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There’s plenty of deal making happening in the hotel industry, but the major brands aren’t generating the activity.
Blackstone announced late last week plans to acquire Condor Hospitality Trust’s entire real estate portfolio for $305 million, or roughly $160,000 per room. The deal — which encompasses 15 limited-service hotels across brands like Residence Inn and Home2 Suites is the latest in an increase in acquisitions in the real estate investment trust, or REIT, sector.
Mergers and acquisitions from the hospitality REIT sector are on track to have a record year, per a report this summer from brokerage firm JLL. Hospitality REIT M&A totaled $70 billion in June and was up 17 percent from last year.
While 2020 essentially brought transaction volume to a screeching halt during the early months of the pandemic, hotel analysts say that’s largely in the rear-view mirror now.
“The bigger driver for transactions are fundamentals and fundamental clarity,” said Michael Bellisario, an equity research senior analyst at Baird. “Now people have gotten through the worst, so there should be more transactions later this year and heading into next because we’re in a better space.”
Blackstone also closed on a joint $6 billion takeover of the Extended Stay America hotel chain, including its real estate assets, with Starwood Capital earlier this year. There have also been a wave of smaller property transactions in recent months from lodging trusts like Host Hotels & Resorts, Pebblebrook Lodging Trust, Apple Hospitality, and Sunstone Hotel Investors.
“On the asset side, I’d expect more of that to continue and asset sales to be coupled with the next wave of real estate transactions,” Bellisario said.
Guarded Brands: The nature of Blackstone’s latest acquisition, where the assets over the entire corporate entity are taken over, is likely how a bulk of hotel deal making will look coming out of the crisis. There is generally more opportunity to be had at the property level rather than the brands themselves.
“There’s just not a lot left for the brands to buy. All the big companies have gotten bigger,” Bellisario said. “Is there a 100-hotel brand company out there a brand is going to scoop up? Maybe, but I think it’s going to be more of a tuck-in deal.”
These types of tuck-in deals or add-ons generally look more like when Marriott acquired brands like Protea and AC vs. when it brought on Starwood Hotels & Resorts. The Protea and AC deals gave the hotel company a bigger presence in sub-Saharan Africa and Spain, respectively, compared to a portfolio of hotels around the world, Marriott CEO Anthony Capuano said last week at Skift Global Forum.
Hyatt’s recent $2.7 billion Apple Leisure Group acquisition plan fuels the company’s goal at having a bigger presence in Europe.
In short: Expect hotel M&A to look more targeted rather than transformational.
Let’s Make a Deal (or 41): The appetite for asset acquisitions has been clear for months, but there hasn’t necessarily been as many transactions as analysts would have expected from such a catastrophic downturn like the pandemic.
The hold-up on transactions got blamed on bid-ask differences, with sellers pricing too high and bidders offering too little. But there were still deals taking place.
MCR Hotels, owner of the TWA Hotel in New York City where Skift Global Forum took place, acquired 41 hotels in the last 18 months with “more coming,” said firm’s CEO Tyler Morse in an interview with Skift founder Rafat Ali last week.
“It’s like going to a convenience store and getting a Slurpee,” Morse added. “Broadly speaking, the travel train is moving quickly in the right direction, so we’re investing in a growing business.”
Juggling Sustainability and Development
Two of the world’s largest hotel companies last week upped the ante on prior pledges to be more sustainable companies.
Marriott International CEO Anthony Capuano announced last week at Skift Global Forum a plan to have the company achieve net-zero greenhouse gas emissions no later than 2050. Accor joined the Sustainable Hospitality Alliance, an organization aimed at improving the environmental impact of the hotel industry.
Pledges like this can sometimes seem like lip service, but Capuano and Accor’s CEO Sebastien Bazin — also featured at Skift Global Forum — promised to be held accountable for moves that can impact how future projects get developed.
“As we’re talking to our partners about new construction, we’ll be looking at sustainable materials, new building methods, energy efficiency,” Capuano said of balancing the pledge with company leadership’s prior commitment to build more hotels in markets like China.
The expanded environmental efforts could even lead to hotel groups deciding to not develop a property. Bazin was in southern Europe and decided after a site tour “we should not be sacrificing that land.”
“We’ve stopped more deals than before,” he added.
Franchisee Buy-In: Any widespread sustainability efforts requires franchisees to get on board, given the hotel parent companies typically don’t own much of the real estate. They just issue the brand standards around how to develop and operate the property.
This can be a headwind to the hotel industry, but Capuano isn’t deterred, either. Marriott held a meeting with 130 U.S.-based franchisees earlier this month regarding the new sustainability pledge, and feedback was generally positive.
“This was the first topic that came up in each forum,” Capuano said. “They’re passionate not just talking about sustainability but evolving our business model in a way that will allow us to achieve these ambitious goals.”
Valuing a Brand
Concerns of brand bloat, or the notion of a hotel company having too many brands, stymied the industry for years. It doesn’t appear either side of the argument is backing down.
Accor, which has 40 brands, might be the poster child for brand bloat to some industry critics; however, Bazin defends the company approach. Ten of the brands last year accounted for 90 percent of Accor’s revenue, but that concentration has since relaxed to 80 percent. In three years, Bazin anticipates those ten brands will account for 60 percent of the revenue.
Lifestyle hotels, or those that rely more on local business and food and beverage outlets, are a big source of diversifying the revenue stream. Accor’s 13 lifestyle brands account for only 2 percent of Accor’s fee volume today, but Bazin noted it could eventually grow to 40 percent.
MCR’s Morse, however, still thinks there are too many brands out there. MCR owns branded and independent hotels and sees value in both, but some brands are significantly more valuable than others.
“We’re happy with branded hotels, and we’re happy with independent hotels,” Morse said last week. “It depends on market conditions, location, and the quality of the project and property.”
It also largely comes down to central reservation distribution, which Morse said Residence Inn and Hampton Inn achieve the highest amount of business based on their brand recognition and distribution.
“It’s a question of what is the most economic way to fill your building,” Morse said. “Some brands don’t provide a lot of customers at all … You have to ask, ‘What’s a brand?’ If it’s only known to 19 people, that’s not a brand.”
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