It’s been roughly 18 months since COVID-19 emerged, growing into a global pandemic that brought the hotel industry to a screeching halt. With multiple lockdowns, quarantine regulations and border closures, it was difficult to know exactly when people would feel confident returning old ways of travelling. During this lengthy period of uncertainty, hotels saw little to no commercial activity, giving operators time to pause and reflect on their future strategy. Now, as travel continues to recover, a renewed hospitality market is emerging, inevitably impacting the way hotels envision their merger-and-acquisition (M&A) plans for years to come.
The first half of 2020 was devastating for the hospitality industry as the pandemic halted business travel and forced many travellers to cancel or re-schedule vacations. During this time, global M&A activity collapsed.
“The number of announced M&A deals globally decreased from 2,349 in February 2020 to 1,984 in March 2020, while deal value decreased from US$151.2 billion to US$129.9 billion,” says Ralph Hollister, travel-and-tourism analyst at U.K.-based GlobalData.
Canada’s largest hospitality transaction by sale price in 2020 was the Westin Edmonton, a 416-room hotel purchased by MH Hotels (WEDM) Inc. for nearly $66.2 million. Other notable transactions during the year included the sale of The Albert at Bay Suite Hotel in Ottawa, acquired by Albert/O’Connor Properties GP Inc. for $58.5 million, and a 40-per-cent interest in the Hazelton Hotel in Toronto purchased by First Capital Realty for $29.8 million.
“The impact of COVID-19 cannot be minimalized as it relates to hotel transactions over the last year, and these impacts have rippled through the entire capital stack,” says Luke Scheer, executive vice-president of CBRE Hotels. “Investors have been forced to hold on to their current liquidity positions, and opportunities to deploy capital in the space have been limited due to pricing disconnects between buyers and sellers. Many buyers have been pushed to the sidelines as there has been hesitancy from sellers to bring assets to market.”
Since hitting historical lows, conditions remained poor for the first half of 2021, but the pent-up demand for travel is overflowing and providing a glimpse into post-pandemic life. While the summer has proved to be a lifeline for hotel companies, particularly those with resorts or assets in other drive-to destinations, the fall and winter months are likely to be more challenging as domestic leisure travel subsides.
“The good news is that there remains strong demand for hotel investment, and as confidence grows alongside the recovery, the transaction market is poised to improve,” says Scheer. “Over the last few months, we’ve seen a significant increase in the volume of inquiries from owners looking to strategize the most opportune time to bring their asset to market. As fundamentals improve and the level of confidence for buyers, sellers and lenders grows, so too will the hotel investment market.”
Currently, the transaction volume with domestic private investors is consistent with 2020, representing about half of the transaction volume, according to Scheer. Conversion transactions are also on the rise.
“Domestic private investors represent approximately 50 per cent of transaction volume year-to-date 2021, which is consistent with 2020 levels,” says Scheer. “Where we have continued to see an emerging trend is the transaction volume related to government agencies and local municipalities across the country purchasing hotel assets for the purpose of conversion, and in some instances social housing. In 2020, this represented approximately 17 per cent of transaction volume and increasing to approximately 30 per cent for year-to-date 2021.
In comparison, foreign investors will soon be knocking at Canadian hotels doors once the economy stabilizes and there’s an increase in buying opportunities.
“Foreign capital remains very interested in the hotel space in Canada, however, suitable product for this buyer group has not been available as these investors typically look for larger resort or urban-core assets,” says Scheer. “Canada continues to be viewed as a safe environment for investment, and as the economy continues to re-bound, foreign investors will be looking to deploy capital in the hotel space across Canada.”
In terms of hotel-segment activity, limited-service hotels are seeing more activity for people quarantining or working in healthcare. With increasing vaccination rates, the activity has shifted to resort hotels as hyper-local travel soars.
“We have seen the most activity in the limited- and select-service assets in tertiary markets trading between hotel-investment companies and private investors. Approximately 70 per cent of transactions have been limited- or select-service hotels year-to-date 2021,” says Scheer. “We also continue to see strong interest in resort assets across the country. During the COVID-19 pandemic, these assets have shown a strong level of resiliency and investors are now looking more closely at this asset type to diversify their portfolios further. Drive-to resort destinations for ‘staycation’ experiences will be a strong segment for the remainder of 2021, and we expect that trend to continue into 2022.”
In this context, K2 Group, a privately owned investment company, has been working behind the scenes to expand its hospitality portfolio, in addition to its oil-and-gas assets, with the recent acquisitions of Ramada Fallsview (August 2019) and Travelodge Lundy’s Lane in Niagara Falls, Ont.
“We acquired the Ramada Fallsview and Travelodge Bonaventure hotels in Niagara Falls — a market that is primarily tourism focused. Even though our occupancy and RevPAR suffered at the height of the pandemic, our other investments have been performing well,” says Thomas Jacob, vice-president at K2 Group. “We’ve started seeing strong revenue numbers in our hotel portfolio as vaccination rates continue to rise and the world opens up again. There’s going to be opportunity in the coming months as government subsidies wind down from an M&A perspective. Strategically diversifying our asset base with investments in petroleum, senior’s retirement residences and real estate has worked to our advantage.”
Additionally, Scheer notes that in 2021, the most significant deals are a part of a larger trend within the industry.
“The most significant transactions are part of a larger trend we’re currently witnessing, and that’s the conversion of hotel product to alternative uses. In the majority of these cases, the buyers are converting older hotels or hotel sites into social housing, multi-residential, seniors and students residences,” says Scheer. “In 2020, approximately 36 per cent of hotel transaction volume was for the purposes of conversion to alternative uses, and in 2021, we’ve seen a similar trend with over 40 per cent year-to-date, including the Days Inn Vancouver Metro, Ramada Vancouver Downtown and Super 8 Toronto Downtown. We expect this type of transaction to continue across the country for the remainder of 2021, as certain product is suitable for conversion both physically and from a location standpoint within its community.”
The largest hotel companies, including Accor, Choice, Hilton, IHG, Marriott and Wyndham, are well positioned to expand the number of properties due to their corporate infrastructures. However, smaller, independent hotels will be forced to listen to offers from their larger competitors.
Despite the challenges fuelled by the COVID-19 pandemic, buyers, sellers and lenders are largely optimistic about the transaction market in 2022 and beyond. It’s expected that the industry will grow increasingly competitive as well.
“The pandemic has been a catalyst for swift, cost-based transformation, resulting in digital automations, more efficient labour-ratio models and increased operational efficiencies, many of which will be permanent — a silver lining of the downturn,” says Jacob.
By Nicole Di Tomasso