What has made 2016 a record-breaking year? The numbers speak for themselves: $3.8-billion in transaction volume surging through the Canadian hotel marketplace as of third quarter, fuelled by massive industry consolidation on both global and domestic scales. “It’s a lot easier to underwrite today than it would have been three or four years ago, especially in Toronto or Vancouver where you’re seeing significant double-digit RevPAR growth,” says Bill Stone, EVP at CBRE Hotels, based in Toronto. “So you have a strong Canadian economy, a safe-haven aspect, low interest rates and strong returns, plus strong potential of returns. It’s a perfect good storm in that context.”
It’s been nearly 10 years since the industry last saw a comparable level of investment activity. During ’06 and ’07, the industry enjoyed a combined $4.9 billion in transaction activity after CHIP REIT and Legacy Hotels REIT were privatized and the Fairmont Canadian Resort portfolio was acquired for $1.7 billion.
Since the recession, Canada has established itself as a place of interest for both domestic and international buyers. Growing availability of debt capital, low interest rates and strong potential returns have contributed to an unprecedented level of activity in the country. By the third quarter of 2016 alone, 12,703 rooms had changed hands. “All the factors have come together to make [Canada] ripe for this level of activity,” says Robin McLuskie, VP of Hotels at Toronto-based Colliers International Hotels, who adds that operating performance has improved since the recession. “It’s not really as much a local story as it is a global story, where you see the larger M&A deals,” she says. “I think there’s some of that capital leaving China, leaving Asia, and different parts of the world are looking to invest in Canada.”
In the spring, industry members stood at rapt attention as China’s Anbang Insurance Group Co. disrupted the Marriott-Starwood merger with a $12.8 billion offer. But, by late September, Marriott became the proud new owner of the Stamford, Conn.-based company, growing its portfolio to 30 brands comprised of 5,700 properties and 1.1 million rooms. “It is, in many ways, about brand dominance and Marriott has assumed that position really well,” Stone sums up.
In August, Hong Kong-backed Bluesky Hotels and Resorts Inc. snapped up Toronto’s InnVest Real Estate Investment Trust in a deal valued at $2.1 billion, representing 14,500 rooms across Canada. “This transaction is a winning outcome for all stakeholders,” says Drew Coles, president and CEO of InnVest, which presided over 107 properties in Canada, as well as a 50-per-cent interest in Choice Hotels Canada.
Dubbed a “category-killer” this year by industry pundits, the Bluesky deal is predicted to be the first of many for the privately held company, whose leadership is interested in making capital investments to improve the quality of its assets and expand its base. “This transaction is an investment that will establish a global platform from which Bluesky will continue to pursue growth opportunities in North America,” says Li Chen, the president and CEO of Bluesky. And, the industry consolidation didn’t stop there. Soon after, AccorHotels finalized its purchase of FRHI Hotels & Resorts Inc. In September, APA Hotel Group, the largest hotel network in Japan, inked a deal to buy Coast Hotels for $210 million, marking a new era of expansion into North America.
These deals followed in rapid succession after the mega-deals of 2015, including IHG’s purchase of Kimpton Hotels & Restaurants for $430 million, Marriott’s purchase of Delta Hotels & Resorts for $168 million and Wyndham’s acquisition of Dolce Hotels and Resorts for $57 million.
UNCOVERING THE REAL STORY
Looking back at 2016, Stone is quick to point out that the big deals disguise the reality of transaction activity. “There’s big M&A activity, but fewer single assets that are trading,” he explains. “And a big part of that is there’s been a significant decline in Alberta and Saskatchewan in terms of activity.”
The Prairies suffered a 58.8-per-cent drop in volume by Q3, compared to the previous year, generating only $63.5 million in transaction activity. In contrast, Ontario racked in a little more than $1 billion in trades alone, boasting a 37-per-cent increase. On a positive note, Colliers reports an interest in limited-service assets, with active trading between private investors and hotel investment companies alike. “It’s interesting because the headlines are all showing these larger deals, but there is still a lot of trading activity in limited-service,” she says. “There’s still tremendous activity on the transaction side in general, in the $5 to $25 million deal range. That’s a reflection of lots of capital being available from the domestic buyers, so we’re seeing tons of interest from local players as well.”
Local players such as Markham, Ont.’s Easton’s Group of Hotels and Mississauga, Ont.’s Silver Hotel Group, which each completed acquisitions worth $90 million, last year. Easton’s nabbed a 14-property hotel portfolio from InnVest REIT for $90 million, which included 1,571 keys across the limited, select and full-service segments in both central and Eastern Canada. In August, Silver Hotel Group acquired the Novotel Toronto Centre and Pantages Hotel Toronto.
The weakened Canadian dollar may have attracted increased attention to Canada, but Dimitrios Zarikos, outgoing regional vice-president and GM of the Four Seasons Toronto, thinks it may be more than that. “The first thing that comes to mind is the Canadian dollar is attractive right now — but also, since 2008 and the financial crisis, Canada has been put on the map and people are paying attention to things beyond maple syrup.” So, when Four Seasons Toronto was put on the market, the interest was palpable as potential buyers flooded in to view the property. “There was huge interest in the hotel — [we took] maybe two, three dozen tours around [the property],” he says. When Shahid Khan — the founder of Flex-N-Gate Group and CEO of the Jacksonville Jaguars of the National Football League — offered $225 million for the four-year-old asset, he set a national record at $868,725 per room. “I don’t think we could have found a better person to buy this hotel,” says Zarikos. “He is enormously proud of owning the Four Seasons Toronto.” (see story on pg. 10)
THE COMPETITIVE ADVANTAGE
Rest assured, there’s still room for strong independent hotels to thrive in a marketplace dominated by frantic M&A activity, asserts Stone. “The hotel-purchase decision is made up of a multitude of factors — branding, positioning, location, services, amenities and the quality of the property. All these things help shape purchase decisions.”
And as hoteliers gripe about OTA commissions in the 15- to 30-per-cent range, the industry consolidation will help them rally to take back market share from profit-eating third-party travel sellers. “We want to help dispel the myth that other travel websites offer better rates for our hotels,” says Karin Timpone, Marriott International’s global marketing officer. The company recently announced new, lower hotel booking rates exclusive to its Marriott Rewards loyalty program members who book directly through its website, app and other channels.
The business efficiencies abound for merged portfolios. “Ultimately, from a buying-power standpoint, when you’re running tens of thousands of rooms, it has an impact on the brand’s ability to acquire FF&E, amenities and all the major acquisitions in a hotel, on a much more efficient basis,” says Stone, adding leaders will be able to flex more muscle when negotiating corporate travel rates.
And, while it may be too soon for some of the newer deals, there are already initiatives in the pipeline. Several hotels will receive a face-lift, thanks to new ownership. Execs at APA Group have described plans to use Coast Hotels as a vehicle to help introduce a new urban-style hotel concept in North America. Features include LED-equipped showers and water-conserving fixtures, as well as other eco-centric initiatives that will allow the hotel to reduce its carbon footprint.
According to a Carlson Wagonlit white paper published in June, the mergers may give hoteliers more heft when negotiating with corporate travel buyers, especially in markets with fewer options. And, now that Marriott is expected to capture nearly a third of all corporate travel spend in 14 of 20 of the world’s top cities — including 41 per cent in Toronto — negotiations will be fierce.
At the same time, these mega-mergers will spell out other benefits for the chains as well, including loyalty programs that will help drive business away from the OTAs, and being able to expand lifestyle brands in certain markets that will help combat sharing-economy providers such as Airbnb.
The big question on everyone’s mind is what 2017 will bring. After a rough 2016, Alberta is expected to lead the country in GDP growth and, together with Saskatchewan, should experience a rebound in investment activity. McLuskie adds that while foreign buyers are purchasing larger platforms, they may not desire the entire portfolio, so we can expect more trading activity on an individual basis.
Stone hints at two more big deals in the works, slated to take place early 2017, but, he asserts, the level of activity won’t be as earth-shattering as 2016. “I don’t think it’s going to be quite as strong as [last year]. If you include the Bluesky deal, it’s going to be hard to beat $3.8 billion in activity, but we see continuing demand, accelerating offshore interest and strong fundamentals.”
Volume 29, Number 1
Written by Jackie Sloat-Spencer