Transactions market strong for independents
Transactions market strong for independents
10 APRIL 2015 9:08 AM
Real estate investment trusts and private investors are dominating the independent hotels transactions arena, showing that high-performing assets in strong markets can fetch good values. 
REPORT FROM THE U.S.—Non-branded hotels have a significant presence in the current U.S. hotel transactions landscape. It’s a fact that supports two major trends, experts say:
  1. Buyers and lenders are increasingly able to see that value isn’t entirely dependent on brand flag; and
  2. Good assets in strong markets are fetching fair values even without a brand attached. 
“When I started in this business, an independent hotel was often considered a declining asset—a hotel that had lost its flag,” said Daniel Lesser, president and CEO of LW Hospitality Advisors. “Today that’s far from the case. Independents are alive and well, and their numbers are expanding.”
Overall, independent hotels are holding their own on the trading field, according to Mike Cahill, CEO of HREC – Hospitality Real Estate Counselors. “The sale of independents has been relatively proportional to overall real estate transaction volume,” he said. “That said, independents are at the higher end of the range. Traditionally reluctant sellers have and will continue to place independent hotels on the market due to record pricing potential.” 
Cahill and Lesser cautioned against painting all independent hotels with the same brush, however, when it comes to their value. Lesser said there’s a big difference between a “wasting asset,” for example, an economy- or midscale-branded property in a tertiary market that keeps losing flags, and one in a thriving urban market that can operate strongly on its own without a brand. 
Cahill described two types of independent hotels from a buyer’s perspective. 
“One: The hotel is an independent that should be branded—these appeal to a value-add buyer who will buy, renovate, rebrand and look for a big financial return,” he said. “Basically, the hotel is struggling but has strong upside as a renovated and branded hotel.”
The other type, according to Cahill, is the hotel that is “splendid as-is, as an independent,” meaning that it is performing well, cash-flowing and promises maintained returns after purchase. 
Location, location, location
While the U.S. hotel industry might be in a good environment right now for buying and selling hotels, location often still is the No. 1 determinant of an asset’s value, particularly for independent hotels that don’t have a built-in insurance policy in the form of a brand.
“The hotel business always has been a neighborhood business; it’s submarket-driven,” Lesser said. “In some markets you can get away with not having a global brand attached to a hotel, and in other markets you can’t.”
New York City is one such market where owners are having success buying independent assets. Real estate investment trust FelCor Lodging Trust in 2012 bought the Knickerbocker Hotel in Manhattan in a joint venture for $115 million, and re-opened it in early February following a $240-million, multi-year renovation. The purchase was part of the REIT’s strategy to reposition its portfolio to focus on its core quality assets, of which the Knickerbocker will be a flagship. 
“We feel very bullish about New York going forward,” said FelCor President and CEO Rick Smith during the company’s 2014 year-end earnings call. Smith said FelCor is “completely focused on the positioning of this hotel … and ensuring it produces the result that we expect.” 
To that end, he said he expects the company will refinance the hotel “sometime next year after its operations have ramped up,” and that the hotel should stabilize in a relatively short time frame.
Lesser cited other recent independent hotel transactions that reinforce the notion that strong markets can support strong independent assets. He pointed to the December acquisition of The Heathman Hotel in Portland, Oregon, by LaSalle Hotel Properties for $64.3 million in cash. 
“This is an example of an identifiable asset in a good market,” he said. 
In addition to purchasing The Heathman last year, LaSalle also acquired the independent Hotel Vitale in San Francisco for $130 million. LaSalle President and CEO Mike Barnello said the REIT is attracted to independent assets in good markets because it can maximize the efficiency of those hotels to take advantage of the market.
“It’s all about the supply and demand in a good market,” Barnello said. “A good market is a good market.”
What about high-performing independent properties that aren’t in New York City or San Francisco? 
They still have plenty of value when it comes to transactions, Lesser said. He said soft branding can be a good option for independents in markets like this, in cases where lenders might like the idea of an independent hotel but still want the stability of a brand before they will finance a project. 
Buyers and potential downsides 
Private investors and REITs continue to dominate as buyers of independent boutique hotels in the U.S. year to date, according to Real Capital Analytics data. 
“Major investors like REITs and private equity investors are looking to purchase upscale and luxury independents in urban gateway cities,” Cahill said. “Age is really not an issue, since many of these properties are historic rehabs.” 
Lesser said it often takes a more sophisticated buyer to see the possibilities in a certain independent asset. “Sophisticated buyers know the market and they can see the upsides,” he said. 
Still, the current window that makes both buying and selling independent assets favorable can’t last forever. While it might make good financial sense now for a buyer to pick up an independent hotel without brand encumbrances, what happens when the next down cycle hits? 
“If and when the next recession comes, will the independent hotel disproportionately lose market share in a tougher, more competitive environment?” Cahill said. “Regardless of whether a hotel is branded or not, a transaction always still comes down to cash flow, yield and risk. … If the investor believes the unbranded hotel is more vulnerable to new supply and a cash flow decline, then he will value it less than the branded asset.” 

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