Many publicly traded brand hotel companies, which historically owned and operated property, continue to dispose of owned real estate assets while focusing on growing more predictable management and/or franchise fee income, as well as expanding their distribution networks and overall critical mass. Many publicly traded pure hotel investment firms continue to acquire assets while also pruning their portfolios and disposing of non-core assets and/or selling hotel properties where they are able to "bake in" recent rapid appreciation gains.
In addition, private equity firms, taking advantage of continued inexpensive debt, have utilized high levels of leverage to continue to be major acquirers of corporate hotel enterprises and large portfolios of hotels. Furthermore, with institutional investors under pressure to "get money out," coupled with the significant amount of foreign capital flowing in to the US from all parts of the world, investment in the domestic lodging industry is anticipated to provide superior risk adjusted returns when compared to other investment options.
Given that the outlook for the US lodging industry remains positive with profits anticipated to continue to grow to record levels, capital, both debt and equity, will continue to robustly flow into the sector. Rising cash flows through both market factors (i.e.: ADRs increasing above underlying inflation levels), and ever more sophisticated asset management techniques should more than offset anticipated modest increases in capitalization rates which cannot compress much further.
The CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major US hotel sale transaction market (above $10 million single asset, not part of a portfolio allocation). Of 20 such trades that occurred through the first quarter of 2007, the largest single-asset US hotel sale thus far this year was the $575-million acquisition by a joint venture between Morgan Stanley Real Estate Fund V US, Trinity Investments LLC and Dowling Co., of the Makena Resort which includes the 310-room Maui Prince Hotel in Makena, HI. On a per-room basis the transaction equates to $1.85 million; however, it is extremely important to note that the sale included in addition to the hotel, two 18-hole Robert Trent Jones Jr. golf courses, 1,317 acres of vacant land, and the stock of the Makena Wastewater Corp.
- The majority of single-asset hotel trades of $10 million or more occurred along both US coasts.
- Major urban 24/7 markets such as Boston, Chicago, Los Angeles, New York, and San Francisco continue to be of interest to hotel investors due in part to high land and construction costs which create relatively high barriers to entry for new hotel product.
- Almost half of the single-asset US hotel trades of $10 million or more that occurred during the first quarter of 2007 were of properties that do not have an international "brand" affiliation.
- The recent rapid appreciation of US hotel assets is clearly demonstrated in the recent $136-million trade of the Washington Marriott in Washington, DC which was acquired 14 months earlier for $90 million. Additionally, Campton Place in San Francisco which was just acquired for $58 million by Taj Hotels Resorts & Palaces previously sold for $44 million 18 months ago.
The fundamentals of the US lodging industry are highly dependent on GDP growth, and any semblance of a slowing economy will have a swift impact on demand and the pricing of the nation's hotel rooms. Finally geopolitical issues and the continued threat of terrorism on domestic soil will clearly remain high on the risk spectrum for the US lodging industry for the foreseeable future.Daniel Lesser is senior managing director-industry leader, valuation & advisory services-hospitality & gaming group of CB Richard Ellis in New York City. The views expressed in this article are the author's own.
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Daniel Lesser
Daniel H. Lesser, President & CEO of LW Hospitality Advisors LLC (LWHA), brings more than 35 years of expertise in a wide range of hospitality operational, investment counseling, valuation, advisory, and transactional services. He provides services to corporate, institutional, and individual clients as well as public agencies on all facets of hospitality real estate including: litigation support and expert testimony, site evaluation, highest and best use analysis, appraisals for mortgage, acquisition, and portfolio management, workout strategies, operational analysis, development consulting, property tax assessment appeal evaluations, economic impact studies, fairness opinions, deal structuring, and negotiation of management and franchise agreements. Mr. Lesser had been retained in connection with a broad variety of lodging assets throughout the Americas, as well as in Europe, the Middle East and Asia.
