Hotel transaction volume in 2015 hit a record in Canada, and analysts and advisers watching sales this year believe 2016 could follow suit.
GLOBAL REPORT—After a record year for Canadian transactions in the hotel industry in 2015, sources said they expect to see similar volume in 2016.
The recently announced pending sale of publicly traded InnVest Real Estate Investment Trust to Bluesky Hotels & Resorts for 2.1 billion Canadian dollars ($1.6 billion) as well as SilverBirch Hotels & Resorts’ strategic review and possible plans to list its properties with Jones Lang LaSalle are two signs of another big year for Canadian hotel transactions.
Canada’s transaction trends are similar to the United States, said Carrie Russell, managing director for HVS. Activity follows suit for being six years into an up cycle, she said. As the environment gets stronger, some institutional investors who want to get out of hotels—such as utility company Fortis Properties—have been selling.
“Institutional investors not wanting to be in the market space feel it’s time to sell,” she said. “Financing is readily available in the market. Overall cap rates are low. It’s a fairly good time.”
HVS’ “2015 Canadian hotel transaction survey” reported the country’s hotel industry saw its highest level of transaction volume since 2007. Asset sales totaled more than CA$2.2 billion ($1.68 billion), representing a 64% year-over-year increase. There were 116 sales in 2014 and 143 in 2015, which was an increase from 14,733 rooms to 20,210.
The year’s biggest transaction was the sale of Vancouver’s 510-room Westin Bayshore to Concord Pacific for CA$290 million ($221 million), or CA$569,000 ($434,752.56) per key. The 12-room Edgewater Lodge in British Columbia took the crown for highest cost per room that year, as a foreign investor paid CA$16 million ($12.2 million) for the property, coming in at CA$1.3 million ($993,358.94) per key.
“(It) was a bit of a surprise,” Russell said. “There was not a sense that was going to happen.”
There are few details available about Bluesky, which is relatively new company, other than it’s backed by Hong Kong capital and executives are interested in Canadian commercial real estate. During the company’s first quarter earnings call, President and CEO Drew Coles said Bluesky is a newly formed company and there isn’t much history to share. The company does have the knowledge, desire and commitment to be in this space at the platform and asset levels, he said.
“I think I can say, and on the behalf of the board of trustees and some major shareholders, we’re comfortable with this group,” he said during the call. “As CEO, I really liked the questions they asked about our portfolio and our team. They seem extremely committed to the people, to the organization and the assets and the strategy to go forward.”
Troy MacLean, an analyst with BMO Capital Markets who follows InnVest, said the company won’t say much else about Bluesky.
“Everyone is sworn to secrecy,” he said. “We’re going to find out more when the management circular comes out in a couple of weeks. We should know more by the vote at the end of June.”
That said, the board members at InnVest are serious people, MacLean said. He added that they wouldn’t go through with the deal if there weren’t substance behind the offer.
Foreign investment in Canada, particularly the Vancouver and Toronto markets, has been significant in the past couple of years, Russell said. In 2015, foreign investors spent more than CA$500 million ($382 million) in Canadian hotels, which represented 21% of the country’s hotel transaction volume.
“It’s common for me to get calls from those outside the hotel space with Chinese investors who want to know what’s for sale, but there’s not a bunch that are for sale,” she said.
Part of the foreign interest comes from the Canadian dollar being low compared to the U.S. dollar, Russell said. This brings attention to Canada, a country known for being a safe, stable place to park money. Aside from the oil markets, the country’s major markets are doing well.
Lyle Hall, managing director at HLT Advisory, agreed with Russell’s sentiments. The interest and recent activity is the result of a safe, attractive and stable marketplace that’s familiar and comfortably similar to the U.S. market, Hall said. There haven’t been significant spikes or dips in the vast majority of markets across the country, and the economy appears strong.
Hotter and cold markets
Vancouver and Toronto are the cities to watch for transactions, Russell said. Vancouver is challenging because its cap rates are low, so it’s difficult to find hotels for sale. It’s easier to find assets for sale in Toronto, she said.
There are more buyers with capital who want to move into hotel spaces in Vancouver right now, Russell said, but the product isn’t there. The market is doing well, so owners aren’t motivated to sell.
When they do sell, the price reflects the success in the area. The sale of the Westin Bayshore in Vancouver for CA$290 million ($221 million) was almost double what it traded for two years earlier as part of a portfolio, Russell said. There’s potential for redevelopment of that site as it’s on the water, Russell said.
Montreal, Halifax and Winnipeg also are seen as relatively safe and strong markets for international investors, Hall said. Any major city outside the energy markets should do well, he said.
However, there likely won’t be many transactions in the oil markets, Russell said.
“I see that part of the country in a holding pattern,” she said. “They’re not to the point of seeing distressed sales, but that’s probably the direction they’ll go if oil prices don’t come up.”
What’s to come
While there have been some asset sales so far this year, 2016 hasn’t seen any individual blockbusters yet, Russell said. However, with SilverBirch’s hotels going on the market, she said this should be another big transaction year. On top of that, InnVest might sell its noncore assets, Russell said, and it’s likely Bluesky will continue on that path after the acquisition.
“I think volume in 2016 will look like 2015, which was a significant year,” she said. “Going into 2017, that’s a little harder to predict.”
The purchase of InnVest REIT reconfirms the strength of the second- and third-tier markets, Hall said, as that’s the bulk of where the individual hotels are located. Buyers of SilverBirch properties will probably be a pension fund or other type of passive owner, he said.
Hall said he expects the country will see some marquee products in the year, some of which are expected to fetch stellar prices.
“You can expect to see them continue at a fairly good clip for the rest of the year and into the next year,” he said. “There’s nothing on the horizon to suggest any falloff in interest or in the underlying fundamentals of why interest is there.”
MacLean, however, said transactions could drop a little this year. InnVest has been an important buyer, he said, so it’s possible the acquisition by Bluesky might slow sales down the rest of the year.