Transaction Trends – Executive Summary
At Year-End 2013 Total Investment in the Lodging Industry Reached an Estimated 21.8B
The lodging industry reached an estimated total investment of 21.8 billion in 2013. This is the highest level since 2009 and is expected to accelerate higher in 2014 and into late decade.
For 2013, 1,171 Hotels were sold or transferred, a decrease of 19% Year-Over-Year (YOY). Previously, Total Transactions and Property Transfers had peaked at 3,218 Hotels/ 441,613 Rooms in 2007, then precipitously fell to a bottom of 528 Hotels/ 60,804 Rooms in 2009, a decrease of 84% by Hotels. After rebounding a bit in 2010 to 1,358 hotels, Transaction volume has since been locked in a bottoming formation with little M&A activity.
Of the 1,171 Property Transfers last year, 775 were individual single asset transactions, which increased 18% YOY. Another 395 were portfolio transactions, which decreased 49% YOY. M&A Property Transfers were of no significance in either 2012 or 2013.
In 2013, 898 Hotels had a selling price reported into the public domain. For those hotels, the average selling price per room was $132,955, an increase of 18% YOY and the highest ever recorded. Prices soared because of low cap rates, improved profitability, a greater availability of lending and because of a larger number of upscale hotels in the sales mix.
Seller and Buyer Activity
For hotel Transactions with a reported selling price, activity totaled 16.8B in 2013. Privately Held Equity Funds and Hotel Companies accounted for 62% of sell side activity with a combined 10.4B. On balance, they were net sellers within their respective portfolios as they implemented exit strategies for assets acquired or developed earlier. Publicly Traded REITs followed with 18% of the sales activity equaling 3.0B.
On the Buy side, Publicly Traded REITs were net purchasers of Lodging Real Estate and accounted for 30% of buying activity with 5.0B recorded. Privately Held Equity Funds with 4.5B and Hotel Companies with 2.5B were also heavy buyers accounting for 27% and 15% of buying activity respectively.
2013 concluded the first leg of the new lodging real estate cycle. The period was characterized by near record low interest rates, a growing confidence in future operating trends, and the prospect for improved earnings. It was an opportune time for investors to sell and take profits on their stabilized assets acquired late last decade during the recessionary lows.
Investors are Looking Ahead
Now that we are beyond the recovery phase, investors see greater opportunity ahead in the second leg of the lodging cycle, which should cause transaction activity to accelerate over the next few years.
Steady economic growth should bring increases in guest room demand and greater pricing opportunity. Since the Construction Pipeline will not produce new supply additions of significance until later in the decade, profitability should continue to improve.
Look also for an increase in portfolio and M&A volume as Wall Street becomes reenergized and the lodging industry begins to consolidate.
It will be an opportune time to be an investor. For assets purchased today, there should be attractive returns and capital appreciation available over a typical five-year holding period.