Independent hotels sold at considerably higher prices than their branded counterparts in 2017, as experts say the independent hotel space seems to have been embraced by once skeptical lenders and institutional investors.
REPORT FROM THE U.S.—Independent hotels continue to enjoy a historically strong transactions climate as more banks and institutional investors view them as viable investment targets, sources said.
According to data from STR, Hotel News Now’s parent company, 125 independent properties were sold in the U.S. during the course of 2017. The most expensive property was the 839-room Pacific Beach Hotel Waikiki, which sold for $515 million, or $613,826 per key. On a per-key basis, the priciest transaction was Ashford Hospitality Prime’s purchase of the 80-room Hotel Yountville for $96.5 million, or $1.2 million per key.
Through the course of the year, independent hotels sold for an average per-room price of $314,000, which was more than the average for branded upper-upscale properties ($190,000) but less than luxury branded hotels ($423,000).*
Joseph Rael, director of consulting and analytics for STR, said independent hotel pricing held strong in a comparatively hard year for their branded counterparts.
“Although the price per room declined for every branded category, the price per room actually increased by $26,000 for independents, with several more high-priced independents sold in 2017,” he said. “In 2016, independents represented five out of the top 10 transactions by price per from, while eight out of the top 10 in 2017 were independent properties.”
In all, four independent properties sold with per-room prices above $1 million: Hotel Yountville, Sunset Tower, The Standard High Line and Oceans Edge Hotel & Marina Key West.
According to STR, 26 of the 40 luxury properties sold in 2017 were independent, and independent luxury hotels saw prices per room roughly $80,000 higher than their branded counterparts.
In fact, independent hotels beat out branded properties in each class in 2017. Rael noted the largest difference was in upscale, where independent hotels enjoyed a $270,000 premium over branded hotels, but he said that was driven by a few large transactions.
“The unusually high price per room for upscale independents was largely driven by the Oceans Edge Hotel & Marina Key West, which sold for $1 million per room, and the Pacific Beach Hotel Waikiki, which sold for $613,826 (per key),” he said.
Overall investor sentiment
The strong pricing for independent hotels seems to be reflective of the recent acceptance by investors of independents as investment vehicles, said Mike Cahill, CEO and founder of Hospitality Real Estate Counselors.
“Overall, the big picture is independents are transacting and being bought and sold at a level that is probably the best I’ve seen in my career,” he said.
He said they’re no longer viewed as relatively risky propositions compared to branded hotels, at least on the high end.
“Lenders over time have increasingly accepted hotels, which makes it easier for people to get deals done,” Cahill said.
Most of the interest in independent hotels gravitates in urban city centers and resort markets, he said, but buyer interest is broad.
The buyers are “your typical group of players, from your larger institutional private equity to your real estate investment trusts, although I would probably say private equity is more likely to invest into high-end independents,” he said.
That doesn’t mean no REITs are playing in the space, though, as evidenced by Ashford’s Hotel Yountville purchase. Some hotel REITs, particularly Hersha Hospitality Trust and LaSalle Hotel Properties, have shown a willingness to invest in independent properties, and Cahill said it will be interesting to see if that outlook continues to grow more prevalent among publicly traded ownership groups.
“It will be interesting to see in the next cycle if more REITs are buying independent properties,” he said. “That would be the signal that Wall Street is accepting the product.”
Sean Hennessey, founder and CEO of Lodging Advisors, noted Wall Street investors could be among the last to be won over. He said this has a lot to do with how much scrutiny they face.
“The one thing Wall Street hates more than anything is risk,” he said. “If you’re in (an) environment where they’re perceiving more risk, to put it a little bluntly, you’re a lot less likely if you’re a VP of acquisitions to lose your job if you invest in a first-tier branded hotel than if you invest in an independent hotel and it doesn’t work out.”
Overall, Hennessey is seeing the same trends coming together as Cahill.
“There has been a long-term trend of increasing interest in acquiring independent assets, particularly boutique or lifestyle properties that have proven they can perform strongly and not be burdened by the overhead and other costs of full-service brands,” he said.
Cahill said pricing strength in the independent space has been driven by strong cash flow.
Rael pointed to food and beverage operations as a particular point of strength in the independent hotel space.
“We generally see that independents sell at higher prices per room and have higher room revenue multipliers than brands in the same class because they typically have more robust F&B operations and more revenue coming from other departments outside the rooms department,” he said.
While all the numbers are trending positively for independent hotel transactions, Hennessey said he thinks there’s a possibility of a change in that regard. He said worries about a downturn, which could change investors’ thinking.
“My sense is, given the current environment, there’s a bit of a pullback in terms of enthusiasm from the investment community,” he said. “At the end of the day, it’s still perceived that a brand is a seal of approval or an insurance policy that is something to fall back on if times get hard. I’m seeing that particularly in New York, where the market has seen not so much diminishing occupancy but weakening rate integrity and pricing power.”
He said that market is seeing greater interest in branded properties than in recent years.
“There’s a perception that although the industry is doing relatively well and performance hasn’t eroded, forward-looking people sense an increase in new supply,” Hennessey said. “Those sorts of concerns are causing a little bit of a more conservative approach, and that hurts independent hotels compart to branded ones.”
*Correction, 3 August 2018: An earlier version of this story cited incorrect February 2018 data on the average price of independent hotel sales.