The Biggest Hotel Deal of the Pandemic So Far Does Not Signal Future Deals

Blackstone and Starwood Capital’s $6 billion joint acquisition of Extended Stay America is the largest hotel deal announced from the pandemic so far — but it isn’t the kind of pandemic hotel bargain many investment firms are jockeying for.

Extended Stay America, through its ESH Hospitality lodging trust subsidiary, owns 564 hotels and only franchises out 86 properties. This is unique, given the hotel industry’s push in recent years to go asset-light and instead focus on management agreements and licensing deals for brand affiliation.

“Extended Stay America is a real estate company, but it’s effectively a $6 billion real estate company,” said Michael Bellisario, a senior analyst covering the hotel sector at Baird. “In order to take a company like that private, the debt market has to be functioning and available as a source of capital.”

The Chase: The extended stay hotel sector has been the hotel industry’s most durable for the duration of the pandemic. Extended Stay America never closed any hotels in the first months of the pandemic when many operators chose to suspend operations in light of cratered demand. The company even ended 2020 with a 74 percent average occupancy rate compared to the greater hotel industry’s 44 percent U.S. national average.

Blackstone and Starwood each invested in the company early in the pandemic, but Blackstone cashed out of that initial investment last summer, the Wall Street Journal reported. So why the return … and why not make a deal earlier in the pandemic when occupancy rates were lower and a potential better bargain could have been struck?

This is an all-cash transaction to take Extended Stay America private, but both investment firms were likely waiting for more certainty in the hotel industry’s recovery before striking on an acquisition — even with something resilient like the extended-stay hotel sector.

“It would have been hard to underwrite in, say, October of last year before we had official vaccine news,” Bellisario said. “The fundamentals have been better for Extended Stay. We’re on the other side of the pandemic, there’s more clarity today, and the debt market is better.”

Don’t Hold Your Breath: The Extended Stay America deal arrives on the heels of Hilton Grand Vacations’ $1.4 billion acquisition plans for timeshare operator Diamond Resorts. Does this mean the floodgates are slowly opening for further pandemic opportunities? Probably not — yet.

Analysts continue to caution it took several years following the Great Recession for hotel transaction volumes to pick up, and there’s no reason to think things will be any quicker this time around. Banks continue to extend lifelines to struggling operators with months, if not years, of loan forbearance.

Whatever deals are out there may not even be that opportunistic, given there are so many investors waiting in the wings with cash.

“Discounts have been tighter than initially thought, feared, or maybe even hoped,” Baellisario said. “Everyone has money and wants to deploy it in pandemic-impacted sectors that have multi-year recoveries ahead of them.”

A Troubled Casino Operator down Under

OK, so there is a distressed deal out there … but not exactly for the reason you think.

Blackstone late Sunday night announced a $6.2 billion bid for Australian casino operator Crown Resorts, of which the investment firm already has a 10 percent stake. But this distress is more to do with years of troubled internal affairs than the global pandemic.

Crown, Australia’s largest casino operator, developed a $1.6 billion gaming resort in Sydney only to have regulators last month deem the company unfit to operate a casino there, reports the Wall Street Journal. An Australian report found Crown laundered money for years leading up to the pandemic through its Perth and Melbourne resorts. The company also allegedly ran a covert operation shuttling customers from China to its Australian properties.

The Blackstone bid takeover would potentially convince Australian regulators a new — and non-corrupt — guard is in charge. Blackstone acquired the Bellagio in Las Vegas for $4.3 billion in 2019 and already owns the Cosmopolitan, which it bought in 2014 for nearly $2 billion. It also has stakes in the MGM Grand and Mandalay Bay resorts.

“The Crown Board has not yet formed a view on the merits of the Proposal,” the Crown Resorts board said in a release. “It will now commence a process to assess the Proposal, having regard to the value and terms of the Proposal and other considerations. It will also engage with relevant stakeholders including regulatory authorities.”

The U.S. Branding Bonanza

Hotel companies love adding new brands to the point where there are now 278 different hotel brands in the U.S. alone, according to STR. Brands like Marriott’s Moxy and the Autograph Collection as well as Canopy by Hilton weren’t around 15 years ago.

Marriott had several industry eyes rolling when it grew to 30 brands following its Starwood merger in 2016. Brand bloat is just as common on the other side of the Atlantic, where Paris-based Accor has nearly 40 brands. The company’s CEO Sebastien Bazin admitted at last year’s Skift Global Forum that 12 of those brands account for 90 percent of Accor’s overall profits.

It appears hotel developers are falling for the brand spell.

Seventy-two percent of U.S. hotels are now brand affiliated, and the development pipeline is leaning more and more into these various flags, reports STR’s owner CoStar. Nearly 60 percent of the U.S. hotel pipeline in 2010 was attached to an IHG, Marriott, Hilton, Hyatt, Wyndham, Choice, or Starwood (separate from Marriott at the time) brand flag. Today, these companies claim 82 percent of the hotel development pipeline.

Beware the Brand Bloat: Hotel executives like IHG CEO Keith Barr even cautioned of there being too many brands in the years leading up to the pandemic, but the catastrophic blow to the industry doesn’t seem to be slowing down the growth: 94 percent of the hotel rooms that opened in the last year were affiliated with a hotel chain. Ninety-one percent of the nearly 200,000 U.S. hotel rooms currently under construction are brand-affiliated.

At least nine brands have been launched since the beginning of the pandemic, according to LW Hospitality Advisors CEO Daniel Lesser: Atari Hotels, Curator Hotel & Resort Collection, GuestHouse Extended Stay, Radisson Individuals, Sonesta Select, Sonesta Simply Suites, StayAPT Suites, Trend Hotels & Suites by My Place, and Umusic Hotels.

The brand bloat is unlikely to go away anytime soon.

“Let’s not eliminate any brands,” Bazin said last year. “All those brands have meaning for your customer base.”

The Global Flag Migration: The big brands see opportunity for further growth both in the U.S. and especially beyond. Only a third of hotels outside the U.S. are attached to a major global brand, according to the CoStar report.

Major hotel companies see these international market fundamentals as a way to significantly expand by appealing to owners of existing hotels to take on a flag affiliation, a deal known as a conversion. Wyndham’s expansion plans in India significantly relies on conversion activity.

IHG is throttling forward with its own expansion abroad with its Holiday Inn Express brand across Europe. The company currently operates 277 of these hotels in Europe and plans to open more than 60 within the next five years, IHG announced last week.

The European hotel sector continues to lag the U.S. and China in recovery — potentially by as much as two quarters, Hilton CEO Chris Nassetta said on an NYU webinar earlier this month. Branded affiliation could help struggling hotel owners tap into new business, given the familiarity attached to the flag affiliation as well as customer loyalty programs and reservations systems.

Wagering on Vegas

Is now the time to cash out or double down on Vegas? Depends on who you ask.

Three weeks after Las Vegas Sands announced a $6.25 billion sale of its entire Sin City portfolio, investor Dreamscape announced it would partner with Hyatt to significantly renovate its Rio All-Suite Hotel & Casino.

The development plans include overhauling the 2,510-room resort into a variety of Hyatt brands. Leaders at Dreamscape nor Hyatt were ready to announce any of the brands beyond a planned 1,501-room Hyatt Regency.

“The reality is, in order to be successful in Las Vegas, you can’t cater to specifically one group and that be it,” said Dreamscape CEO Eric Birnbaum. “We’re going to have a diversified offering ranging from a convention-oriented customer to a leisure customer.”

The Hyatt renovation at the Rio is independent of the more than $1 billion hotel investment opportunity war chest Dreamscape announced earlier this month, Birnbaum added.

Convention Crash or Comeback: Las Vegas is the convention sector’s canary down the coal mine following the pandemic. We’ll find out soon enough how ready people are to get back to massive, city-wide conventions.

Following months of zero convention business, Las Vegas will host its first major convention in early June: the World of Concrete. Roughly 60,000 attendees were in Las Vegas for the commercial construction trade show’s 2019 event, and Nevada officials granted approval last week for the event to resume this summer following last year’s pandemic shutdown.

This is a major win for Las Vegas resort owners, as mid-week business relies heavily on the meetings and events sector while leisure takes over on the weekend.

Hyatt has been one of the most bullish hotel companies on the convention sector’s comeback, despite many analysts expecting it to be among the last type of revenue streams to recover from the health crisis. The hotel company saw a return of group business at its Chinese hotels as early as last July by hosting product launches for BMW, Gucci, and Volvo.

Group booking activity is only off by a relatively modest 10 percent for 2022, Hyatt CEO Mark Hoplamazian said last month on an investor call. Nearly 60 percent of recent group booking volume is for 2021.

“The volume is picking up,” said Kimo Bertram, Hyatt’s vice president of real estate and development. “We think, as more folks get vaccinated and testing becomes more prevalent as well, more people are going to be comfortable with traveling and gathering. We’re encouraged by the signs.”

But don’t let the optimism cloud any recovery forecasts. Las Vegas was a major laggard in the economic recovery from the Great Recession. Nevada didn’t return to pre-recession unemployment figures until 2017.

Let’s Make a Deal: The Rio conversion may be separate from Dreamscape’s hunt for hotel investment opportunities, but, given its development partner’s rosy outlook on the convention space, it seems natural Las Vegas has to be top of mind for a place to park capital.

Birnbaum did indicate earlier this month hotels catering to corporate travel or meetings and events would likely offer the best opportunistic pricing.

“We certainly like the macro trends and are certainly believers in Las Vegas. We’re also disciplined, and if the right opportunity presented itself, we’d certainly entertain it,” he said. “Are we expecting or anticipating anything happening imminently? No, but the acquisitions or opportunity business is a lumpy business and an unexpected business.”

Trump AWOL in Indonesia

A mega-hospitality development planned for West Java, Indonesia, appears to be moving ahead without one of its original partners who just so happened to be a former occupant of the White House.

Former President Donald Trump’s namesake company was attached to Lido City, a 7,400-acre resort project, since 2015. But the Trump Organization was nowhere to be found or mentioned when the project finally kicked off earlier this month, Forbes reports.

The Trump tie-in was still touted as recently as September of last year, but the former president has since lost his re-election, gone through a second impeachment trial, and the pandemic has cratered business at his hotel division. It’s only natural to ask yet again: does the Trump Organization have any future in the hotel business?

Finalized Sonesta Growth

Sonesta International Hotels Corp. finalized its acquisition of RLH Corp., owner of Red Lion Hotels, last week. The deal turns Sonesta into a major global player, with 15 brands and roughly 1,200 hotels.

The RLH deal comes after a very active 2020 for Sonesta, which added roughly 200 hotels to its portfolio due to disputes between major brands like Marriott and IHG and landlord Service Properties Trust, or SVC — a Boston real estate trust that also has a 34 percent stake in Sonesta.

Before its massive growth spurt, Sonesta entered the pandemic with about 80 hotels across North and South America as well as Egypt.

A Farewell to Jack

Jack DeBoer, founder of Residence Inn, died this month at his home in Kansas, the Wall Street Journal reports. Originally an apartment developer, he launched the hotel brand in 1976 as an extended-stay option for guests looking to book for weeks or months at a time. DeBoer sold the brand to Marriott in 1987.

His vision for the extended-stay hotel sector expanded and included developing and growing the Candlewood, Summerfield, and Value Place hotel chains.