With hotel occupancy rates high and still rising, investors are continuing to book huge investment deals in the segment.
Take today for example. NorthStar Realty Finance Corp. announced that it has entered into a definitive agreement to acquire a $1.1 billion hotel portfolio from Inland American Real Estate Trust.
The portfolio is comprised of 52 upscale extended stay and select service hotels with approximately 7,000 rooms.
Inclusive of this portfolio and an additional approximately $700 million hotel portfolio that NorthStar Realty expects to close this month, NorthStar Realty will have an approximately $3.2 billion hotel portfolio consisting of 159 hotels and over 20,000 rooms.
A significant portion of the hotel portfolio will be affiliated with Marriott and Hilton.
NorthStar Realty is acquiring the Inland portfolio in a joint venture with Chatham Lodging Trust where NorthStar Realty will have an approximate 90% ownership interest and Chatham the remainder.
Chesapeake Lodging Trust also pulled in $126 million from a public stock offering this month. It is under contract acquire the 337-room JW Marriott San Francisco Union Square for a purchase price of $147.2 million, or approximately $437,000 per guest room.
DiamondRock Hospitality Co. acquired the fee-simple condominium interest in the 282-room Hilton Garden Inn/Times Square Central in New York City for a purchase price of $127.2 million (or $451,000 per guest room). It also acquired the fee simple interest in a 106-room boutique hotel, the Inn at Key West in Key West, Florida, for $47.5 million (or $448,000 per guest room).
Increasing tourism across the country is helping to drive hotel occupancy rates, which remained high or rose in the Boston, New York, Philadelphia, Cleveland, Atlanta and San Francisco, according to the Federal Reserve. Most of the Fed’s reporting districts indicated optimism about future activity levels, with Boston, Richmond and San Francisco reporting strong advance hotel bookings through the fall.
That report is backed by PKF-Hospitality Research’s latest forecast, which calls for record hotel occupancy continuing in 2015.
PKF expects the U.S. lodging industry to achieve 65% occupancy in 2015, the highest national occupancy rate since the hotel analysis firm began reporting data in 1987. By year-end 2015, PKF-HR projects that the demand for lodging accommodations will have increased 25.8% since the depths of the recession in 2009, while the supply of hotel rooms will have grown by just 5.6%.
“An ever-improving economy, and the favorable relationship between supply and demand, have led to significant growth in both revenues and profits from 2009 to the current year. We expect this trend to continue through 2017,” said R. Mark Woodworth, president of PKF-HR. “The 1990s were the only other time we observed such a sustained confluence of positive economic and market conditions.”
With U.S. hotels achieving all-time high occupancy levels, PKF-HR believes that hoteliers will be able to increase their average daily rates (ADR) at an average annual pace of 5.7% from 2015 through 2017. Concurrently, Moody’s Analytics, PKF-HR’s source for economic projections, is forecasting the annual pace of inflation to average just 2.5%.
“The best news for U.S. hotel owners and investors is that the combination of high occupancy levels and significant real ADR growth will perpetuate strong bottom-line gains. PKF-HR is projecting the current three year streak of double-digit gains in net operating income (NOI) to continue through 2016,” Woodworth noted. “We have not seen six years of such strong and sustained profit growth in the 78 years PKF has been tracking the U.S. lodging industry.”
Harry C. Curtis, lead gaming and lodging research analyst for Nomura Securities, sees the same for public companies in the hotel sector.
“Our message is the same: the lodging group has strong earnings growth and visibility. Lodging companies continue to return capital to shareholders in amounts we have not seen during the previous two cycles.”
But with occupancy levels nearing their records, some analysts believe the window of opportunity may be closing for lodging companies to make attractive hotel acquisitions during this upcycle.
“We are closely monitoring companies’ external growth strategies given the risks that acquisition missteps can pose to balance sheet strength,” noted Fitch Ratings. “Conversely, sector credit profiles could benefit if companies use this opportunity to sell noncore assets.”
However, Fitch said the acquisition window has not completely shut, noting that purchasing assets below replacement cost remains possible in many markets and that lodging REITs are expected to continue to selectively pursue acquisition opportunities.
Meanwhile, increasing land and hard construction costs still tip the scale in favor of acquisitions over new development, particularly in markets such as New York, San Francisco and Miami.
Gregory A. LaBerge, vice president and national director of Marcus & Millichap’s National Hospitality Group noted that there was 112 hospitality transactions closed at midyear, totaling more than $460 million in sales. This represented an 87% increase in transaction volume and a 110% increase in sales value over the same period in 2013.
“There is substantial equity in the hotel investment market and investors continue to see optimism in this asset class, particularly when paired with attractive debt solutions,” LaBerge said. “An important leading indicator is the number of investors bidding for each of our exclusively listed assets, and that number continues to increase.”
