Travel is finally seeing the rebound hotel operators have been waiting for since the onset of the Covid-19 pandemic more than two years ago.
The week ending April 16, the most recent data available, saw U.S. hotel occupancy at 62%, still 5.6% less than the same week in April 2019, according to data from Hendersonville, Tennessee-based hospitality data company STR Inc. But the average daily rate was $147.25, a 14.4% increase from the same time in 2019, and revenue per available room was $91.25 — 8% higher than the same week three years ago.
Drive-to leisure markets are still dominating the overall hospitality industry's recovery. Among the top 25 U.S. markets evaluated by STR, Tampa, Florida, had the highest occupancy increase over 2019 — a 3.2% increase, to 76.6% — the week ending April 16. Phoenix posted the biggest ADR increase of 33.8% from the same week in 2019, to $189.16.
Those types of markets, subsequently, are where investors seem most interested in placing capital.
Carlos Rodriguez, president and CEO of Coral Gables, Florida-based hospitality investment firm Driftwood Capital LLC, said his company's overall portfolio saw ADR up 7% and revPAR down 3% in the first quarter, compared to 2019. But among leisure-market hotels it owns, ADR was up 16% compared to 2019. ADR among its Florida hotels specifically was 14% higher than Q1 2019 levels.Sun Belt markets like Florida, particularly ones that've had looser pandemic-related restrictions, and ski resorts continue to outperform hotels in business-oriented cities and properties in Northeast or Midwestern cities, Rodriguez said.
Minneapolis saw the largest occupancy decrease among 25 markets from 2019 the week ending April 16 — a 22.7% decrease, to 46.6%. It also saw the biggest revPAR deficit, a 22.5% decline from 2019, to $52.66, according to STR.
A prolific hotel investor, Driftwood won't necessarily write off markets that haven't seen a full rebound yet for acquisition opportunities. But it would, at least right now, primarily look for deep discounts in those areas, Rodriguez said.
"I think you will see opportunities in the areas that were most affected," he continued. "You just need to be selective and careful about injecting enough working capital to sustain it through the ramp-up."
There's a lot of money chasing hotel deals right now, and Driftwood has frequently been outbid by other groups on deals, he added. Billions in capital were raised in anticipation of widespread distress in the hotel sector, but federal stimulus and deferred loan payments, especially in the early days of the pandemic, have staved off a wave of delinquent properties.
Last year, $50 billion in hotel deals transacted nationally, a record, according to CoStar Group Inc. (NASDAQ: CSGP). A handful of headliner transactions, such as the $5.7 billion sale of The Cosmopolitan in Las Vegas, boosted those figures.
But it seems likely 2022 will be another robust year. More than $12.5 billion worth of hotel properties sold in Q1 — the best opening quarter since 2016, according to CoStar. Brian Waldman, executive vice president of investments at Atlanta-based Peachtree Hotel Group LLC, said his firm bought pools of mortgage notes on hotels from banks throughout the pandemic. He said restructuring those notes helped borrowers get through the worst days of the pandemic for the hotel industry, and provided a chance to recapitalize or sell the property when values rebounded.
Waldman said, of the more than 200 notes his firm bought since the pandemic, almost all have been paid off.
"Buying notes is a very cyclical opportunity," he said. "The window opened in Covid, where traditional regulated banks were looking to get hotel paper off their books. As we come out of the pandemic and things start to recover, that window kind of closes."
The industry is coming into a perfect storm for deal activity because pandemic-weary hotel owners are ready to recapitalize or offload their properties, he added.
In particular, for capital-starved properties, 2022 could be a moment of truth.
Many hotels secure debt in commercial-mortgage-backed securities, or CMBS, loan portfolios. The lodging sector's delinquency rate among CMBS properties was 7.99% in early April, a notable decrease from 14.73% a year prior, according to Radnor, Pennsylvania-based commercial real estate data platform CRED iQ.
Rodriguez said he expects more CMBS loans will be coming due this year and next, as a lot of 10-year loans were issued toward the end of the global financial crisis a decade ago. An analysis by The Business Journals found, among hotels with CMBS debt facing some level of distress, 386 portfolios are set to come due this year or in 2023. That represents about 20% of all limited- and full-service hotel loans with potential distress, including 237 limited-service hotel portfolios and 149 full-service hotel portfolios.
Distress, as evaluated by The Business Journals, includes properties flagged by loan servicers as at least 30 days delinquent on loan payments, in some stage of the foreclosure process, in special servicing or on so-called watchlists because of issues that may affect a borrower's ability to stay current on payments.
And, as The Business Journals previously reported, distressed full-service hotel properties with CMBS debt have seen $2 billion in reduced property value since the pandemic. Limited-service hotels have collectively seen a reduction of $870.7 million.
When that CMBS debt matures, owners of, in particular, business travel-dependent hotels in markets that've yet to rebound could struggle to meet refinancing hurdles, forcing them to sell, Rodriguez said.
"I think a lot of assets will be traded," Waldman said. "The question will be around value. There's so much pressure on the lender that owners are forced to sell. Can the owners sell at a number where they’re comfortable to move on?"
Jan Freitag, national director for hospitality market analytics at CoStar, said there's a distinct tale of two cities when it comes to hotel investment and valuation.
He cited last year's sale of the 59-room Alila Ventana Big Sur resort in Big Sur, California, which Chicago-based Hyatt Hotels Corp. (NYSE: H) acquired last summer for $148 million, a North American record of $2.5 million per room. Three months later, Hyatt sold the hotel for $150 million, to Bethesda, Maryland-based REIT Host Hotels & Resorts Inc. (NASDAQ: HST), setting another record of $2.54 million per room.
And the newly built 346-room W Hotel Nashville sold for a record-shattering $328.7 million to Orlando, Florida-based Xenia Hotels & Resorts Inc. (NYSE: XHR) last month.
Conversely, the Sheraton New York Times Square — one of New York's largest hotels, with 1,780 rooms, in the heart of midtown Manhattan — recently sold for $373 million to New York-based MCR Hotels and Island Capital Group LLC. That's $365 million less than the $738 million the previous owner, Host Hotels, paid for it in 2006. The new owners say they plan to invest more than $100 million in the hotel's rooms, banquet areas and public spaces.
But the dichotomy in pricing shows how office demand — and, subsequently, corporate-meeting demand to fill local hotel rooms — remains unknown for a place like midtown Manhattan, Freitag said. That could then weigh on those markets' hotel sales activity and pricing. Premium hotels in destination spots like California, Las Vegas or Nashville, Tennessee, meanwhile, are proving hot with investors and commanding top dollar.
Some hotel owners weren't in a position to materially renovate or update their properties in the past two years, but brands have recently begun putting pressure on operators to invest in their properties — whether through a rebrand, new amenities or extensive renovations.
But so many owners used reserves to keep making interest payments to lenders during the worst of the pandemic, Freitag said, which means many remain strapped for cash to embark on additional investments. Plus, elevated inflation and surging construction costs are making renovation and new-construction projects alike more expensive.
Driftwood recently acquired the 326-room Scottsdale Resort at McCormick Ranch property in Scottsdale, Arizona, and 240-room Sheraton Old San Juan Hotel in Puerto Rico, both of which will undergo multimillion-dollar renovations. Driftwood will convert the Scottsdale resort to a Curio Collection by Hilton and update all guest-facing areas, including food and beverage concepts, the pool and spa-and-fitness center. The hotel in Puerto Rico, which also includes 27,500 square feet of retail space, will become a Tribute by Marriott flag and also receive revamps throughout.
Because revenue is exceeding projections at both of those properties, that'll help offset some of the steeper costs associated with upfitting those properties, Rodriguez said.
And because of rising costs across the board — construction, acquisition, financing, even labor costs, as employment in leisure and hospitality was down by 1.5 million workers, or 8.7%, in March 2022 compared to February 2020 — investors are approaching each potential deal with elevated scrutiny.
Waldman said, more recently, investors new to the hotel sector are looking for opportunity in select markets, observing an uptick in values. And, among commercial real estate property types, hotels are also widely viewed as a hedge against inflation, as pricing resets nightly instead of much longer lease terms in other sectors, Freitag said.
"The hotel industry is a great industry, and there’s a lot of opportunity to create value," Waldman said. "But it's a lot more nuanced than other asset classes."
By Ashley Fahey – Editor, The National Observer: Real Estate Edition,
Apr 27, 2022