transaction market, Kessler said, and the investment models are very different. For instance, private equity funds raise capital at one time and seek a high internal rate of return (IRR) or multiple of cash flow. REITs, on the other hand, are dynamic market buyers that raise money sequentially and the cost of capital varies over time. “REITs add a great benefit to the transaction market by providing liquidity and also a great benefit to investors by providing a good return on the investment capital,” Kessler said.
“The REIT business has been really good for the hotel sector,” Turner agreed. “It’s the first time almost in the history of the business that you have stable, transparent, institutional quality, and disciplined investors.”
The forecast for supply is still fairly muted, but Kessler expressed concerns that the hotel industry has a short-term memory and building just to build and earn fees is not in everyone’s collective best interests. “Generally what’s killed our industry has been too much new supply,” Kessler says. An excessive of new supply is not good for the REITs, he added, because while it may depress prices, it also depresses performance.
Turner said that while the limited-service and budget spaces are experiencing increases in supply, it’s still a conversion game in the full-service space in North America.
While financing is available, Eisseman says the leverage levels are generally lower and lenders are often looking for sponsors to step up with more recourse. “What we’re seeing is that the projects that are moving forward are more thoughtfully underwritten and are probably stronger from how they’re structured so they can withstand it if there is some variation after they open.”
The panelists urged owners to be wary of exogenous events that could derail the industry’s positive performance, such as a gridlock in Washington, D.C., but otherwise there is more room to run. Hoteliers should embrace optimism and take this opportunity to drive rate and move forward. “Focus on maximizing revenue to greatest extent you can each and every day, focus on cost,” Eisseman says. “We’ve done great job coming out of the last downturn…we just have to make sure we don’t get sloppy as we continue.”
