HotelNewsNow
09/27/17

Bump in California Hotel Sales Shows Strength of Market
By Bryan Wroten

http://www.hotelnewsnow.com/Articles/241548/Bump-in-California-hotel-sales-shows-strength-of-market

REPORT FROM THE U.S.—California remains an active hotel investment market in 2017, and data from Jones Lang LaSalle shows more hotel investment in the state during the first eight months of the year than there was during the same period in 2016.

The state saw $2.9 billion in hotel trading through August, said JLL EVP James Stockdale, while for the same period in 2016, that number was just under $2 billion.

“That proves there’s still a number of folks trying to buy hotels and who still see them as a good investment,” he said.

That statement seems to be further justified by the results of Atlas Hospitality Group’s 2017 Midyear California Hotel Sales Survey, which showed the state reported a new midyear record in hotel sales, as the number of transactions reached 206, exceeding the 187 sales closed in the first half of 2014.

Alan Reay, president of Atlas Hospitality Group, said his company’s survey had some surprising results.

“We were all looking at the market taking a breather,” he said. “Interest rates were going up; people were perhaps pulling back and taking a wait-and-see approach. Obviously, the opposite happened.”

Stockdale said many of the deals from early 2017 were probably 2016 deals that took longer to unlock equity. During the second half of 2016, he said, everyone was so focused on who would win the U.S. presidential election that buyers and sellers went into a holding pattern and transactions activity shut down.

“There was a robust push the first half of this year to get deals done and make things happen in 2017 after a quiet half in 2016,” Stockdale said.

Who are the buyers?
Many first-time buyers entered the industry during the first half of the year, especially in secondary and tertiary markets, where sales spiked, Reay said. Those first-time buyers smartly invested in existing properties, which are better than new developments in that they give the buyer time to understand how hotels operate and how to get the returns they expect, he said.

Continuing a trend from 2016, the main buyer profile this year remains private equity, Stockdale said. The firms have realized a lot of money since the downturn, he said, and they’ve invested a lot of money, too. Hotels have been a popular destination for private equity money still in their coffers, he said.

There also has been more international activity than in prior years, he said, with entrants from China and South Korea.

Real estate investment trusts have been more engaged than they were last year, Stockdale said, but remain selective in their acquisitions. REITs have purchased more in terms of total dollar volume ($450 million) than in 2016 ($350 million), he said, but represent a smaller percentage of the total deals.

“The reason people were expecting them to be more active is stock prices rebounded following the election: the Trump bump,” Stockdale said. “People expected that would fuel more REIT investment activity.”

Some have been active players, he said, while others are standing pat on their existing portfolio or are buying back their stock.

In May, Ashford Hospitality Prime purchased the 80-room Hotel Yountville in Napa Valley for $96.5 million or $1.2 million per key, making that the highest price-per-key sale in the state during the first half of 2017.

Ashford Prime CEO Richard Stockton said that hotel acquisition worked out well for the company, which owns another property in Yountville—the Bardessono Hotel and Spa. The sellers of the Hotel Yountville had come to know Ashford Prime not only as a credible buyer and a company that knows the market, but also as an owner that is friendly to the community, he said.

“They wanted a transaction that achieved their objectives financially and was going to be acceptable within the community,” he said.

That relationship helped to negotiate an off-market deal, which gave Ashford Prime slightly more favorable pricing than if the property had gone out for bids, Stockton said. Another benefit of the deal is the asset came unencumbered by management, allowing his company to realize cost savings by sharing the GM and director of sales from the Bardessono Hotel.

“That really helped us get our projections to deliver the right returns for us,” he said.

Having two hotels in the same market—where they are the top performers—opened up revenue synergies as well, creating options for group business and overflow, Stockton said.

Further transactions
California is on track to have record year in number of transactions, Reay said, but it will still be behind 2015’s peak in dollar volume.

There’s a lot to choose from in the state, including several markets to consider, Stockton said. Ashford Prime identified three markets—San Francisco, Los Angeles and San Diego—that fit its criteria for size in terms of breadth of annual transaction market, strength of the fundamentals and pricing based on sellers’ expectations.

“We’re constantly on the lookout for opportunities, particularly in those places,” he said. “There could be one-off opportunities to acquire resorts maybe in smaller submarkets and, subject to the right pricing, we would look at that as well.”

Over the past five years, cap rates have stayed about the same, Stockton said. For a period in 2014 and 2015, rates compressed about 50 basis points, but they’ve come up* again, he said.

There is some lag in expectations, he said, with sellers still expecting the same pricing of previous years, when it has actually widened out a bit.

Ashford sifts through opportunities to find acquisitions that make sense from a pricing perspective, Stockton said. The company has a portfolio of 13 hotels, which means it doesn’t take much to move the needle, he said. Its two purchases this year—the Hotel Yountville and the Park Hyatt Beaver Creek Resort and Spa in Beaver Creek, Colorado—were significant additions to the portfolio and added diversification and exposure to other markets, he said.

“If we’re able to keep up that pace of acquisition, we’re able to meaningfully move the needle for our investors in terms of the breadth of our portfolio,” he said.

There likely will be more activity this year than last year, Stockdale said, as the year-to-date numbers show several projects in the pipeline. Next year will probably resemble 2017, he said; and if not, it will fill in the gap between 2016 and 2017.

The space is still popular, Stockdale said, and the fundamentals remain good. Looking at supply and demand in southern California, there are pockets of heavy supply in places such as Los Angeles, Orange County and San Diego, he said. Completion of work to expand the Moscone Center in San Francisco will fuel additional transaction activity going forward, he said.

For the remainder of the year, Stockton said he expects Ashford Prime’s acquisitions pace will be consistent. The debt markets continue to be favorable for buyers, he said. The spreads on loans, particularly secured property loans, continue to compress, which allows buyers to get a little more done.

California sales averaged between $400 million and $500 million per month this year, Stockton said, adding that he expects that to accelerate.

“You tend to have a little more heavy transactions volume going into the last quarter,” he said.

Some of that is attributable to calendar-year accounting, Stockton said. Ashford Prime is looking at several transactions, which it hopes to close on before the end of the year to keep the pipeline active, he said.

There’s nothing really standing in the way of transaction activity at the moment, Stockton said. There are geopolitical risks and fears about rising interest rates, but it would take some sort of disaster to truly scare buyers away from the transaction markets.

“Unless there’s real evidence of an event that could trigger an economic downturn, I don’t see the pace slowing down much,” he said.