The Orange County Register
04/04/16

Is the Hotel-Buying Mania Cooling Off?
By Jonathan Lansner

http://www.ocregister.com/articles/hotel-710651-year-percent.html

Is the hotel business getting the chills?

To understand how hot hotels have become, please ponder the Montage Laguna Beach resort. Who wouldn’t want to own the gorgeous seaside resort?

Well, it was sold twice last year – and another deal to sell it is in the works. Yes, a hotel buying spree has meant the 250-room Montage has been flipped like an ordinary investment condo.

• It started in January 2015, when the Montage was sold by an investment group started by eBay Inc. founder Pierre Omidyar to resort specialists Strategic Hotels.

• Before the year was out, Strategic Hotels – whose 18-hotel portfolio includes the Ritz-Carlton Laguna Niguel and San Diego’s Hotel del Coronado – sold itself for $6 billion to real estate investment giant Blackstone Group.

• And last month, after just three months of ownership, Blackstone agreed to flip those Strategic hotels – including the Montage – to Chinese insurer Anbang for $6.5 billion.

“I’ve never seen anything like this,” said hotel consultant Alan Reay of Atlas Hospitality in Irvine. “These are trophy assets that usually trade once every 10 years, 20 years. Three times in a year? Unheard of!”

Hotels traded last year like never before.

In California, a record $9.5 billion worth of hotel deals were done last year – up 87 percent vs. 2014, according to Atlas’ annual tally. The median sales price, on a per-room basis, was up 36 percent last year to a record high. Dollars spent on Orange County hotel sales more than doubled in 2015 to a record $1.75 billion.

But 2015, when talking hotel dealing, seems like a long time ago. A recent report from Green Street Advisors, a Newport Beach company that tracks publicly traded trusts that own hotels, says hotel values in March were down 10 percent from a year ago.

As Reay put it, “Buyer perception and lender perception have changed. We may have seen the peak. There’s a little more caution out there.”

To understand the swing in hotel investment you have to recall how badly the Great Recession stung tourism. A recent report from Green Street highlights the recessionary pain:

• Travel plans – corporate and consumer – were widely canceled, so average hotel occupancy fell to 63 percent in 2007 from 71 percent two years earlier.

• “Vacancy” signs meant heavy discounting as average nightly room rates fell 11 percent in 2009.

• Thus a key measure of hotel cash flow – “Revpar” in industry lingo – fell by 18 percent in 2009.

The sharp downturn knocked out many hotel owners. For example, lenders took over the 400-room St. Regis Monarch Beach resort in 2009. But while most of the economy struggled with a tepid recovery, the hotel business rebounded almost as sharply as it tumbled.

Rooms filled up quickly. Industry occupancy was back above 70 percent by 2012 and at 74 percent last year. Discounts are mainly history, too: Room rates are up 23 percent in six years.

These improved finances lured hotel buyers en masse, and the typical hotel trust was valued last year at double the 2009 lows. But now the party may be over. Why?

Green Street notes that while leisure travel remains strong, the highly profitable business travel is pinched as corporations struggle with their thinning profits. That means hotel cash-flow growth has cooled just when hotels’ major operating costs like wages and property taxes are on the rise.

“Transaction activity has slowed recently; it’s not clear where hotel values are,” Green Street wrote.

Look at the valuation fog at the Montage. Strategic paid $360 million for the Orange County resort in January 2015. When Blackstone bought Strategic at year’s end, it valued the Montage at $270 million, according to Atlas.

China’s Anbang last week stunned the hotel business by quitting a heated bidding war for the Starwood Group, which owns the Sheraton and Westin hotel chains. Anbang, citing “various market considerations,” pulled a $14 billion offer that had bested a bid from Marriott International.

Analyst Reay of Atlas doesn’t think the cooling of hotel values means a painful reversal for the industry in the works, like we saw in the last recession.

“It’s cautious optimism, as opposed as to irrational exuberance,” Reay says.

Could it simply be sanity returning to the hotel market?