When the industry gathers for ALIS in January 2018, how will 2017 compare with previous years? To start this dialogue now, BHN talked with transaction experts to get a sense of what they have seen thus far this year, and what is on the horizon in the Americas.
Hotel industry transaction activity has been robust over the past several years. To put things in perspective, JLL provided the following statistics on Americas-wide hotel transaction volume, including portfolio and single asset transactions, over the past 10 years:
2007 = US$51.5 billion
2008 = US$10.4 billion
2009 = US$2.5 billion
2010 = US$12.2 billion
2011 = US$17.7 billion
2012 = US$18 billion
2013 = US$25 billion
2014 = US$29.1 billion
2015 = US$47.6 billion
2016 = US$31 billion
As summarized by JLL, in 2016 the U.S. and the Americas saw a notable slowdown in transactions. However, it is important to note that 2015 was the second-highest year ever, coming close to the 2007 record in terms of hotel real estate transaction volume. While reported sales slowed in 2016, it was still the third-highest volume level reported in the past 10 years. Factors leading to the slowdown in 2016 included less activity from private equity funds, sentiment that the hotel industry was getting closer to a plateau, and simply because certain deals in 2015 were so singular and high profile, such as Blackstone’s sale of the Waldorf Astoria in New York City, that they could not be repeated.
On the M&A side and not included in the JLL data, mega-company deals like Marriott/Starwood, AccorHotels/FRHI, HNA/Carlson and more have made headlines over the past year.
To find out where 2017 and beyond is headed, BHN talked to experts including Ben Leahy, managing director at Goldman Sachs. “In 2016, we saw continued and strong M&A activity in the hotel sector,” he says. “There were two primary drivers: corporate consolidation – such as Marriott’s acquisition of Starwood and Accor’s acquisition of FRHI, and foreign direct investor activity (and notably Chinese investors), including Anbang’s acquisition of Strategic Hotels & Resorts and HNA’s acquisition of Carlson Hospitality Group.”
Leahy adds that in 2017 his firm expects consolidation, platform scale and efficiencies to drive M&A dialogue. “The lodging cycle also continues to push into the late stages when most deal making typically occurs,” he says. “M&A dialogue in 2017 is most pronounced amongst the public companies and, in particular, hotel REITs. Very few large hotel portfolios have been changing hands. For 2017, while we expect hotel M&A volumes to remain strong due to supportive debt markets, volumes will likely trail 2016 due to stricter capital controls in China and elevated stock market volatility that tends to dampen M&A volumes.”
Regarding foreign direct investment, Gilda Perez-Alvarado, managing director of JLL, says 2016 saw several large-scale portfolios trade to offshore buyers. “With the composition of domestic investors featuring more strongly in 2017, we expect to see some growth in single-asset volumes – driven in part by REITs’ rising activity,” she says. “The average portfolio size is likely to decrease with a greater prevalence of portfolios with up to 5 to 10 assets versus multibillion-dollar deals. We are forecasting transaction volume in the Americas to be between US$29 billion to US$31 billion.” This is almost identical to reported 2016 levels but for different reasons, Perez-Alvarado notes.
Taking the expected REITs’ rising activity in 2017 one step further, Daniel Loeb, managing director of Dirigo Consulting, adds, “Over the last several years, we have seen three publicly traded hotel companies taken over (Starwood, Strategic and Morgans). But with only one hotel REIT leaving the public markets, we are still left with a large number of small and mid-sized hotel owners. I would expect to see consolidation among these companies over the next several years. Real estate stock investors generally award larger, more liquid REITs a lower cost of capital and greater access to capital. A larger hotel REIT might be better able to tap public capital markets as it seeks continued growth.”
Given the emerging weakness in occupancy in major markets, as well as the slow rise in interest rates, a lot of portfolio and individual asset owners are looking to take profits, Loeb adds. “However, the bid-ask spread still appears a bit wide, so executing deals will be difficult. On balance, I expect the volume of deals to be more like last year’s total rather than like 2015. The wild card will be if large portfolios, like some of the select-service assets held by private equity, change hands.”
Teague Hunter, president of Hunter Hotel Advisors, predicts 2017 transactions will be in line with 2016. “Market fundamentals remain solid and there is an abundance of capital to invest; however, there is still a wide bid-ask spread between buyers and sellers,” Hunter says. “Interest rates are projected to rise which should motivate investors to act before the cost of capital increases.”
Others suggest a geographic shift in the composition of properties that may be sold. “In 2017, North American hotel property sales should be roughly equal to 2016 based on number of transactions,” says Michael Cahill, CEO and founder of HREC. “However, the total dollar volume exchanged may decline as smaller, less valuable hotels transact in secondary/tertiary markets instead of larger, urban hotels in gateway cities.”
To the north and south
Although the U.S. typically makes up over 90% of the hotel transaction volume in the Americas as reported by JLL, a look at Canada, Mexico, the Caribbean and Central America shows a similar outlook.
Regarding Canada, Bill Stone, executive vice president of CBRE Hotels, says, “The Canadian hotel investment market remains robust with annual transaction volume approaching record levels. In 2016, over 50% of the activity was represented in M&A deals (the largest being InnVest REIT and Coast Hotels) with total transaction volume over C$4 billion. This year has seen the SilverBirch portfolio trade with others anticipated. This year is expected to be another exceptional year with the potential for transaction volumes to only be slightly less than 2016.”
For Mexico, the Caribbean and Central America, Gregory Rumpel, JLL managing director, says hotel transaction volumes have averaged approximately US$750 million annually since 2013, and he expects a similar amount of activity in 2017. “Resorts across the region will continue to attract interest from opportunistic U.S.-based investors, and high-quality, branded urban and suburban properties in Mexico will be pursued by Mexican REITs, among other investment groups,” he says.