What do Hilton Hotels, the Palms Casino Resort, Motel 6 and the Fairmont San Francisco have in common? They’re all owned by private equity firms.
The leveraged buyout industry can’t seem to get enough of the risky lodging industry acquiring over 4,700 hotels and resorts since 2000 with a total deal value of over $80 billion. Blackstone, Apollo, Starwood Capital and Oaktree are among some of the biggest buyers of the last decade.
U.S. hotel transaction volume reached $16.3 billion in 2012, the highest level since 2007 when total transactions hit their peak at $47 billion. Private equity firms have been at the of center the action overtaking REITs as the largest acquirer of hotel rooms.
Ten years ago, among the top 10 largest hotel owners, private equity firms owned 12% of hotel rooms while REITs owned 67% of rooms. Today PE firms own 59% while REITs have scaled back owning 33% of hotel rooms in 2013.
“Private equity firms have been the largest and most acquisitive group of hotel buyers in the U.S. thus far in 2013, accounting for a buyer share of 37%,” says Lauro Ferroni, Director of Hotels Research at Jones Lang LaSalle in Chicago. “They’re nimble and can put a deal together quickly.”
Blackstone is by far the biggest player in the space. The firm has been buying hotels since 1990 with deal value totaling $49 billion, according to Dealogic. It’s acquired big names like La Quinta Corp in 2005 in a deal worth $3.4 billion and is expected to sell it later this year. It bought Extended Stay for $3.1 billion in 2005, sold it in 2007 for $8 billion and bought it again in 2010 for $3.9 billion after it went into bankruptcy. In July, it filed to take the lodging company public.
The firm’s biggest act will come later this year when it’s expected to take its biggest holding,
Blackstone's not alone though. Apollo Global Management bought Great Wolf Resorts in a deal worth $740 million in 2012. Oaktree Capital Management picked up Fairmont San Francisco for $200 million in May 2012. TPG and Leonard Green & Partners nabbed Palms Casino Resort in 2011. There was also Apollo and TPG's $27 billion purchase of Harrah's Entertainment in 2006.
Why all the PE love for hotels? Compared with REITs, private equity firms have more buying power and risk tolerance in volatile environments. The real estate assets are the real gem for PE buyers. Many hotels were bought up by PE firms when properties were undervalued. That was the case in Blackstone’s purchase of Extended Stay—both times.
Private equity firms also like that they can be hands-on as hotel owners; they can revamp operations, bring in new management and invest heavily in renovations at times others can’t afford to.
Their bets are paying off. Hotel values are shooting up in the last few years as supply is at historic lows. The long term average for annual hotel room supply is 2%. In 2011, the supply increased just .5% and in 2012 supply fell again to .2%.
The reason? When asset prices fell after the financial crisis it became a lot less economic to build new hotels as travel slowed and occupancy and room rates fell. Meanwhile, bank are busy shrinking their balance sheets and remain reluctant to underwrite construction loans.
“Private equity firms tend to acquire assets that have value-add opportunities and show promise for upside potential. They can come in and identify underutilized space, like a rooftop or a shuttered meeting room, that isn’t maximized to its full potential and turn it into a money-making [restaurant],” Ferroni says.
