Hospitality

The hospitality sector suffered considerably from the effects of the pandemic but proved to be remarkably resilient.  Hotel revenue per available room (“RevPAR”) declined dramatically and a significant decline in business travel and group meeting business, as well as in international and destination travel, caused major decreases in occupancy.  This particularly effected luxury and upscale hotels as well as properties located in major markets.  This was especially true in larger urban centers.  In several North American cities, some  luxury properties still remain closed.  However, many luxury properties are again demonstrating strong fundamentals. 

Within the overall hotel sector, midscale and economy hotel chains, including extended stay and select service properties, outperformed other categories during the pandemic and this resilience has continued, with the recovery of select service properties outpacing most other hospitality sectors.  Additionally, the industry’s ongoing trend toward increasing market differentiation and segmentation has continued unabated.  Multiple new or evolving lodging categories, such as experiential luxury, have developed as the industry’s target guest has become more sophisticated and diverse.  Today, both business and leisure travel have resumed at scale.  In fact, one of the primary challenges faced by hotel operators presently is the limited availability of a trained workforce.

Investors in the hotel industry have traditionally acquired assets to enhance returns and to provide protection during inflationary periods, particularly given the sector’s unique ability to continually adjust pricing levels on an immediate basis.  The industry has repeatedly demonstrated its capacity to recover following significant global economic downturns, including the periods following the 9/11 terrorist attacks and the 2008 financial crisis.  While supply in the sector grew solidly for a period of over ten years prior to the pandemic, impacting both pricing and RevPAR, supply growth since the pandemic has been constrained.  The hotel sector experienced a significant drop in new construction starts which will benefit existing assets for some time.  Furthermore, the previously high levels of new construction in many sectors of the hospitality industry have given rise to some noteworthy market opportunities as economies recover and travel rebounds.  When new product does enter the market, many older existing assets will, of necessity, be re-flagged or sold, some at deep discounts to inherent value given present market conditions.  These assets present particularly appealing opportunities for those following a renovation and rebranding strategy.

For investors, hotels offer both diversification and attractive risk adjusted returns relative to many other asset classes.  Over decades, the hotel sector has demonstrated remarkable resilience.  It is currently offering attractive opportunities for distressed investment.  Particularly appealing are situations where properties and portfolios can be acquired at favorable pricing levels, particularly assets that can benefit from renovation and rebranding to more effectively meet current consumer demand and that can achieve enhanced performance through active operational management.

The industry’s current practice of separating fee oriented management activities from property ownership, along with its continuing consolidation and reorganization following significant merger and acquisition activity and increasing product segmentation, create opportunities to selectively purchase hotel properties in both urban and resort locations, allowing investors to control prime assets that typically trade infrequently.  Additionally, despite the growth of large, publicly held international investment and operating companies in the hospitality sector, hotel ownership remains highly fragmented in many markets.  

Prescott considers investment in strong hotel properties that benefit from sound competitive, locational and operating characteristics as well as assets that have attractive fundamental attributes but will significantly increase in value through market repositioning or redevelopment.  The participation of capable operating management with a meaningful financial commitment and significant experience in the relevant sector of the hospitality market is crucial and a prerequisite to Prescott’s participation in hotel and resort investments.  In hospitality investments, Prescott is especially attentive to opportunities to acquire portfolios of assets, particularly in circumstances where such acquisitions may support or complement specific strategic and operating objectives.