Panelists at the Hunter Hotel Investment Conference speaking about hotel valuation believe many U.S. markets are still performing well and offer opportunities for purchases and sales.
ATLANTA—With most signs pointing toward the U.S. hotel industry nearing the end of its cycle, hoteliers are looking for guidance on hotel acquisitions and dispositions.
Panelists speaking during the “Hotel values in a changing market” session at the 2017 Hunter Hotel Investment Conference explained that although the industry isn’t performing as well as it was a few years ago, most markets are still producing profits, making them attractive acquisitions under the right conditions.
The U.S. hotel industry is close to its peak valuation phase, said Hank Staley, managing director at CBRE Hotels. Although STR projects supply growth to exceed demand growth in 2017 and 2018, he said, the decline is still minimal and shows continued revenue-per-available-room growth. (STR is the parent company of Hotel News Now.)
“We’ve got a decline ahead of us, but it’s so slight it’s practically immaterial,” he said. “I’m not as pessimistic as some seem to think as it relates to the next two, three, four years.”
The industry is coming off a period of significantly higher RevPAR growth into a situation in which RevPAR is going everywhere, said McKenna Luke, director at HVS. RevPAR growth and decline will occur market by market and asset by asset, she said.
The majority of properties will see RevPAR and cash flow going to their bottom lines increasing, Luke said, though less than in years past. Some asset types in certain markets will see declines because of supply, property improvement plans and other factors, she said, but most will see positive growth.
Heading out of 2016, a great deal of private equity was involved in acquisitions, said Sam Reynolds, EVP and director of acquisitions and dispositions and portfolio management at Apple Hospitality REIT. While the general belief is that public real estate investment trusts were on the sideline, he said, the truth is they were still looking for deals.
“You will see a trend away from some of the 2016 buyers more toward those like RLJ and ourselves,” he said.
There’s a lot of money out there on the sidelines, said Kate Henriksen, SVP of investment analysis and portfolio management at RLJ Lodging Trust.
“A lot of REITs have been selling assets so they have cash on their balance sheets,” she said. “Private equity is accruing it. We’re finding the best deal we can.”
Foreign capital will remain in play, she said, but it’s unknown if it will increase since it’s a moving target to get money out of those countries.
“Thirty-billion dollars is a pretty fair target for what we’re seeing in the overall transaction target,” she said.
Are Starwood assets more attractive now?
Apple REIT has historically owned only Hilton and Marriott properties, Reynolds said, and it has held strictly to that in 50 years of purchasing hotels. Now that Marriott owns Starwood, he said, the company is looking at them more, specifically Element and Aloft properties, as possibilities.
Henriksen said RLJ is in the same boat as Apple Hospitality.
“We’re definitely more inclined to look at them this year than in years before,” she said.
Brand is important when it comes to valuation, Staley said. Marriott and Hilton historically have been the “twin 800-pound gorillas,” he said. Starwood joining the Marriott family inherently enhances their value, he said.
“Who benefited most from the merger, Marriott or the Starwood franchisee?” he asked.
The attractiveness of Starwood-branded hotels depends on the presence of other Marriott and Starwood hotels in the specific markets, Luke said. Marriott-branded properties would benefit in areas without many Starwood hotels, especially as Starwood Preferred Guest members might now consider a Marriott brand when they might have driven out of the immediate market to stay at a Starwood hotel prior to the acquisition, she said. Markets with multiple properties of each will have a harder time, she added.
Lenders have become more stringent in the underwriting process in what they’re looking for, Luke said, taking into consideration sponsorship, stabilization of cash flows and the economic life of the asset going forward.
“For new construction, it’s definitely going to need to be a good project they feel strongly about going forward,” she said.
Construction financing is more difficult now than before, Staley said, but getting financing for an acquisition isn’t as hard if it’s the right buy.
Interest rates have increased over the last year, Luke said, but how that affects transactions depends on the lender and the asset. From what she’s observed, lenders are building rate increases into the spread.
“The cost of capital will increase,” she said.
Cap rate has to provide a return to the debt and equity components of an investment, Staley said. There are a number of things that affect cap rates, he said, most of which is the inherent risk in the market. Since coming out of the Great Recession in 2011, cap rates for a full-service hotel ranged from 7.1 to 7.6, he said, the higher end of which was in 2016.
“Interest rates go up, and cap rates go up accordingly,” Staley said. “The cost of new product has gotten to the point where it’s made acquisitions a more viable alternative than new construction.”