Amy Bostock: How would you characterize Canadian hotel valuations in 2018?
Mark Sparrow: Outside of the Prairies, which continued its climb out of a slower operating period, Canadian hotel valuations witnessed a moderate uptick across the country, largely driven by continued growth in local operating performance — further enhancing profitability, continued availability of high-leverage financing at historically low rates and a strong buyer pool with limited product. That said, most groups contemplating a sale chose to refinance and reinvest in their hotels, given the favourable debt market and challenges finding quality replacement properties to recycle their capital — suggesting 2018 was a resounding “hold” market environment.
Mary Gagliardi: There was an overall increase in values driven by improved capitalization rates. Valuations in general seemed to come up closer to actual market rates, whereas in previous years, the gap was greater. There was increased competition for hotel assets, which drove valuation growth across all segments, with an increased average price per room. Consideration was given by appraisers for the “assumed” potential for increased rates, which tempered values.
Jake Pedler: Most markets in Canada experienced a moderate increase in value, while the usual suspects — Vancouver and Toronto — enjoyed a notable increase.
AB: How would you describe the 2019 Canadian hotel-transactions market so far?
MS: Towards the tail end of 2018 and into early 2019, we witnessed an increased number of groups looking for broker opinion of values, with an increased number of groups looking to capitalize on a strong investor appetite with limited quality product available on the market. We envision transaction volume in 2019 will bounce back to 2015-to-2017 volumes, as regional groups continue to expand their holdings and sellers look to take advantage of the amount of debt/equity sitting on the sidelines looking for a home.
MG: Current cap rates are holding steady as we move into 2019 and may lower with interest rates softening. There’s still a demand for the product, but we’re unlikely to see the same levels from the previous year. Hotel profits/results are continuing to grow, but at a more moderate rate and acquisitions seem to be slowing.
JP: Montreal, Niagara Falls, Vancouver and Toronto are experiencing a significant increase in value due to a large demand. We have a large pool of clients focusing on those cities with a small inventory available.
AB: What fuelled activity in 2018 and 2019?
MS: There was limited activity in 2018, primarily driven by the lack of quality product available in the marketplace. The limited sales that did occur were driven by paring down of existing non-core assets for sellers and regionally based private investors expanding their portfolios on the buy side. Debt remained readily available and an increased reliance on higher-leverage or mezzanine debt placed on top of traditional first mortgages helped buyers execute on fairly high valuations.
MG: [We saw an] increased buyer universe and heightened competition to hotel assets in 2018. In 2019, bond yields are decreasing, which will result in lower rates — possibly spurring borrowing for acquisitions, but more likely for improvements. We saw a lot of acquisitions in 2018, with an increase in hotel-transactions volume ($800 million). Expectations are that acquisitions will come down in 2019.
JP: In 2018, the hotel industry experienced a strong economy supported by a strong operating performance driven by rising room rate, creating more demand from investors. We’re not seeing much change in 2019, aside from more buying activities from national and international pension/hedge funds and private equity.
AB: Where are we seeing the largest churn?
MS: Full-service and focused-service [properties] in major markets continue to see the most interest from buyer groups, but with limited availability of product, groups are hesitant to sell without options for replacement. There’s also been a noticeable pick-up in activity in Alberta over the past six months.
MG: We see a lot of activity in Quebec especially around the Greater Montreal Area (GMA). There was also an increase in value for assets in the GMA market, with cap rates dropping heavily for them. Montreal and Toronto are very strong markets and seem poised to continue this trend
JP: Montreal, Niagara Falls, Vancouver and Toronto are the most-targeted markets. Full-service hotels will have the largest volume sale by dollar and limited-service will have the largest transaction by volume of properties.