The hotel may just see the return of its trophy hunters

Three giant transactions suggest a resurgence in demand for some of the biggest and most expensive assets in the global hotels market.

Hotel mega-deals are rare events. There have only been 31 single-asset transactions of more than €500 million worldwide over the past decade, according to real estate services firm Cushman & Wakefield. But three of those have been agreed in the first six months of 2023 alone.

In February, Credit Suisse Asset Management and Trinity Real Estate Investments acquired the 1,000-room Diplomat Beach Resort in Hollywood, Florida, from Brookfield Asset Management. The $835 million price represented the third-largest single-asset hotel deal on record. The same month saw London-based private equity firm Henderson Park sell its stake in the 428-room Westin Paris Vendôme to Dubai Holding for a sum believed to value the hotel at around $700 million.

A third giant transaction followed in May, as listed Ryman Hospitality Properties paid $800 million to purchase the 1,002-room JW Marriott San Antonio Hill Country Resort & Spa in Texas from Blackstone’s open-end US real estate investment platform. But does a trio of such deals constitute a trend, or just a coincidence? Are high-value trophy asset hotels back on the menu for investors after the capital markets turmoil of recent months?

Fresh impetus

“Usually when somebody buys or develops one of these assets they just go into the vaults, and hardly ever come out for sale,” says Gilda Perez-Alvarado, global chief executive officer of JLL’s hotels and hospitality division. “But there are more must-have super-trophy assets that are coming to market now than at any other time before.”

In 2022, JLL recorded 37 transactions worldwide of high-profile luxury assets for over $1 million per key (or room), the second-highest annual total recorded. Perez-Alvarado notes that a variety of factors have contributed to the trend.

An increasing number of owners are going through a “generational transition” in which the younger members of a family are no longer interested in running a hotel business. Some assets require capital-intensive renovations, prompting owners to sell. And in some cases, holding companies, rather than the assets themselves, are coming under stress with a consequent need to restore liquidity through a disposal.

But this is not an easy market in which to close big deals. “There is more than sufficient equity in the public markets and the big private equity funds. But the biggest question is the debt markets,” says Dan Peek, president and chief operating officer at adviser Hodges Ward Elliott (HWE). “The money center banks provide a lot of direct and indirect liquidity for hotel transactions, and they have been on the sidelines.”

Sourcing debt finance for large transactions has become more difficult and more expensive. “Select-service assets and those below $25 million represent a larger portion of the overall transaction activity than they normally would,” says Peek. “That is because they are easier to finance than larger assets and portfolios, while still providing cashflow.” HWE research shows that in 2022, and the first quarter of 2023, the average US single-asset hotel deal size was the lowest in a decade – excluding the pandemic-hit year of 2020 – at $20.4 million.

Similar conditions apply in Europe. Frederic le Fichoux, international partner and head of hotel transactions for continental Europe at bokerage and advisory Cushman & Wakefield, observes that while bank finance is still available, the overall cost of debt has roughly doubled since last year. Buyers must factor that, and the uncertain future cost of refinancing, into their underwriting. “That is having a big influence on the pricing expectation from buyers, versus the pricing that the vendor wants to achieve. Vendors see a very strong operating cashflow. In some cases, it has never been as strong. 

“They don’t see why they should sell at a discount, so that is why we don’t see many transactions. Deals are still happening, though. It just takes longer, and you need to be more creative.”

With big deals hard to land, and the data suggesting smaller deals are more in-demand, why will trophy-asset deals still happen? Because “not all hotels are created equal,” argues Perez-Alvarado.

“Some assets may have functional or physical obsolescence. But others are extremely well-positioned to continue to benefit from the cyclical and secular trends that we are seeing in the sector. Only the must-have assets are trading. The nice-to-haves are not, unless there is a very compelling commercial reason.”

Firm foundations

Javier Arus, senior managing partner, hospitality and leisure, at Spain-headquartered investment manager Azora, says the revived interest in trophy assets is in line with much stronger demand for the hospitality sector, which is popular because it has demonstrated resilience, with the luxury segment particularly favored. He says: “We have seen many more transactions of more than €1 million per key. Before, they were very rare. There is a perception that at the high end of the market, value preservation is more solid.”

Trophy assets are often on the radar of investors focused on capital preservation, notes le Fichoux. Perez-Alvarado adds: “Buyers are a combination of high-net-worth [individuals], family offices, sovereign wealth funds and, in some instances, private equity.”

The principal attraction of the Diplomat Beach Resort for buyer Trinity Investments was its status as “truly irreplaceable real estate,” says president and chief executive officer Sean Hehir. Because of its size, conference facilities and beachfront position, it covers multiple market segments, he argues. “You are not just relying on group, or corporate, or leisure travel. We attract all of those.”

So-called “revenge travel” has produced a surge in demand from people who were unable to take a vacation during the pandemic. Industry observers suggest that wave of enhanced activity may be starting to recede somewhat.

Large hotels with conference facilities are now beginning to benefit from a return of demand for group bookings, however. More widespread use of videoconferencing is likely to reduce the number of individual business trips, it is argued. Instead, companies are expected to arrange more large-scale gatherings where employees can interact with one another and network with suppliers and competitors.

“In the next five years, the group space is where the action will be,” says Shai Zelering, managing partner in Brookfield’s real estate group. “In Europe there is a good infrastructure of standalone convention centers. But in the US, many of them are attached to hotels.

“Out of 63,000 hotels in the US only around 100 have the 1,000 rooms or more that are needed to accommodate large conferences. Getting your hands on one is like finding a needle in a haystack.”

Ryman buying the JW Marriott Hill Country Resort validates the thesis that the group leisure destination market is strong and booming, argues Hehir. “They paid a similar price per key to what we paid for the Diplomat, and you couldn’t replace that asset for 50 or 100 percent more than that, so it was a very smart buy.”

Meanwhile, the supply of such properties is highly constrained, he says: “In a high-inflation environment, you just can’t build hotels like these anymore. You can’t even find the land to do it. And if somehow you do, getting the entitlements, and competing against condominium economics, makes development extremely difficult.” 

Zelering argues that resorts, and especially group-oriented resorts, have historically been undervalued. “We are starting to see that price recalibrated as the intrinsic value of these supertankers starts to grow.” 

Would-be purchasers must still get over the financing hurdle to close a deal, though. “There is a window of opportunity for buyers whose hands are not tied by the credit markets,” says Zelering. Trinity was able to assume existing CMBS debt when buying the Diplomat, while as a REIT, Ryman was able to raise unsecured debt in the public markets. 

Other investors, in particular sovereign wealth funds, may be capable of transacting without having to raise substantial debt finance. “Depending on the profile of the investment, they might buy with a high percentage of equity, or even all equity initially, before eventually refinancing when credit markets are more favorable,” says Arus.

Are there more mega-deals on the horizon? When US money center banks return to lending and credit spreads compress, that could release pent-up demand for large transactions given the enormous volume of equity available, says Peek. Several catalysts will bring more assets to market over the course of this year, says Perez-Alvarado, including fund maturities, existing owners struggling to refinance in a market where debt is constrained, and situations where substantial capex is needed.

The number of players in a market in which single assets can cost almost a billion dollars will always be small. But it is growing, says Zelering. 

He says: “We will continue to be very interested in such transactions, and I think we will see more of them. At a billion dollars per resort, the numbers are still eye-popping. 

“But the market is supported by great fundamentals if you are a long-term investor with the right vehicle to not only operate it, but also to capitalize.”