Blackstone Seeks IPOs as Hotel Sales Climb: Real EstateHui-yong Yu
Private-equity firms are accelerating sales of hotels to take advantage of a recovery in U.S. lodging demand and stock prices close to record highs.
Hotel-property transactions jumped 47 percent to $14.1 billion this year through July in the U.S., according to Real Capital Analytics Inc. Sales by institutional investors, including private-equity funds, more than doubled in the first half, as the growth of revenue per available room slowed. Blackstone Group LP, the largest buyout firm, has decided now’s the time to sell shares as it prepares initial public offerings of Hilton Worldwide Holdings Inc. and Extended Stay America Inc.
A recovery in travel after the last recession has led to hotel real estate values almost doubling since 2009’s low, based on an index from research firm Green Street Advisors Inc. Companies including Starwood Hotels & Resorts Worldwide Inc. and Marriott International Inc. have climbed to their highest prices since 2007, when Blackstone bought Hilton Hotels Corp. for $26 billion at the tail end of the biggest buyout boom in history. With some firms cashing in on their investments, further property-price gains may be muted.
“Fundamentals are still pretty strong but, in general, revpar is increasing at a declining rate,” said Keith Gelb, a managing member of Rockpoint Group LLC, a Boston-based private-equity real estate firm that has been selling hotel assets. “The capital markets have been quite strong and we’ve executed our business plans sooner than anticipated.”
Institutional investors, after snapping up hotels at distressed prices at the real estate market’s bottom in 2009 and 2010, have made sales totaling $3.44 billion in the first half, compared with $1.68 billion a year earlier, according to New York-based Real Capital, a property-research firm. Purchases rose at a slower pace, climbing 21 percent to $3.43 billion.
Growth in revpar, the lodging industry’s measure of average daily room rates and occupancies, is slowing after three years of gains. It rose 5.6 percent in the first half, compared with 6.8 percent growth for all of last year and 8.2 percent in 2011, according to STR, a Hendersonville, Tennessee-based data provider. The firm forecasts revpar will increase 5.7 percent this year and 6 percent in 2014.
“We still have two to three years of pretty good growth and below-average supply increases,” said Scott D. Smith, senior vice president in the Atlanta office of PKF Consulting USA LLC, a San Francisco-based research and advisory firm for the hotel industry. “But if demand declines, then hoteliers will start to lose occupancy and discount their room rates, and obviously that will have a great impact on net operating income.”
Some investors are attracted to hotels because they offer investment yields, as measured by capitalization rates, of about 7.8 percent, or about 2 percentage points higher than the average of the other major commercial-property types -- office, industrial, retail and apartments, said Lukas Hartwich, a lodging analyst at Green Street in Newport Beach, California. Cap rates are net operating income divided by purchase price.
If interest rates rise further, that would boost borrowing costs and may reduce the prices that buyers who rely on debt financing are willing to pay for hotel assets, Hartwich said.
“Some buyers are looking for a certain return on equity so if the cost of debt goes up, that hurts their return,” he said.
Rockpoint has sold or recapitalized more than $1.5 billion of hotel properties in the past 12 months, including New York’s Milford Plaza, Boston’s Park Plaza Hotel, Hawaii’s Waikiki Courtyard and Bacara Resort & Spa in Santa Barbara, California.
“We’ve monetized a significant percentage of our hotel assets in the past year,” Gelb said.
Private-equity firms continue to make new hotel bets as they sell or start to exit older investments. Blackstone bought about $4 billion of hotel assets during the past year, including the Motel 6 budget chain and a leasehold in a Hyatt resort in Waikiki.
Hilton, the world’s largest hotel chain, filed to raise as much as $1.25 billion when it goes public, a placeholder amount that may change. New York-based Blackstone also filed for an IPO of Extended Stay, a mid-priced lodging chain, in July, and is exploring a stock sale of La Quinta Inns & Suites. The firm is seeking to take advantage of surging stocks while holding on to a stake in Hilton in a bet travel will remain robust.
The last large chain to go public, Hyatt Hotels Corp., has risen 82 percent since its November 2009 share sale. Marriott, the largest publicly traded U.S. hotel chain, is up 16 percent this year, while Starwood has gained 19 percent. The Bloomberg Hotel Real Estate Investment Trust Index reached a five-year high in May before slipping 4 percent through yesterday on the prospect that rising interest rates will limit property demand.
Planned IPOs may curb gains in lodging stocks in the next few months, said James Corl, a managing director overseeing distressed real estate investments at New York-based Siguler Guff & Co. and former head of real estate securities fund management at Cohen & Steers Inc.
“New supply is always going to compete with the existing companies for the incremental dollar,” Corl said. “One of the reasons the REIT market’s been off the last couple of months is there’s a pretty significant backlog of new public companies” preparing to sell stock.
A successful IPO of Hilton would mark a major turnaround for Blackstone’s biggest investment ever and a victory for the firm’s real estate chief, Jonathan Gray. The firm’s real estate and private equity funds put $5.7 billion of equity in the October 2007 buyout, betting on the company’s international growth potential. The deal looked like a money loser when the credit crisis severely curtailed travel.
Instead of walking away, Blackstone invested $800 million of equity to buy back some debt, convert other loans and push out maturities in a 2010 debt restructuring that cut Hilton’s borrowings by $4 billion.
Hilton President and Chief Executive Officer Christopher Nassetta has moved the company headquarters to the Washington suburb of McLean, Virginia, from Beverly Hills, California, and expanded the hotel count by more than 30 percent to over 4,000 properties. The majority of that growth is overseas and in franchised and managed hotels, which require almost no capital investment by the company.
Hilton, with brands including Hampton Inns and Embassy Suites, had a 3 percent increase in revenue in the first half, to $4.64 billion from $4.52 billion a year earlier, following 5.6 percent growth last year, according to the IPO filing. The company has more than $13.5 billion of debt that it expects to refinance before the end of the year.
The majority of Hilton’s earnings before interest, taxes, depreciation and amortization comes from the 3,843 hotels, resorts and timeshare properties it franchises or manages. The company also owns or leases stakes in 157 hotels with about 62,500 rooms, including icons such as the Waldorf Astoria in New York, the Hilton Hawaiian Village and the London Hilton on Park Lane, according to its IPO filing.
Hilton could be valued at about $30 billion, based on multiples of earnings before interest, taxes, depreciation and amortization at comparable companies such as Stamford, Connecticut-based Starwood and Bethesda, Maryland-based Marriott, a person with knowledge of Blackstone’s plans has said.
When Blackstone agreed in July 2007 to pay $47.50 a share for Hilton, the price was 40 percent more than the stock’s closing price the day before the acquisition was announced. The deal ignited a round of high-fives in Corl’s office at Cohen & Steers, a Hilton shareholder, at the time.
“The valuation they paid was extraordinary,” Corl said. “If they’re able to get out of that with any sort of decent returns, they are indeed heroes.”
Asset sales by investors reflect strength in the hotel market, said Smith of PKF.
“In a nine-inning game, we’re probably in the sixth inning,” said Greg Duff, chairman of the hospitality, travel and tourism practice of Seattle-based law firm Garvey Schubert Barer. “On many levels and in many different markets in terms of occupancy, we have met or exceeded where we were pre-recession.”