Hotel deals struck during the pandemic will likely outperform earlier transactions based on historical data from the Great Recession.
Private funds with exposure to hotel properties formed in the years following the Global Financial Crisis yielded higher net IRRs than previous vintage years due to lower valuations, Jared Bochner writes in a Preqin blog post.
So far, transactions in the hotel sector have been few and far between due to many factors, including, not surprisingly, the effects of the pandemic as well as a relative lack of distress in the market. As in other CRE sectors, lenders have been working with borrowers on forbearance. While the number of delinquent hotel loans is high, the damage could have been worse.
Nonetheless, even without much transaction flow to establish pricing, it is clear that hotel valuations have eroded during the pandemic, and it is now a buyer’s market, according to Preqin.
Matt Rooney, vice president at TriGate Capital, tells Preqin that lower valuations result from a combination of factors, both pre-existing and COVID related. The dislocation in hotel fundamentals has made hotel pricing more attractive than it was pre-pandemic.
Labor and taxes drove high expenses before the pandemic. But COVID has forced increases in other costs, such as workers’ wages; sanitizing and disinfecting rooms and public areas; purchasing and implementing infrastructure to enable contactless check-in and entry to rooms; and branding and marketing campaigns to attract safety-conscious travelers.
As costs are increasing, hotels’ bottom lines are being hit by fewer rooms being rented and group and corporate business drying up. Uncertainty about the reopening policies makes investors wary of overpaying for an asset, according to Preqin.
Funds Gather
Still, there have been a number of funds gathering to buy these assets at opportunistic pricing.
Former Major League Baseball star Alex Rodriguez, and his partner, serial investor Adi Chugh, recently announced they were investing in CGI Merchant Group’s new $650 Hospitality Opportunity Fund.
The hospitality fund will acquire more than 20 hotel properties over the next three years in North American and Caribbean markets. The assets will be housed within the Hilton portfolio of brands.
Additionally, a joint venture among The Allen Morris Co., Stormont Hospitality Group, and Black Salmon, plans to acquire $300 million in US hospitality assets within the next 18 months. The venture recently acquired the Pelham Hotel in New Orleans.
And bargain-priced assets can be found, despite an overall scarcity of deals. An affiliate of The Axton Group recently closed on the acquisition of the Renaissance Austin Hotel for $70 million. The purchase price of the hotel represented more than a 50% discount to replacement cost.
Preqin points to another example: MCR Hotels, the fifth-largest hotel owner-operator in the US, which has raised two funds that will acquire limited and full-service hotels and is expecting steep discounts on previous valuations.
Joe Delli Santi, the firm’s senior vice president of Acquisitions and Development, told Preqin that by the beginning of Q4 2020, some properties may be trading at 20% to 40% off 2019 prices. “Delli Santi expects more buying opportunities and steeper discounts on hotels that rely on group and corporate travel, both of which will not likely return to pre-COVID levels until a vaccine is developed and widely administered,” Bochner writes.
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December 17, 2020 at 07:09PM
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