The perks of selling assets via auction, sealed bids
 
The perks of selling assets via auction, sealed bids
18 APRIL 2016 8:23 AM

Hotel buyers and sellers are increasingly employing alternative deal-making methods such as live auctions and sealed bids, which can mean big profits compared to traditional hotel brokers.

REPORT FROM THE U.S.—Hoteliers are increasingly turning to alternative means of buying and selling hotels when appropriate, particularly through live online auctions and sealed bids.
While not effective for all assets, sources said that in some cases these methods can yield a larger buying pool and potentially higher sales prices for sellers, which for many owners is reason enough to start thinking outside the traditional brokerage box.

According to hoteliers who have already navigated the process, it’s not much different to sell a hotel at auction rather than doing so through a broker, particularly in terms of the length of time needed for marketing the asset and to later make a deal. The main difference is that with auctions and sealed bids, there are usually more possible buyers involved than there would be amid direct one-to-one sales negotiations. The auctioneer also might provide extensive marketing for the asset; in some cases on a far broader level than would otherwise be seen.

“It does open certain assets up to buyers that don’t go to the big investment conferences like (the Americas Lodging Investment Summit), for example. You even get some non-hospitality buyers and probably get a bit more competition than maybe you would have before,” said Doug Dreher, president and CEO of The Hotel Group, which is using an auction site to sell its DoubleTree hotel in Santa Fe, New Mexico.

“In choosing this process, I think to a large extent we opened up the property to buyers who were not really exposed to the typical broker database,” Dreher said.

The Hotel Group is using an auction site to sell its DoubleTree hotel in Santa Fe, New Mexico. (Photo: The Hotel Group)


Sellers can expect to see similar results with sealed bid auctions, too, according to sources. While similar to a live auction, with a sealed-bid method the potential buyers submit their best price offering after conducting extensive due diligence, then the bids are opened after a final submission date.

For example, HVS Capital Corporation was recently tapped by Hong Kong-based Cheung Kong Property Holdings to sell its 409-acre Grand Lucayan Resort complex in Freeport, the Bahamas, using sealed bids in a no-reserve (no minimum price) format. While less common, HVS Capital Director Mike Sullivan explained this method is better suited for the massive, big-ticket property.

“Our client wanted essentially worldwide exposure for the sale. It’s a destination resort; pretty much a world-class asset,” Sullivan said.

Sullivan explained that the resort’s sprawling facilities, which include two golf courses, nearly 1,300 guestrooms, a casino and a variety of additional assets, creates a situation where the property can potentially be sold either in part to multiple buyers or as a whole. Financing also might be available for bidders. These unique aspects, as well as the general complexity of the sale, tipped the means in favor of using sealed bids, according to Sullivan.

“Because of the complexity of the asset, it’s not the type of thing that would lend itself to what we call an ‘open cry-out auction,’ where you go to bid, with gavel sounds and all that jazz,” Sullivan said. “This is something that requires some thought on behalf of the bidders, and likewise thought or approval on behalf of the seller, in terms of selecting the appropriate bidder or bidders.”

Benefits of broker-less sales
Regardless of whether sellers choose a live auction or sealed bids, in both cases one can expect the deal to close faster than it normally would through a broker, which provides a major added bonus. According to sources, this expedience stems from the extensive prequalification processes many auctioneers require of their bidders in advance of the sale.

“The greatest benefit from a seller standpoint is that at the end of the day, you end up with a pretty high degree of certainty of closing, because the purchase and sale agreement, as per the contract, is consummated within a few hours after the auction,” Dreher said.

He said non-refundable earnest money, which is 5% of the deal, is wired the next day.

“So it offers not 100% certainty of closing, but you eradicate re-trading and you mitigate other factors out there. All the upfront due diligence is done by the buyers before the auction,” Dreher said.
Peachtree Hotel Group has both bought and sold multiple hotels on auction websites, while also still using traditional hotel brokers when applicable. Jatin Desai, the company’s chief investment officer, praised the online auction sale process for similar reasons—namely the broad marketing base and the prompt closing. Desai said that on the buyer’s side, going the auction route also simplifies making purchases due to the greater levels of transparency afforded.

“The hotels that we got (at auction) were pretty good deals,” Desai said. “The beauty is that we didn’t have to do extensive negotiation prior to a purchase and sale agreement. We already pretty much knew what we were getting into, and the seller knew what they were getting into. We put up hard money at the close, so everybody was big boys about it. That’s what we liked about it from the sales side.”

Desai also noted that among the multiple properties Peachtree has sold at auction, higher final prices were realized than what the company had expected, especially if a traditional brokerage had been used. Part of that comes from the greater visibility but also the competitive heat of a true bidding war, when prices can jump significantly in the final minutes before the slam of the gavel. The charged atmosphere of a live auction can mean big bucks when multiple bidders refuse to walk away. For this reason alone, one can expect to see even more hotels on the auction block in future years. 

“It’s a clean way to do it, and frankly it can become a little bit of a bidding war at the end,” Desai said. “We’ve sold well above our reserve and well above the pricing expectation that we had. We executed better in the auction format than we would have if we’d marketed the hotel in a more traditional format. In many cases, you do get a higher price.”

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