Many factors continue to align and support hotel investment activity in Canada. Sustainable operating performance, the low cost of capital, relatively steady markets and an abundance of available product are key factors laying the foundation for another active year within Canada’s hotel investment market.

Year-end investment volume is likely to match or exceed the $1.1 billion in transactions in 2012, as Q1 deal volume was on par with the start of last year. There continues to be a range of listings across the country, from small limited-service hotels in secondary and tertiary markets to major urban assets, which appeal to a diverse group of pre-existing buyers as well as new entrants looking for meaningful opportunities to enter Canada.

Preliminary estimates peg Q1 2013 Canadian hotel-transaction volume at more than $380 million, up from the prior three quarters, in line with the $384.4 million reported in Q1 2012. The highest-priced trade in 2012 was the 380-room Four Seasons Hotel Toronto, which was acquired by Camrost/Felcorp for $142.5 million ($375,000 per room or $2 per sq. ft.) and is now being converted to residential condominiums. This transaction initiated a trend in which developers and real-estate companies accounted for a larger portion of investment activity, topping 41 per cent of total hotel transaction volume in 2012. This buyer group was able to underwrite unrealized value for hotels that had become non-core or obsolete as a result of time, changing market conditions or due to physical or location constraints. Properties that provided strategic opportunities were also targeted. It was a defining year for developers as they purchased underperforming hotel assets with untapped potential as residential, retail, private school, student/seniors/retirement residences and other commercial uses.

Non-traditional hotel buyers continue to be active, as evidenced by the sale of the 127-room Battery Hotel & Conference Centre in St. John’s, N.L., to Memorial University in March 2013. Although it occupies one of the city’s most scenic downtown locations on Signal Hill, the hotel required substantial capital. The property, which includes two restaurants, meeting rooms and office space, also provided much needed room for a prominent university nearby. With a purchase price of $9.5 million, and plans for the university to spend up to $16.2 million on renovations, the property will be transformed into a graduate residence as well as university offices and public engagement space. As institutional owners and larger hotel investment companies continue to strategize long-term plans for their portfolios, and pare down non-core assets, it’s anticipated more product will come to market that will be value-enhanced through alternate-use considerations.

Lead sellers in 2012 included Kingdom Hotels, Holloway Lodging REIT (now Holloway Lodging Corporation), Sutton Place Grande Limited, Dolemo Development Corporation and SilverBirch Hotels & Resorts. The most active buyers included Temple REIT, Camrost/ Felcorp, Kingsett Capital, Lanterra Developments and Pomeroy Group. The top-five sellers by volume only represented 34.9 per cent or $373.8 million of total volume, while the top-five buyers spent 43.5 per cent or $466.8 million. Although a number of portfolios were marketed in 2012, the only one that sold was the combined $50.9-million acquisition by Pomeroy Group of the Grande Prairie Inn, Stonebridge Hotel Grand Prairie and Stonebridge Hotel Fort St. John. 

While only five portfolio deals have occurred since 2011, the transactions do provide an attractive way for the right buyer to grow its presence when brand and/or location synergies can be capitalized. Noteworthy in 2013 was the acquisition by Temple Hotels Inc. of the Centennial Nova Scotia Hotels portfolio from Centennial Hotels Limited, the original developer/operator of the hotels. Representing the second-highest-priced portfolio in terms of overall transaction value in the past three years, the transaction included the 203-room Prince George Hotel in Halifax, the 200-room Cambridge Suites Halifax and the 146-room Cambridge Suites Sydney, in N.S., traded for an aggregate price of $87.25 million. The deal provided Temple entry into Atlantic Canada with immediate scale, furthering their objective for coast-to-coast coverage.

Private Canadian and off-shore capital have been involved in the largest single-asset deals to date in 2013 with the trade of the 428-room Metropolitan Toronto in January for $39.7 million ($92,800 per room) and the 600-room Hilton Toronto in February for $140 million ($233,000 per room). Both deals allowed the buyers to gain a significant foothold within the city core, but both were quite different offerings as the Hilton sold encumbered with brand, while the Metropolitan will undergo a renovation program and be branded as a DoubleTree by Hilton.

With current market steadiness, Canadian hotel investment is showing no signs of slowing in 2013; however, we do see the market providing a somewhat tenuous window of opportunity, with change expected over the long term. Starting in Q3 2012, there was a shift in the balance of committed sellers to engaged buyers, although highly disciplined pricing and underwriting on both sides avoided this from becoming a full-fledged buyer’s market. While fewer buyers are generally participating in bid processes, the active participants are highly qualified.

There are also a number of active opportunistic buyers aggressively pursuing product in strong locations with identifiable value through capital investment and/or repositioning. For example, with Saskatoon poised to be one of the top three growth markets in terms of GDP during the next three to four years, Temple Hotels’ (Temple REIT at the time of the sale) acquisition of the 250-room Saskatoon Inn in November 2012, for $37.2 million with an estimated $10 million capital needed, facilitated the buyer’s desire to be within this target. We anticipate more hotel investment companies and institutions will be strategically assessing not only the market they wish to be in but also the profile of the asset that will best align to their corporate strategy and objectives.

The one exception has been suburban Toronto, which has seen upwards of 16 hotels come to market in the past 18 months. Buyer focus has become fragmented as options are weighed, which has compressed pricing. There have also been a number of instances in which asset disposition marketing programs have been prolonged, particularly for assets encumbered by brand, management, a union and/or land lease or with significant capital needs. Also contributing to extended timelines is brand availability within a given market, realistic pricing expectations that account for property conditions as well as market fundamentals.

There is far more liquidity in the mortgage markets now than we’ve seen since 2007, up and down the capital stack and from all the major providers of debt capital to our industry. There is plenty of senior, mezzanine, bridge and preferred equity and construction-loan money available. Yields have narrowed and there will be more competition from lenders in 2013, which will ultimately benefit borrowers.

The good news is we continue to see very little distress in the market and owners have, for the most part, been able to stay the course during disposition processes. Average per-room pricing for Q1 2013 has been reported at approximately $120,- 000, down from Q1 2012. From 2011 to 2012, per-room pricing had remained relatively stable, at $107,000 in 2011 and $100,000 in 2012. Cap rates were also stable during this period, although we feel these may start to creep up in some markets and value growth will come from overall economic improvements and cogent strategies for income enhancement through capital investment and asset repositioning.

It’s expected that 2013 will be one of the most active transaction years on record, as a result of a wide array of hotel and resort assets on the market, a diverse representation of buyer equity and highly attractive debt financing.


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