Notable observations from the LWHA YTD Q2 Mid Year 2011 Major US Hotel survey include:

• 17 major US hotel sale transactions greater than $100 million occurred in the first half of 2011, compared with 10 during all of 2010, and only five which were consummated during each calendar year 2008 and 2009;
• New York and San Diego are the most active US hotel sales transaction markets with a combined 17 major deals totaling $3.1 billion, or roughly half of the total dollar volume for the nation so far this year;
• Pebblebrook Hotel Trust is the dominant acquirer of major US hotel transactions with six so far this year totaling over 1,500 rooms and aggregate purchases of over $500 million. Chesapeake Lodging Trust follows with four acquisitions totaling close to 1,000 rooms for an aggregate amount of just over $300 million;
• The St. Regis Washington DC was purchased by Westbrook Partners for $100 million, or 40% less than the $170 million previously paid by Claret Capital, a private equity firm based in Ireland, who acquired the hotel at the peak of the market in 2007;
• Available capitalization rate data in connection with several recent major US hotel trades are illustrative of the low cost of REIT capital and/or perceived upside of urban hotel assets in top US markets: |
  • Pebblebrook Hotel Trust acquired the following assets: |
    • Mondrian Los Angeles at a forward 12-month capitalization rate of 5.6% to 6.1%, and an estimated 20% to 25% discount to replacement cost;
    • W Boston at a forward 12-month capitalization rate of 4.5% to 5%, and an estimated 30% discount to replacement cost;
    • Viceroy Miami at a forward 12-month capitalization rate of 5.1% to 6%, and an estimated 50% discount to replacement cost;
    • Hotel Monaco Seattle at a forward 12-month capitalization rate of 4.5% to 5%, and an estimated 30% to 35% discount to replacement cost;
    • Westin Gaslamp Quarter San Diego at a forward 12-month capitalization rate of 5.9% to 6.4%, and an estimated 25% to 30% discount to replacement cost.
  • DiamondRock Hospitality Company acquired the following assets: |
    • Radisson Lexington Hotel in New York at purchase price that represents a 6.7% capitalization rate on forecasted 2012 net operating income;
    • JW Marriott Denver at Cherry Creek at a purchase price that represents a 7.5% capitalization on forecasted 2012 net operating income.
  • Newly formed RLJ Lodging Trust acquired the following asset: |
    • Hampton Inn Houston - Near The Galleria at a purchase price that represents an 8.3% capitalization rate on 2010 net operating income.

During the next several years as the sector recovery matures, US lodging industry fundamentals are anticipated to continue to rebound resulting in a prolonged rise in sale transaction volume of an array of hotel assets. Pricing of major US hotel properties is rising and gaining momentum as investors that were able to hold on during the downturn now bring assets to market. Furthermore, savvy sponsors who acquired properties at or close to the recent market bottom are now executing exit strategies to monetize robust returns that have been realized during a relatively short holding period. Publicly-traded hotel-centric REIT’s flush with cash have been highly acquisitive. Finally, large sums of raised private capital funds are competing to invest in the sector seeking superior risk adjusted returns during the current up cycle. Urban 24/7 markets such as New York City; Boston; Washington, DC; and San Francisco are once again perceived as darling hotel investment markets with assets trading at relatively low capitalization rates, however still below replacement cost. As special servicers continue to work through problem legacy deals and effectuate sale transactions in a rising market, investor demand for US hotels is expected to move beyond the coasts and spread into the middle of America where pricing has been much slower to recover. Sophisticated hotel investors never lose sight of the inherent risks of the lodging industry which is highly cyclical. With the continuous repricing of room rates, external events such as terrorism and natural disasters can cause sudden market dislocations and have an immediate impact on hotel profitability.