Hotels — once considered risky assets — are attracting scads of private equity
A growing labour shortage, the skyrocketing Canadian dollar, record-high gas prices and dwindling in-bound tourism from the U.S. were all major factors in the performance of hotel companies in 2007, but they still couldn’t stifle the swell of investment pouring into the industry. New players continue to muscle their way into the lodging business, ushering in major ownership changes at several of the nation’s biggest hotel companies in the process.
In 2006, when the Ontario Municipal Employees Retirement System (OMERS) bought a bundle of properties from Fairmont Hotels and Resorts for $1.5 billion, it ignited a trend that rolled into 2007, as pension funds targeted hotels as investment vehicles for long-term profitability. In October 2007, Fairmont sold Delta Hotels to Victoria-based British Columbia Investment Management Corporation (bcIMC) for an undisclosed amount. Then two months later, bcIMC acquired CHIP REIT for $1.2 billion in a 32-property transaction. And in September of last year, Westmont Hospitality teamed up with InnVest and Caisse de dépôt et placement du Québec to buy Legacy Hotels for $2.5 billion, making 2007 the year of the mega-deal.
“Many people see the recent transactions as a validation of hotels as being real estate worthy of institutional investment, rather than an asset class too volatile and risky for institutional money,” Ed Pitoniak, president and CEO of bcIMC Hospitality Group told Hotelier in May.
While pension funds were putting together mammoth deals for Canadian hotels, other investors were gobbling up shares and taking blue chip companies off the stock market. Four Seasons Hotels and Resorts — a Toronto-based company founded by Isadore Sharp, which was publicly traded for years — was privatized in a $3.7-billion deal after Sharp, Bill Gates’ Cascade Investment and Saudi Prince Alwaleed Bin Talal formed a powerhouse partnership. This agreement came just one year after Fairmont, another iconic Toronto-based lodging company, dodged a hostile takeover by corporate raider Carl Icahn and went private with the help of the Prince and U.S.-based Colony Capital LLC.
But the mega-deals weren’t just a Canadian phenomenon. Last year, Hilton Hotels, based in Beverly Hills, Calif., was acquired by private-equity firm The Blackstone Group for a whopping $26.6 billion, entrenching the trend further.
With the movement of private equity into hotel ownership, the volume of Canadian hotel transactions hit dizzying highs in 2007. According to the 2008 Canadian Hotel Investment Report by Toronto-based Colliers International Hotels, the total value of transactions last year approached $4.6 billion as 168 hotels changed hands. That represents a 55.3 per cent increase in volume and 37.5 per cent jump in the number of properties. With companies being privatized alongside some significant changes in Canadian REIT regulations and in addition to widespread consolidation in the industry, which is reducing the number of active players, it will be interesting to see what the future holds for Canada’s remaining public hotel companies and REITs.
While more properties were sold than ever before, hotels on average performed reasonably well last year, especially considering the negative forces that conspired to hamper tourism across the country. According to PKF Consulting in Toronto, in 2007 the national occupancy rate rose by 0.6 percentage points to 65.1 per cent. ADR reached $127.06, a 3.7 per cent increase from $122.57 in 2006, while RevPAR increased 4.6 per cent from $79.07 in 2006 to $82.74 last year. Interestingly, the region witnessing the greatest percentage increase in RevPAR was the Northwest Territories, with an 18 per cent jump from $76.47 to $90.23. Saskatchewan and Alberta also welcomed significant RevPAR increases of 15.6 per cent and 10.3 per cent, respectively. According to Brian Stanford, director of PKF Consulting, Calgary and Edmonton experienced strong demand growth driven by the energy sector, and even Winnipeg enjoyed some of the effect of Canada’s booming natural resources industry. Quebec was the only province to see decreases in occupancy, ADR and RevPAR for 2007.
On the economic front, Statistics Canada reported real GDP increased by 2.7 per cent in 2007, down slightly from the previous year. During that time, Americans took fewer trips to Canada and there was an overall decrease in spending. With the U.S. sub-prime mortgage meltdown leading to a sluggish American economy and the diminished buying power of the greenback in Canada, many Americans opted not to cross the border.
But there’s good news — while fewer Americans made the trip north, tourism spending by Canadians in Canada increased 6.7 per cent. And according to Tony Pollard, president of the Ottawa-based Hotel Association of Canada (HAC), the industry continued to be a significant contributor to the Canadian economy. In 2007, hotels employed 378,000 people directly or indirectly on a full-time, part-time or seasonal basis, generating some $18.6 billion in total wages. Total revenue generated by hotels for 2007 was $17.9 billion with $6.9 billion collected as taxes for the federal, provincial and municipal governments.
Make no mistake — Canada’s hotel business is on solid ground. In 2007, the Top 40 hotel companies posted combined sales of $14.5 billion from a total of 1,808 properties, a growth of 12.4 per cent over the $12.9 billion generated last year. Four Seasons and Fairmont ranked first and second once again, with combined revenues of $6.6 billion, representing 44.6 per cent of the total revenue for the Top 40 companies. And, though the companies are no longer Canadian owned, the fact that they’re headquartered here make them an important part of the hotel landscape. Westmont Hospitality climbed from seventh to third place after acquiring Legacy REIT, and the Mississauga, Ont.-based company is now a prominent player in the Canadian hotel industry, with 176 hotels in Canada and gross revenues of $1.3 billion. The acquisition helped grow its gross revenues by 187 per cent; however, the total number of properties increased by only eight per cent. Rounding out the Top 5 are Starwood and Marriott, generating revenues of $730 million and $690 million, respectively.
With record investment, many players (big and small) are currently eyeing new deals, and there are a multitude of hotel projects at various stages of development across the country. Marriott continued to expand its portfolio of hotels in Canada last year with the addition of six new properties and it plans to add to its 56 hotels by building seven more by the end of this year. Starwood is aiming to open 17 new hotels in Canada, with the recently renovated and rebranded Westin Bristol Place Toronto Airport and Montreal’s Aloft among its newest additions. Best Western showed strong growth in Alberta and the Atlantic provinces, and the world’s largest hotel chain is targeting further Canadian expansion in both Quebec and Saskatchewan. It has 184 hotels across the country.
Pacrim Hospitality was active in 2007, growing its portfolio by 23 hotels and increasing total sales by $27 million or 42.2 per cent to $93 million. With its acquisition of management contracts for 10 of the Holloway Lodging REIT hotel properties located in northern Alberta and B.C., Pacrim moved up from number 23 on the 2006 rankings to number 20 this year. Easton’s Group, based in Markham, Ont., is one of the smaller hotel companies in Canada but it’s thinking big. Its revenues grew 58.5 per cent last year and it’s planning continued expansion with the opening of three new hotels in 2008 after opening just one property in 2007. Hilton opened five hotels in Canada in 2007 under various banners (Hilton, Hilton Garden Inns, Hampton Inns and Suites, Embassy Suites), with revenue increasing by almost 10 per cent.
Another emerging trend last year saw the world’s largest hotel companies shift their focus to developing properties internationally. Starwood’s active pipeline includes 500 hotels worldwide, with approximately half of those outside North America. In late 2007, InterContinental Hotels Group (IHG) announced a $1-billion worldwide relaunch of the Holiday Inn brand family, which comprises the Holiday Inn and Holiday Inn Express brands. IHG has big development plans in India, with 14 new-look Holiday Inns expected to be built in the country by the end of this year. In fact, Holiday Inn remains one of the world’s fastest-growing hotel brands with some 365 hotels in its global pipeline.
Ultimately, transaction activity in the Canadian hotel sector should slow down in the coming years. According to Colliers’ report, uncertain economic conditions in the U.S., driven by tightened debt markets, will mean a drop-off in the number of large-portfolio transactions. But with new hotel development chugging along at a steady pace, supply in most markets should increase. The real question hoteliers want answered — will there be demand to match it?