Private-equity firms are accelerating sales of hotels to take advantage of a recovery in U.S. lodging demand and stock prices close to record highs.
Hotel-property transactions jumped 47 percent to $14.1 billion this year through July in the U.S., according to Real Capital Analytics Inc. Sales by institutional investors, including private-equity funds, more than doubled in the first half, as the growth of revenue per available room slowed.Blackstone Group LP (BX), the largest buyout firm, has decided now?s the time to sell shares as it prepares initial public offerings of Hilton Worldwide Holdings Inc. and Extended Stay America Inc.
A recovery in travel after the last recession has led to hotel real estate values almost doubling since 2009?s low, based on an index from research firm Green Street Advisors Inc. Companies including?Starwood Hotels & Resorts Worldwide Inc. (HOT)?and?Marriott International Inc. (MAR)?have climbed to their highest prices since 2007, when Blackstone bought Hilton Hotels Corp. for $26 billion at the tail end of the biggest buyout boom in history. With some firms cashing in on their investments, further property-price gains may be muted.
?Fundamentals are still pretty strong but, in general, revpar is increasing at a declining rate,? said Keith Gelb, a managing member of Rockpoint Group LLC, a Boston-based private-equity real estate firm that has been selling hotel assets. ?Thecapital markets?have been quite strong and we?ve executed our business plans sooner than anticipated.?
Outpacing Purchases
Institutional investors, after snapping up hotels at distressed prices at the real estate market?s bottom in 2009 and 2010, have made sales totaling $3.44 billion in the first half, compared with $1.68 billion a year earlier, according to New York-based Real Capital, a property-research firm. Purchases rose at a slower pace, climbing 21 percent to $3.43 billion.
Growth in revpar, the lodging industry?s measure of average daily room rates and occupancies, is slowing after three years of gains. It rose 5.6 percent in the first half, compared with 6.8 percent growth for all of last year and 8.2 percent in 2011, according to STR, a Hendersonville, Tennessee-based data provider. The firm forecasts revpar will increase 5.7 percent this year and 6 percent in 2014.
?We still have two to three years of pretty good growth and below-average supply increases,? said Scott D. Smith, senior vice president in the Atlanta office of PKF Consulting USA LLC, a San Francisco-based research and advisory firm for the hotel industry. ?But if demand declines, then hoteliers will start to lose occupancy and discount their room rates, and obviously that will have a great impact on net operating income.?
Cap Rates
Some investors are attracted to hotels because they offer investment yields, as measured by capitalization rates, of about 7.8 percent, or about 2 percentage points higher than the average of the other major commercial-property types — office, industrial, retail and apartments, said Lukas Hartwich, a lodging analyst at Green Street in?Newport Beach,?California. Cap rates are net operating income divided by purchase price.
If?interest rates?rise further, that would boost borrowing costs and may reduce the prices that buyers who rely on debt financing are willing to pay for hotel assets, Hartwich said.
?Some buyers are looking for a certain return on equity so if the cost of debt goes up, that hurts their return,? he said.
Rockpoint Deals
Rockpoint has sold or recapitalized more than $1.5 billion of hotel properties in the past 12 months, including?New York?s Milford Plaza,?Boston?s Park Plaza Hotel,?Hawaii?s Waikiki Courtyard and Bacara Resort & Spa in?Santa Barbara, California.
?We?ve monetized a significant percentage of our hotel assets in the past year,? Gelb said.
Private-equity firms continue to make new hotel bets as they sell or start to exit older investments. Blackstone bought about $4 billion of hotel assets during the past year, including the Motel 6 budget chain and a leasehold in a Hyatt resort in Waikiki.
Hilton, the world?s largest hotel chain, filed to raise as much as $1.25 billion when it goes public, a placeholder amount that may change. New York-based Blackstone also filed for an IPO of Extended Stay, a mid-priced lodging chain, in July, and is exploring a stock sale of La Quinta Inns & Suites. The firm is seeking to take advantage of surging stocks while holding on to a stake in Hilton in a bet travel will remain robust.
Click here to read more.