Two deals, worth a total of USD1.69bn, have been signed in the US for hotels in the extended stay and select service sectors.
The spend illustrates the expanding appetite across the hotel sectors, as rising transaction prices drive investors to seek returns away from trophy assets in prime locations.
The larger of the two deals saw Northstar Realty, the US-based Reit, buying 52 hotels under Marriott International and Hilton Worldwide brands in a USD1.1bn deal. The portfolio is being acquired from Inland American Real Estate Trust in a joint venture with Chatham Lodging Trust, in which Northstar will have a 90% stake. Island Hospitality is expected to manage a substantial majority of the hotels.
The deal marks the Reit’s continued rapid growth. In June, the company acquired a 47-strong hotel portfolio from Cerberus Capital Management, also in a joint venture with Chatham, for USD958.5m. With the completion of the most recent deal, NorthStar will hold a hotel portfolio consisting of over 20,000 rooms at 159 hotels valued at USD3.2bn.
NorthStar Realty’s chairman & CEO, David Hamamoto, said: “We are excited about the continued expansion of our portfolio of extended stay and limited service hotels and the deepening of our relationship with Chatham and Island Hospitality. This portfolio … provides NorthStar Realty with substantial optionality, scale and diversification in a sector that we strongly believe will continue to benefit meaningfully from a growing economy.”
The hotels are made up of extended stay and select service sites, predominately affiliated with the Marriott (63%) and Hilton (32%) brands. After the most recent deal, NorthStar Realty’s portfolio will be 74% affiliated with Marriott brands and 17% affiliated with Hilton.
In the same week, Lone Star Funds has agreed to buy 38 Hyatt hotels in the US for USD590m, across the Hyatt Place and Hyatt House brands. The investor will also invest USD50m in the portfolio over the next two years.
Hyatt will sign franchise agreements with Lone Star and continue to operate them under their current branding.
“Hyatt utilised its strong balance sheet and industry expertise to launch the Hyatt Place and Hyatt House brands. We are now leveraging that brand equity to recycle capital while maintaining a long-term brand presence in multiple markets,” said Steve Haggerty, global head of capital strategy, franchising and select service for Hyatt.
Lone Star is more commonly focused on the distressed debt market, having acquired the majority of the Project Rock and Project Salt debt portfolios linked to the regional UK market earlier this year. Among the debts traded under the Project Rock portfolio were loans outstanding to UK regional hotel chains including QHotels, Somerston Hotels, Puma Hotels and Curzon Hotel Properties.
Lone Star has been working with the groups involved to strengthen them, most notably with Puma, which has been rebranded as The Hotel Collection and undergone a pre-pack administration. Lone Star has appointed Grant Hearn, the former Travelodge CEO, as chairman and is thought to be planning to invest in refurbishments across the portfolio.
The US transactions market is currently booming on the back of a strong lending environment and abundance of equity. Arthur Adler, Americas CEO & managing director of JLL’s hotels & hospitality group said in June: “There is plenty of available capital chasing assets ranging from high-profile full-service hotels to select service portfolios to resorts in markets across the spectrum.”
Adler was confident this would continue, commenting: “As 2014 marks the fifth consecutive year of revpar gains, we believe that the lodging industry is solidly in the middle of a long-term upward trajectory. As we look toward the next two quarters of 2014, we anticipate investors will continue making investments in the lodging sector to capitalise on the sector’s strengthening recovery.”
With demand running high, interest has extended from the high-profile assets and primary locations. According to a study from JLL, the select service market is of growing interest to investors. The company found that last year saw the highest transaction volume in the sector since before the economic downturn, with USD6.2bn, which the group forecast would increase to USD6.5bn this year, with the majority buyers looking to the secondary markets as their primary acquisitions target.
This was noted earlier this year by Hyatt. At the company’s second quarter results it reiterated plans to recycle capital into new projects. CEO Mark Hoplamazian told analysts that the company was marketing 42 of its 44 select service hotels, commenting: “Given the current market environment for these types of hotels, we think now is a good time to explore options.” Hoplamazian said that he was expecting bids from listed and unlisted Reits, and private equity players.
While the buyers of both of these portfolios were retaining the existing branding, the JLL report came with a note of caution for the brands – half of the buyers surveyed had plans to change the flags of their acquired properties to unlock additional value through repositioning.
HA Perspective [by Chris Bown]: NorthStar has clearly decided it likes the US branded hotel market right now, doubling its portfolio in June and now adding the same number of hotels again. It now has substantial scale, and has catapulted itself into a position of being a significant partner of Marriott.
Until the development market opens up in the US, revpar and occupancy figures will continue to climb – something others such as Marriott’s Arne Sorenson has referred to happily. NorthStar clearly believes hotel assets will deliver as this stage of the cycle has some way to run yet.
The seller, Inland American, is privately held and is shaking up its hotel interests as part of a wider corporate reorganisation designed to free up cash for shareholders. Following this sale, the company is planning to spin off its remaining hotel assets under new brand Xenia Hotels & Resorts through an IPO.
During Hyatt’s most recent results presentation, Hoplamazian made clear it was time to recycle the cash invested in the portfolio the company has just sold. Some of the USD590m proceeds are likely to be returned to shareholders, while the company has committed to spending in four areas: gateway cities, resorts, urban select-service and convention hotels.
It is spending substantially on growing its portfolio at the higher end of the market, recently opting to purchase its new Park Hyatt in New York, having originally pledged to take a two-thirds stake. There was also a commitment from the CEO to take a closer look at expanding the brands in China and India.