By Daniel Lesser
As the world was emerging from a once in century pandemic, global and national events during the first three months of 2022 have resulted in a transformative quarter unlike any for nearly 80 years. During the nuclear superpower age, the notion of an unprovoked brutal attack and invasion of a sovereign state was the stuff of fiction. “Never again” is a phrase associated with the Holocaust, the genocide of European Jews during World War II. Unfortunately, the phrase is merely two words as history is currently repeating itself in Eastern Europe.
As of the end of Q1 2022, skyrocketing energy and food costs have greatly contributed to the largest surge of U.S. inflation in 40 years. Like many industries, the hotel sector is confronted with supply chain challenges as well as unprecedented rising labor shortages and cost difficulties with no immediate solution. The past two years will be looked back upon as an inflection point influencing economic, political, and social paradigm shifts that will emerge during the remainder of this decade.
With COVID-19 beginning to be perceived as endemic, many are optimistic that pandemic related disruptions throughout the globe will further abate. Gross domestic product (GDP) growth is forecast to moderate in 2022 and thereafter, will continue to increase during the foreseeable future. Strong economic growth should support a full-bodied lodging recovery.
Underscored by the strength of room rates, copious amounts of leisure patronage and rebounding group business, the pace of travel recovery has been robust. Nationally, average room rates have exceeded 2019 levels for the last six months, and most anticipate substantial growth for the balance of this year. Hotel sector profitability, which declined dramatically during 2020, has experienced a significant rebound since Q2 2021 and many believe will reach 2019 levels by next year. Hotel values, which on average declined 25 percent in 2020, have for the most part returned to pre-pandemic levels.
The LWHA Q1 2022 Major U.S. Hotel Sales Survey includes 128 single asset sale transactions over $10 million which totaled $7.9 billion and included approximately 26,000 hotel rooms with an average sale price per room of $306,000. By comparison the LWHA Q1 2021 Major U.S. Hotel Sales Survey included 31 single asset sale transactions over $10 million which totaled $8.1 billion and included approximately 17,000 hotel rooms with an average sale price per room of $477,000. Net of the Venetian Resort Las Vegas & Sands Expo and Convention Center trade which skews the data, the Q1 2021 statistics equate to 30 trades totaling $1.85 billion, 9,900 hotel rooms with an average sale price per room of $187,000.
• Comparing Q1 2022 with Q1 2021 (net of the Venetian Resort Las Vegas), the number of trades increased more than fourfold while total dollar volume also grew more than fourfold and sales price per room soared by roughly 65 percent.
By further comparison, the LWHA Q1 2020 Major U.S. Hotel Sales Survey (data reflects hotel sale price statistics prior to any impact of COVID-19 spreading across the U.S.) identified 30 transactions totaling roughly $1.97 billion including 7,600 hotel rooms with an average sale price per room of $259,000.
• Comparing Q1 2022 with Q1 2020 (net of the Venetian Resort Las Vegas), the number of trades increased more than fourfold while total dollar volume also grew more than fourfold and sales price per room rose by roughly 18 percent.
Noteworthy Q2 2022 observations include:
• Twenty-six trades or roughly 20 percent of the national quarter total occurred in the State of Florida, followed by twenty-three trades or 18 percent of the national quarter in California. Combined, forty-nine trades or 38 percent of the national quarter occurred in Florida and California.
• Seven trades or roughly 6 percent of the national quarter total occurred in Arizona, all of which were in the Phoenix Metropolitan Area.
• Six trades or roughly 5 percent of the national quarter total occurred in Colorado, all of which were in the Denver Metropolitan Area.
• Encore Boston Harbor, a 671 key luxury resort and casino located in Everett, Massachusetts sold for $1.7 billion, or more than $2.5 million per unit. Realty Income (NYSE:O) structured a sale-leaseback transaction that includes a triple-net lease agreement with an initial total annual rent of $100.0 million and an initial term of 30 years, with one thirty-year tenant renewal option. Rent under the lease will escalate at 1.75% for the first ten years of the lease and the greater of 1.75% and the CPI increase during the prior year (capped at 2.50%) over the remainder of the lease term.
• Nine Q1 2022 sales were consummated for between $100 million and $199 million each.
· Host Hotels & Resorts, Inc. (NASDAQ: HST) acquired The Alida, Savannah, a 173-room hotel, for approximately $103 million or $595,000 per unit.
· Stonebridge Cos. sold the 230-room Hyatt Place San Francisco / Downtown to Dynamic City Capital for $105.9 million or $460,000 per key.
· DiamondRock Hospitality Company (NYSE: DRH) acquired the 170-room Henderson Beach Resort in Destin, FL for $112.5 million or $662,000 per unit.
· Driftwood Capital purchased from Junson Capital the 326-key Scottsdale Resort at McCormick Ranch in Scottsdale, AZ for $113 million or approximately $347,000 per unit.
· Tishman Hotel & Realty acquired the 400-room Wyndham Grand Orlando Resort Bonnet Creek for $120.5 million or $301,000 per key.
· Sunstone Hotel Investors, Inc. (NYSE: SHO) disposed of the 368-key Embassy Suites by Hilton Chicago Downtown Magnificent Mile, and the 361 room Hilton Garden Inn Chicago Downtown/Magnificent Mile for a combined sale price of $129.5 million, or $178,000 per key.
· The Irvine Company sold the 295-room Fashion Island Hotel in Newport Beach, CA to Eagle Four Partners for $143.6 million or roughly $487,000 per key. The hotel, which originally opened in 1986 and operated for twenty years as a Four Seasons affiliate, was shuttered in 2020 due to the pandemic, and will be reopened in 2023 as the Pendry Newport Beach.
· JEMB Realty Corporation acquired from K & P Clearwater Estate LLC the 343-room Wyndham Grand Clearwater Beach in Clearwater, FL for $170 million or $496,000 per unit.
· Century Casinos, Inc. (Nasdaq Capital Market: CNTY) acquired from Marnell Gaming, LLC, the 1,380-room Nugget Casino Resort in Sparks, NV. CNTY acquired 50% of Smooth Bourbon, LLC (“PropCo”) which owns the land and building for $95 million and entered into a lease with Nugget Sparks, LLC (“OpCo”), for an annual rent of $15 million. The Company will receive $1.9 million per quarter (before any expenses pursuant to the lease) for its share of the rent from OpCo. Within one-year CNTY will purchase OpCo for an additional $100 million and has a five-year option to purchase the remaining 50% of PropCo for $105 million plus 2% per annum.
• Three Q1 2022 sales were consummated for between $200 million and $299 million each.
· A joint venture between Värde Partners and Hawkins Way Capital acquired the 1,220-room Sheraton Boston Hotel from Host Hotels & Resorts, Inc. (NASDAQ: HST) for $233 million or $191,000 per key.
· Host Hotels & Resorts, Inc. (NASDAQ: HST) acquired the 319-room Kimpton Hotel Van Zandt in Austin, TX for $242 million or $759,000 per unit, a new high water mark for the Austin Metropolitan Area.
· Blackstone Group sold to Henderson Park the 715-key 45-acre La Quinta Resort & Club in La Quinta, CA for $255 million or $357,000 per unit.
• Two Q1 2022 sales were consummated for between $300 million and $399 million each.
· The newly opened 346-room W Nashville was acquired by Xenia Hotels & Resorts, Inc. for $328.7 million or $950,000 per unit, a new high-water mark by far for the Nashville metropolitan area.
· MCR purchased the 1,780-key Sheraton New York Times Square Hotel from Host Hotels & Resorts, Inc. for $356 million or $200,000 per key.
• After two reported failed attempts by Fontainebleau Development to acquire the 1,000-key Diplomat Beach Resort in Hollywood, FL, Trinity Investments acquired the property from Brookfield Properties for $850 million or $850,000 per unit.
Institutional investment platforms, many of whom are lodging centric, dominated the Q1 2022 hotel transaction arena.
• Examples of buyers include: AWH Partners, Chatham Lodging Trust, Crescent Real Estate Equities, DiamondRock Hospitality Company, Host Hotels & Resorts Inc., Driftwood Capital, Fillmore Capital Partners, Henderson Park, KKR & Co., Kor Real Estate Partners, LCP Group, Magna Hospitality Group, MCR, Mission Hill Hospitality, New Castle Hotels & Resorts, OTO Development, Peachtree Hotel Group, Procaccianti Companies, RLJ Lodging Trust, Stonebridge Companies, Tishman Hotel & Realty, TPG Capital, Trinity Investments, and Xenia Hotels & Resorts, Inc.
• Examples of sellers (some of whom were also buyers) include: Alliance Bernstein LP, Blackstone, Brookfield Properties, Canyon Group, Columbia Sussex, Host Hotels & Resorts, Inc., Irvine Company, Junson Capital, Lightstone Group, MCR, Noble Investment Group, Northwood Investors, Peachtree Hotel Group, Procaccianti Companies, RLJ Lodging Trust, Starwood Capital Group, Stonebridge Companies, Sunstone Hotel Investors, Inc., Sydell Group, and Wynn Resorts.
The fundamental trajectory and overall outlook for the U.S. lodging industry appears positive. While leisure destinations continue to benefit from favorable supply/demand dynamics resulting in pricing power, until corporate, group, and international travel fully re-emerge and demand for lodging re-stabilizes creating compression, many urban and suburban hotels will be challenged to benefit from strong room rate increases. Recovery in the hospitality industry is varying depending on segmentation and geography, which should be considered when analyzing national averages. During the near term, net new supply will be tepid as some hotels permanently close and new construction slows due to supply chain issues and rapidly rising material and labor costs all of which will create financial feasibility underwriting challenges.
With compressed return rates for other commercial real estate asset types, investment interest in U.S. hotel assets is anticipated to remain high. Furthermore, as pandemic-induced forbearance periods end, and brands re-enforce product improvement requirements, many owners will be motivated to dispose of hotel assets during a rising market.
