It appears that this downturn may very well produce a period that rivals the very best in both returns and depth of opportunity.
By Daniel H. Lesser
The year 2020 will not be soon forgotten as the spread of COVID-19 and society’s reaction to the virus have combined to devastate the global economy. U.S. GDP in the second quarter declined by 32.9 percent on an annualized basis, the most significant quarterly decline observed since the 1940’s. While the stock market has rebounded considerably from its lows and seems to be reflecting an optimistic view regarding an economic recovery, base case will be a slow and very bumpy re-opening of the economy. Legislators and their public health advisors struggle to balance the desire to get people back to their lives with the fear of causing a second and possibly third wave of illness and death. With those concerns, and as long as the federal government is willing to print and distribute money, it would seem reasonable that the choice will be to opt to err on the side of preventing further spread of the virus, which will augur for a slower re-opening.
Many believe that a full return to pre-COVID-19 behavior may not occur until a vaccine that the mainstream media, policymakers, and medical society have blessed and is broadly disseminated. Even taking a more optimistic approach – that most people regain confidence only after a staged economic re-opening that averts triggering a disastrous second wave outbreak, would still not lead to a full return to normalcy for a year or longer. In either case, the reversal of economic devastation will most likely be measured in years, and that does not begin to factor in the unknowable implications that will need to be dealt with as a result of massive government stimulus programs (both past and future) and inflation of its debt levels.
There have been some significant economic downturns over the past forty years, and with the benefit of hindsight, each has presented wonderful investment opportunities. It appears that this downturn may very well produce a period that rivals the very best in both returns and depth of opportunity. Hotels have been one of the hardest hit sectors by the coronavirus pandemic given the widespread reduction in corporate, group, and leisure travel across the U.S. Many property owners, seduced by historically low interest rates, entered this era with healthy levels of leverage. Now with severely impacted net incomes for most property types (specifically larger, full-service hotels), the seeds for broad distress are now planted. Like prior downturns, many anticipate deep distress will produce increasing levels of loan defaults, which will likely continue for some time.
The LW Hospitality Advisors (LWHA) Q2 2020 Major U.S. Hotel Sales Survey includes 6 announced single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $246 million and included approximately 1,459 hotel rooms with an average sale price per room of roughly $169,000. By comparison, the LWHA Q2 2019 Major U.S. Hotel Sales Survey identified 35 transactions totaling roughly $2.6 billion including 9,100 hotel rooms with an average sale price per room of $286,000. Comparing Q2 2020 with Q2 2019, the number of trades decreased by approximately 83 percent while total dollar volume declined roughly 91 percent and sales price per room dropped by 41 percent. The Q2 2020 sales include:
- The Buccini/Pollin Group (BPG) acquired the 622 room Renaissance Baltimore Harborplace Hotel in Baltimore, MD for $80 million or $129,000 per unit. In January 2020, BPG signed a contract to purchase the hotel for $100 million. During March 2020 when the COVID-19 crisis hit the U.S. in earnest, the seller, Sunstone Hotel Investors Inc., agreed to lower its clearing price resulting in a 20 percent decline. This trade is the first major U.S. hotel sale transaction that has produced market-based evidence of perceived value erosion because of the COVID-19 pandemic.
- BentallGreenOak (BGO), Flank Management LP (Flank), and Geolo Capital (Geolo) announced in June the acquisition of the Hutton Hotel in Nashville, Tenn., in an all-cash $70 million or $280,000 per room purchase price. The seller, Watermark Lodging Trust (formerly known as Carey Watermark Investors Inc.), reportedly acquired the property in 2013 for $73.6 million and The Wall Street Journal recently published that, “The 250-room hotel was valued between $90 million to $100 million before the COVID-19 outbreak, according to people familiar with the matter.”
- Pebblebrook Hotel Trust (NYSE: PEB) executed a contract to sell the 125-room Union Station Hotel Nashville, Autograph Collection in Nashville, TN for $56.0 million or $448,000 per room to Southwest Value Partners. According to PEB, “The transaction is subject to normal closing conditions, and PEB offers no assurances that the sale will be completed on these terms, or at all. PEB is targeting to complete the sale in the third quarter of 2020.”
- Boynton Property Holdings LLC purchased the Courtyard by Marriott Boynton Beach, FL for $19 million or $111,000 per room from Boulder Hotel Management. The deal for the 8.1-acre property included the 171-room hotel with 18 two-bedroom luxury townhouse rental units, a Buffalo Wild Wings restaurant, and a preschool.
- The 113-key Quality Inn & Suites by the Parks in Kissimmee, FL was sold by Rosemont Hotels Inc. for $10,550,000 or $93,400 per unit to Japan based Sarasa Hotels Ltd.
- SureStay Plus Hotel by Best Western Clearwater Central, Clearwater, FL sold for $10.5 million or $59,000 per unit. The 178-room hotel sits on nearly 5 acres of land and was originally built as a Hampton Inn.
While the post-COVID-19 environment may meaningfully reduce demand for commercial real estate, past downturns no matter how painful, have always been followed by recoveries during which new highs were achieved for both rental rates as well as property valuations. With the unprecedented amount of fiscal and monetary stimulus activity already committed to, and yet more likely to come, it is reasonable to expect that this trend will hold true once again in the coming years.
Although the world is currently in unchartered territory, having recovered from prior economic and demand shocks, America’s hotel industry has a proven track record of resiliency. The fact is that over a long-term basis, commercial real estate and particularly hotels offer superior risk adjusted yields compared with other investment classes focused on value-add opportunities.
