• It’s all-Reit now

The American Realty Capital Hospitality Trust has paid USD1.93bn for the Equity Inns portfolio, creating one of the largest hospitality Reits in North America.

The deal came as Woolworths in Australia confirmed it was considering putting its hotel portfolio into a separate listed vehicle, suggesting that the public markets increasingly favoured the hotel sector.

In the US, ARC Hospitality has acquired 126 hotels across the US from Goldman Sachs-backed Whitehall Real Estate Funds, taking it to 132 hotels. The sites are franchised by brands from Hilton Worldwide, Marriott International, Hyatt Hotels and InterContinental Hotels Group.

Nicholas S. Schorsch, ARC Hospitality chairman, said: “We believe the select-service hotel segment offers tremendous value given the economic recovery in the US, higher profit margins and reduced operational risks characteristic of these assets. We further believe that now is an opportune time to acquire well-located, high-quality hotels in the upscale and upper midscale tiers as the lodging cycle continues its recovery and enters what we expect will be an extended upward trajectory.”

The group said that it was acquiring the hotels at a discount to replacement cost “with the size, brands, diversity, and consistent and growing cash flows that in our view cannot be easily replicated in the hospitality industry today”.

ARC Hospitality said the properties offered the opportunity for long-term improvement to property performance, particularly through its partnership with Crestline Hotels & Resorts.

ARC Hospitality launched itself in the hotel sector in March this year with a deal to acquire six hotels franchised by Hilton Worldwide, Marriott International and Starwood Hotels & Resorts, also in the US, for USD102m from Grupo Barcelo. This deal also saw ARC Hospitality acquire a 60% interest in property manager Crestline Hotels and Resorts.

The chairman of parent group AR Capital described the deal as “opportune in light of the improving US economy, the resurgence of consumer confidence and business travel, strong pricing power emerging in many markets and the lack of new supply in the industry”. August last year saw AR Capital filed registration papers for the IPO of American Realty Capital Hospitality Trust.

In Australia, Woolworths is aiming to take advantage of the country’s strengthening hospitality sector, where, according to Deloitte, occupancies reached 10-year highs in three capital cities, including Sydney and Melbourne.

Woolworths – no relation to the UK brand – has disposed of about ASD2bn of property assets over the last two years. The group confirmed that it was considering options for potential divestment of freehold property assets of ALH Group, which is 75% owned by Woolworths Limited.

These options, it said, included “single property sales, portfolio property sales and the creation of separate vehicles to own the assets”.  Any divestment would involve the relevant Woolworths group business retaining operational control of the properties through a leasehold interest.

ALH Group includes a liquor store chain and over 323 hotels across Australia, ranging from pub style and backpackers accommodation to four-star hotels of over 100 rooms. Some of the properties are leased while some are owned outright. Rumours suggest that Woolworths could create a listed vehicle of around 100 properties, which could be valued at around ASD600m.

It has been reported that one motivation for the split would be to distance the eponymous Woolworths retail brand, which brands itself as centred around fresh produce and includes Jamie Oliver in its advertising, from the less ethically-sound liquor business.

The company would also be able to benefit from the resurgence of the country’s IPO market and growth in its hotel sector. There has been some wariness in the sector regarding the public markets, as the floatation of Mantra Hotels was pulled in March, only to resurrect plans for a June float this week.

The future for the hotel sector is looking less unsteady. Deloitte said that the outlook for hotel performance overall was one of “demand growing at nearly twice the pace of supply over the next three years” and occupancy rates being propelled further into record territory as a result. Nationally, the average occupancy rate was projected to climb from 66.8% to 68.9% over the three years to calendar 2016.

 

H Perspective [by Chris Bown]: So long as developers struggle to obtain bank finance and therefore supply remains constrained, existing hotels look an attractive proposition. And the chance for investors to buy into the steady income that a hotel Reit promises with the added bonus of much more liquidity than is possible through direct property investment, is making them particularly attractive.

With a few select exceptions – witness Marriott’s bid for the Ritz in Madrid – the major groups are still not prepared to invest directly in growing their portfolios. Instead, hotel chiefs regularly pepper their presentations with the “good” news that supply in most mature markets remains constrained. Even Accor’s new actions as an investor have been mostly confined to buying what it already operates, rather than risking cash on new developments.

Australian markets continue to exhibit shortages in hotel supply, to the extent that authorities in Brisbane recently launched a marketing campaign targeting hotel operators and investors. The city is missing out on 278,000 room nights of business a year, because of the lack of accommodation.

In Australia, the expectation that growing numbers of Chinese tourists will start arriving has encouraged Asian investment in the hotel sector; while Chinese airlines are increasing flight frequencies. Chinese investors have picked up a number of single hotel properties. From Singapore, Silverneedle recently took over management company Constellation, while last year saw Far East Organisation form an AUD450m joint venture to help local hotel group Toga expand.

 

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