What hotel values will average out to be post-COVID-19 crisis is anyone’s guess at this point, though several analysts have tried to calculate the impact on lodging asset prices for this year and next.
During Long Live Lodging’s April 30 LodgingStream digital conference, several of the more than 50 experts who took part in the panel discussions mentioned the uncertainty of where hotel valuations will end up as the COVID-19 crisis begins to ease.
It’s nearly impossible to gauge a hotel’s market value today as more than 5,700 hotels in the U.S. have closed since March 15, according to Kalibri Labs, which updated its statistics on Monday. More than 17 percent of rooms are closed, while most hotels that are remaining open are seeing occupancies of 5 percent to 20 percent.
WATCH: In the opening session of Long Live Lodging’s digital conference LodgingStream: A Brave New World, Jamie Lane, senior director of economics and forecasting at CBRE Hotels Americas Research, and Daniel Lesser, founder and CEO of LW Hospitality Advisors, share their calculated outlooks on the U.S. hotel industry for during and after the COVID-19 crisis. View the presentation here.
It’s really a survival of the fittest – or best location – at this stage in the pandemic. Upper-tiered hotels in gateway cities are not faring as well as lower-priced properties along interstates and near hospitals or warehouses, said conference panelists.
When it comes to chain scales, certain segments are doing better than others. Kalibri Labs reported closures according to chain scales.
Here’s the breakdown of closures and the percentage in each chain scale segment:
Luxury – 236 hotels or 59.3 percent
Upper upscale – 739 hotels or 43.8 percent
Upscale – 900 hotels or 17.8 percent
Upper midscale – 1,060 hotels or 10.8 percent
Midscale – 467 hotels or 9.2 percent
Economy – 733 hotels or 8.1 percent
More than 1,300 independent hotels or 13 percent of that sector have closed.
Though it’s hard to comprehend that anything can be won during the pandemic, one chain scale sub-segment that’s doing well – relatively speaking – is the economy extended-stay sector.
In an unprecedented statistical correlation, overall RevPAR in the U.S. hotel industry fell nearly 52 percent in March compared to March 2019, reported STR. But extended-stay hotels experienced less of a decrease in RevPAR, with a drop of 38 percent, reports The Highland Group, which tracks extended-stay business.
To break it down in price segments, RevPAR in economy extended-stay decreased 9 percent in March 2020 compared to March 2019, while mid-price was down more than 32 percent and upscale dropped by more than 45 percent.
“A significant portion of business comes from the residential guest, who have a very long length of stay,” Skinner said.
Extended-stay hotels are practically their permanent homes. In some cases, long-term guests are transitioning between homes. “These types of guests are not necessarily vulnerable to travel restrictions,” Skinner said.
In addition, despite the shelter-in-place orders, large construction projects – particularly infrastructure such as roads – employ workers who need a place to stay during the span of the project.
Health care workers, too, are among extended-stay’s long-term guests.
Two powerful private equity groups recently responded to the strength of the economy extended-stay niche by investing in Extended Stay America, a publicly traded company.
The Wall Street Journal reported that in mid-March, Blackstone Group acquired a near 5 percent stake in the company at $6.50 a share and Starwood Capital acquired an 8.5 percent stake for $137 million or around $9 a share.
Deals on Hold
Meantime, prospective investors are waiting on the sidelines for the opportune time to invest, meaning hotel market values have to go lower than they are now and owners have to be willing to sell.
Suzanne Mellen, senior managing director and practice leader at HVS, said she expects some owners will go through forbearance steps with their lenders but will eventually decide “to hand over the keys to their bankers” as the pandemic’s financial toll begins to surface over the next few months.
Mellen has been in the hotel valuation business for 40 years. She’s witnessed a lot of ups and downs.
She’s also noticed how investors are eager to talk about their hotel’s market value during the good times but reluctant to face the truth in a downturn.
Mellen and her colleagues recently released a report that shows a decrease in hotel market values across the U.S.
The report, titled The Impact of COVID-19 on Hotel Values, was released about a month ago, and researchers’ expectations have changed a bit since then. Mellen said they now expect an industry recovery in occupancy and RevPAR to be a U shape versus a V as business performance eases back up over the next couple years.
LISTEN: To hear Suzanne Mellen share insights about the study, The Impact of COVID-19 on Hotel Values, listen to Episode 268 of Lodging Leaders podcast.
“Hotel valuation is pretty simple mathematics,” Mellen said. Though the numbers are sad right now, the industry was facing a lackluster year as many analysts called for zero growth in RevPAR and occupancy in 2020.
Mellen said as owners work with lenders throughout the COVID-19 crisis, it’s important for them to have a realistic grip on their business metrics. She advises investors to not use capitalization rates when trying to deduce their hotel’s value as any business charted over a rolling 12-month span is not going to present a true calculation of value.
To provide a basis for its analysis, HVS looked at hotel sales transaction trends from Q1 2007 through the end of 2019. As illustrated in the graph above, hotel sales transactions started to decline markedly in late 2007 as the market began to falter. The financial crisis in the fall of 2008 stalled out the transaction market, with few sales occurring in late 2008 and 2009. Once hotel performance bottomed out in late 2009, hotel investors jumped in, and the number of transactions began to accelerate mid-year 2010.
Like any investment cycle, there are winners and there are losers. HVS predicts that under the most likely scenario, an opportunistic investor acquiring a hotel this year would see a near 50 percent increase in value in five years. If buyers wait until next year, the return on investment would be near 30 percent.
During Long Live Lodging’s LodgingStream digital conference last week, presenter Daniel Lesser, CEO of LW Hospitality Advisors, talked about the rise and fall in business performance metrics such as occupancy and RevPAR impact hotel values.
Many people, he said, “cannot understand or comprehend how the value of a hotel can increase 20 percent in one year. It’s all about cash flow.”
Values have sunk or will sink to new lows, but STR projects a 63 percent rebound in RevPAR in 2021. “Just as fast as values can decline, they can rise,” Lesser said.
As for hotels that will not recover or have owners who want out, Todd Roffman, a partner at Highline Hospitality Partners in New York City, expects the “flood gates will open in the next four to six months. We have started to hear and currently see discounts of 25 to 30 percent of valuation.”
Roffman was a panelist on Deals on the Horizon, a session at Long Live Lodging’s LodgingStream digital conference.
Mary Beth Cutshall, executive vice president and director of development at Hospitality Ventures Management Group in Atlanta, moderated the discussion. She said underwriting new deals will be a challenge in the coming months as “the business metrics have gone completely sideways.”
Roffman said when it comes to a property’s pro forma, underwriters will have to look at it differently. “The landscape has changed so dramatically, you can’t have long-based pro formas. You have to create bands of time.” If you’re not comfortable with the hotel’s business performance within that band, “don’t do the deal,” he said.
Fellow panelist Lou Plasencia, CEO of The Plasencia Group, said the price of a hotel impacted by COVID-19 depends on the level of distress it faces, and coming up with the total payoff will be difficult and will call for some creativity. A deal could be cut in which the buyer pays 75 percent of the sale price up front and the parties agree the rest can be paid over time.
During the Great Recession, Plasencia said he looked at historical data of hotel assets on the block, but this is a completely different time. “Now is not the time to do valuations,” he said. “It’s an absolute waste of time. Whatever (value) you give the seller or the lender, the chances of that being wrong is 100 percent.
“We have to give it time to let things settle and we’re six months away from doing that.”
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In the first few months of the COVID-19 pandemic in the U.S., financiers anticipated a swell of distressed hotel businesses. Some raised rescue funds to respond to what they thought was a pending crisis. Though there are financial rescues taking place, the level of such activity is far below what industry advisers and fund managers expected. Commercial real estate investors positioned to act in the early days of the pandemic held off and are now just beginning to unleash their cash hoards totaling billions of dollars. Episode 345 of Lodging Leaders podcast explores the state of capital investment in the hotel industry.