Equity Yield Rates on the Decline

HVS continually tracks the rates of return on the assets on which we consult. In our most recent review, we found that equity yield rates, on average, have shown a continued trend of decline in the full-service and luxury hotels sector, as well as the lower-tier limited-service sector, with the select-service and upscale limited-service sector showing stability.

Equity yield rates were notably lower for full-service and luxury hotels, averaging 16.4% for the year-to-date 2019 period, which is 140 basis points (bps) below the 17.8% most recent peak level recorded in 2017. This decrease was driven largely by a decline in the number of transactions thus far this year. Moreover, 31% of the recorded transactions with derived equity yield rates occurred in New York City, which drove down the average modestly.

Equity yield rates for the select-service and upscale limited-service hotels averaged 18.6% for the year-to-date period ending September 2019, registering a slight uptick from the 2018 level (or virtually no change). The stability in this asset class reflects that a low point was found in the 2018/19 period; a difference of essentially one percentage point is considered reasonable and normal between this category and the lower-tier limited-service category.

The average equity yield rate for lower-tier limited-service hotels similarly showed a notable decline in 2019. The average for the year-to-date period fell to 19.5%, or 150 bps lower than the 2017 peak. Factors that have contributed to this trend include several hotels in the Pacific Northwest that sold with equity yield rates in the 17.0% to 18.0% range; however, most sales shown with equity yield rates did trade in the 19.0% to 20.0% range.

Total property yields (overall discount rate) similarly declined for the full-service and luxury hotels, as well as the lower-tier limited-service category, while holding steady in the select-service and upscale limited-service category. Total property yields are averaging 10.0% thus far in 2019 for the full-service and luxury category. Higher levels of 10.8% for select-service and upscale limited-service hotels and 11.4% for lower-tier limited-service hotels were recorded.

Rates of return are calculated using the actual sale prices of the hotels with forecasted cashflows and inputting market terms for fixed-rate financing on a ten-year hold.