By Daniel H. Lesser
We live in extraordinary times. There are only a limited number of periods in America’s 245-year history which have been as transformative as 2020 (i.e., 1776, 1865, 1929, 1945, 1968, 2001). The confluence of a global pandemic, mass civil disobedience, and the transfer of power will undoubtedly affect how we live and work in 2021 and beyond.
The COVID-19 pandemic that commenced in early 2020 represents yet another demarcation in life “before” and “after.” 2020 began as geopolitical tensions spiked on January 3rd, and the U.S. stood at the brink of war when an American drone strike near the Baghdad International Airport in Iraq killed Iranian major general Qasem Soleimani. In addition to the human tragedy of illness and death produced during a global plague, the U.S. president was impeached by the House of Representatives, the nation has endured wide ranging civil unrest, deadly wildfires that burned millions of acres throughout the western U.S, and a divisive nation elected a new president. The year culminated in yet another infamous day in American history, namely the shocking and unprecedented event at the U.S. Capitol in Washington DC on January 6th, 2021.
Nearly one year into the COVID crisis, this once-in-a-century worldwide pandemic has caused a swift, wide, and deep economic recession that has decimated key travel and leisure related industries including airlines, car rentals, cruise lines, ridesharing, tour operators, and transient lodging facilities. The U.S. hotel industry continues to experience negative stress as all segments of travel demand experience a sharp and sustained decline which continues to significantly lag pre-pandemic levels.
As we enter 2021, the U.S. is experiencing a record surge in coronavirus cases, continued government restrictions on travel and trade resulting in an astonishing economic crisis. That is the bad news; the good news is there are several reasons for optimism. In addition to the recent $900 billion fiscal stimulus package that was passed, due to a reduction of spending in the services sector the U.S. personal savings rate has increased dramatically. Combined, these elements should fuel consumer spending during the second half of 2021. Additionally, during the next several years record low interest rates are anticipated to endure. Furthermore, Democratic administrations tend to generate infrastructure investments to stimulate the economy. Finally, during the midst of one of the worst human and economic crises we have seen in our lifetimes, the Dow Jones Industrial Average (DJI) closed the year at a record high. When the coronavirus pandemic ultimately wanes, the seeds of growth are lined up for strong U.S. and global economic growth.
The LW Hospitality Advisors (LWHA) Q4 2020 Major U.S. Hotel Sales Survey includes 32 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled $2.3 billion and included approximately 7,700 hotel rooms with an average sale price per room of $295,000. By comparison, the LWHA Q4 2019 Major U.S. Hotel Sales Survey identified 54 transactions totaling roughly $9.0 billion including 19,900 hotel rooms with an average sale price per room of roughly $450,000. Comparing Q4 2020 with Q4 2019, the number of trades decreased by approximately 40 percent while total dollar volume declined roughly 75 percent and sales price per room decreased by roughly 35 percent.
For the year 2020, the LWHA Major U.S. Hotel Sales Survey includes 79 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled $5.3 billion and included approximately 19,400 hotel rooms with an average sale price per room of $273,000. By comparison, the LWHA 2019 Major U.S. Hotel Sales Survey identified 164 transactions totaling roughly $17.7 billion including 48,800 hotel rooms with an average sale price per room of $364,000. Comparing 2020 with 2019, the number of trades decreased by approximately 52 percent while total dollar volume declined roughly 70 percent and sales price per room decreased by roughly 25 percent.
Newsworthy Q4 2020 observations include:
- Ten trades occurred in California, seven of which were acquisitions facilitated under the state’s Project Homekey program which involves administering $600 million in state and federal emergency funds to buy hotels and establish permanent housing facilities for people experiencing homelessness.
- Five trades were consummated for between $100 million and $200 million each.
Notable Q4 2020 Major U.S. Hotel Sales include:
- Caesars Entertainment, Inc. sold Tropicana Evansville, IN for $480 million or nearly $1.4 million per unit.
- Host Hotels & Resorts, Inc. sold to a joint venture between Eagle Four Partners, LLC & Lyon Living Development Company the 532 room Newport Beach Marriott Hotel & Spa in Newport Beach, CA for $216 million of roughly $406,000 per key.
- Mansueto Properties, an entity created to hold the real estate holdings of Joe Mansueto, Founder and Executive Chairman of Morningstar, acquired from Walton Street Capital, the 215 key Waldorf Astoria Chicago for $54 million or at $251,000 per unit, a fraction of replacement cost. During September 2019, a seller sponsored debt fund foreclosed on a defaulted $90 million loan encumbering the property which previously sold in 2015 for approximately $112 million or more than 50 percent lower than the most recent trade.
- In April 2020, Xenia Hotels & Resorts terminated a proposed $100.5 million sale of the 492 key Renaissance Austin Hotel. During November 2020, the Axton Group acquired the property for $70 million which represents a 30 percent decline in value within a seven-month period.
- The 190-unit Surrey hotel in New York, NY was acquired by Reuben Brothers for $151 million or just shy of $800,000 per unit.
The onset of the COVID-19 pandemic earlier this year has for the most part resulted in a reset in lodging property values. After several months of limited activity, we are now starting to see hotel sale transactions come to fruition. Additional market-based transactions will reveal price discovery which generally reflect discounts of 20 to 40 percent to pre-COVID levels. The uncertain macroeconomic environment presented by the pandemic will surely present opportunities to acquire assets from motivated sellers facing near-term pressures. Buyers during 2021 will include open-ended commercial real estate funds, highly leveraged financial institutions, public REITs, and private developers.
Numerous institutional investment firms have raised significant amounts of leverageable capital in anticipation of a coming wave of distressed commercial properties including hotels that will come to market in 2021 and 2022. Given the amount of available dry capital, the most compelling opportunities will be “bid up” and although numerous transactions will be spurred on by distress, many will not necessarily reflect distressed pricing. History has proven that early cycle contrarian, value-oriented investors with proven long term track records over multiple prior cycles, invariably acquire lodging sector assets at an attractive basis that ultimately realize healthy returns on investment.
