Heading to the top of the hotel cycle
Heading to the top of the hotel cycle
13 AUGUST 2013 6:02 AM

As Blackstone looks to cash-out of its holdings, other indicators signal the hotel real-estate cycle might be cresting.

It was no surprise to many people when word leaked last week that Blackstone Group LP was preparing to take Hilton Worldwide public sometime early next year. After all, everyone has been talking about a Hilton initial public offering practically since the day Blackstone bought the hotel giant in 2007.

It seems obvious Blackstone is in the first stages of cashing out of the hotel segment, at least for now. Last month, it took steps toward an initial public offering for Extended Stay America, and a few days before the Hilton rumors hit the press, news outlets reported Blackstone is looking to sell La Quinta Inns & Suites or take it public.

There’s probably no smarter company in business, so when Blackstone says it’s time to liquidate, it must mean we’re heading toward the top of the economic cycle, or at least in this case, the hotel real estate cycle.

While hotel performance varies significantly by location, it’s on the upswing in many regions and countries, notably the U.S., which at least by some measures is nearly back to previous peak levels set before the onset of the Great Recession.

And the outlook for the industry for the remainder of this year and 2014 might never have been better. The latest forecast from STR, parent company of Hotel News Now, calls for a 4.9% increase in average daily rate this year, which will fuel a 5.7% rise in revenue per available room. The outlook for 2014 is nearly a carbon copy: a 4.6% bump in ADR and a 6% rise in RevPAR.

Best of all, growth in supply and demand is in near-perfect balance. This year, supply is projected to rise 1% and demand up 1.8%. Same dynamic in 2014: supply rises 1.5%, but demand grows even faster at 2.8%.

These are the kinds of numbers investors look at and wonder how much better it could be, so maybe now is the time to plan an exit. Other signs point in that direction.

Last week, during second-quarter earnings calls executives at several hotel companies talked at length about ongoing or just-completed renovation projects at their properties. Sunstone Hotel Investors recently completed $69 million in renovations at four hotels, while Hospitality Properties Trust had projects underway at 42 properties, with more to come.

It could be these companies are sprucing up their portfolios so they can be placed on the market at quick notice. And in the meantime, these upgraded hotels will be producing higher rates and profits, further enhancing their values.

On the other side of the transaction equation, some of these same ownership groups are squirreling away cash so they’re ready to buy real estate before prices or interest rates, or both, rise to prohibitive levels.

Also last week, InterContinental Hotels Group announced it purchased hotels in suburban Washington, D.C., and Connecticut to redevelop as the first two units in the company’s wellness-themed Even Hotels brand.

As my colleague Jason Q. Freed wrote, it’s unusual in this asset-light environment for hotel brand companies to buy real estate. But, as he pointed out, IHG wants to kick-start the brand before the cycle turns downward.

There’s the good news: While we might be approaching the top of the hotel cycle, all signs—especially the healthy supply-demand ratio—point to a long period at the top before the cycle inevitably starts its roll back toward the bottom.

In the meantime, the smart ones in the hotel business are positioning themselves to cash-in, even if, like Blackstone, it means cashing out.

Email Ed Watkins or find him on Twitter.

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