Buyer’s Market

Last year was a quiet one for transactions considering all the factors that traditionally fuel lodging investments were the most favorable in years. In 2012, 1,342 hotels containing a total of 183,300 rooms changed ownership for an estimated total investment of $15.3 billion. The Blackstone Group’s purchase of the Motel 6 and Studio 6 portfolio from Accor Hotels for $1.9 billion accounted for 649 of these hotels—nearly 50 percent of the total.

Possibly due to the election or the heightened uncertainty created by the fiscal cliff crisis, there was a pronounced shortage of hotels available for sale in 2012. Year-over-year, individual transactions were down from 830 in 2011 to 582. Except for Blackstone, portfolio transactions and merger and acquisition activity were down as well.

Of the 1,342 hotels changing ownership in 2012, 507 had selling prices reported into the public domain. Average selling price (ASPR) per room was $117,849 for those 507 hotels. It is slightly below the peak of $118,991 established in 2007 and the highest ASPR recorded since the cyclical bottom of $57,188 set in 2009.

Equity funds and REITs, the two largest sectors on the buy side, were net investors in 2012. Capitalizing on realized appreciation and looking to sell before the capital gains tax rate increased, equity funds were the largest sellers in 2012.

LOOKING AHEAD

By early second quarter the sequestration and debt ceiling issues will be resolved. That should produce a noticeable improvement in business confidence, stimulating higher levels of investment and leading to acceleration in the number of hotel properties coming to market.

It is an opportune time for privately held hotel companies and owners of individual assets to go to the market and take profits before there is any significant pickup in new supply. Cap rates are low and net income multipliers are high, producing near record selling prices. In 2013 average daily rate (ADR), revenue per available room (RevPAR), and total revenues will have rebounded to pre-recession levels. Occupancy is expected to follow in 2014. Much of the available upside will have already been captured as many high-profile properties transition from an internal growth phase to an operating maturity phase.

This is definitely an opportune time to buy. Equity groups and real estate investment trusts (REITs) are waiting to deploy the capital they have accumulated over the past few years. Wall Street is standing by, eager to fund these groups. The cost of capital is at lifetime lows. While waiting for other sectors of the economy to more completely recover, the Federal Reserve Board is committed to keeping interest rates low until 2014.

The stock market is hovering around five-year highs and is within an eyelash of all-time highs. Improved business confidence and a stabilized stock market indicate the potential for a resurgence of portfolio sales and merger and acquisition activity in 2013 and ’14, hastening consolidation within the lodging industry. Many main street lenders continue to loosen loan terms as they view certain hotel loans as safe harbor lending.

All the factors on both the buy and the sell sides seem to be in alignment for kindling a surge in transactions that could carry well into mid-decade.

Patrick “JP” Ford is a senior vice president of Lodging Econometrics.

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