Hotel Online  Special Report
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  The Lodging Ledger


Hotel Deals Continue to Roll Along
The Allure of Luxury Lodging Assets
The Next Wave of Mega-Resorts
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HOSPITALITY RESEARCH
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CONSULTING SPECIALISTS
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Autumn 2006
 
 


The $393 Million Sale of the Westin Kierland was the largest transaction in the 3rd quarter. 
Photo courtesy of Starwood Hotels & Resorts

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Deal Climate is Still Hot

On the heels of a record 2005 where we witnessed over $17.1 billion in upscale and luxury lodging transactions, 2006 has already surpassed that level, reaching $17.4 billion through the first three quarters. While fewer assets have changed hands this year, the price per room has increased significantly, rising 70% year over year through the third quarter.

High profit levels and a rosy outlook for the next two to three years, coupled with the glut of funds targeting the lodging industry, have produced a record level of deal volume in the upscale and luxury lodging sectors over the past twelve months. During the period, over $22.5 billion in transactions occurred. The average price per room over the trailing twelve months was $239,000, a sizeable jump from the $169,000 level achieved in 2005. 
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U.S. Upscale & Luxury Lodging
Transactions Q3 2006 & YTD 2006

Source: Hospitium

While the number of properties sold dropped from 60 to 45 year over year during the third quarter, the acquisitions volume rose from $3.5 billion to $4.2 billion. 

U.S. Upscale and Luxury Lodging Transactions Since 1996

Source: Hospitium

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The average deal size has grown as well. In 2004 and 2005, the average sale price was between $53 million and $57 million. This was similar to the prior market peak in 1998 when the average sale price was approximately $54 million. Through the third quarter of 2006, the average price per asset rose to $87 million. This is largely a result of transactions involving more high-end luxury assets which by nature generate a higher price, but certainly illustrates the price companies are willing to pay to enlarge their property portfolios.

U.S. Upscale & Luxury Lodging Facilities
Average Sale Price

Source: Hospitium

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Big Deals

The highest priced individual asset sales of the quarter were primarily luxury facilities, led by the Westin Kierland which was acquired by Host Hotels & Resorts for $393 million. Just up the road from Kierland, the Fairmont Scottsdale Princess was acquired by Strategic Hotel Capital for $345 million. The Ritz-Carlton Laguna Niguel, also purchased by Strategic Hotel Capital, garnered the highest price per key for the quarter at over $778,000. The top deals listed below accounted for over $1.5 billion in volume, or roughly 36% of the total transaction volume for the quarter.

Top Individual Upscale & Luxury Transactions by Sale Price
3rd Quarter 2006

Property
Rooms
Sale Price
Price per Room
Westin Kierland 732  $393,000,000  $536,885
Fairmont Scottsdale Princess 651  $345,000,000  $529,954
Ritz Carlton Laguna Niguel 424  $330,000,000  $778,302
Four Seasons Dallas Las Colina 397  $230,000,000  $579.345
Marriott Sawgrass 508  $220,500,000  $434,055
Source: Hospitium

Deal Activity on Pace with Our Forecast

As we previously projected, year-end 2006 deal flow is anticipated to exceed the $20 billion level. As exhibited by the recent trends, fewer assets are expected to change hands during the fourth quarter 2006 than during the same period in 2005. Average price per room for 2006 is forecast to be $227,000, slightly above the $222,000 we initially predicted.
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U.S. Upscale & Luxury Lodging Facilities
Transactions Volume

Source: Hospitium
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Strategic Hotel Capital’s acquisition of the Four Seasons Georgetown in March raised a lot of eyebrows with its $800,000-per-key price tag. However, the luxury asset is a newly renovated facility in a primary urban market with high barriers to entry. Moreover, it has a lock on the Four Seasons flag in DC. (And yes, it was originally designed to be a Holiday Inn when it was constructed in the late 1970s.) Photo Courtesy of Four Seasons Hotels.

The Mandarin Oriental Boston with 168 guest rooms and 40 condominiums is slated to open in mid-2008. Photo Courtesy of Mandarin Oriental Hotel Group.

The Allure of Luxury Lodging Assets

Rising Prices and Climbing Construction Costs Do Not Deter Investors 

Since being heavily impacted by the economic recession and events of 9/11, the luxury lodging sector has experienced an exceptional rebound in performance and consequently, price tags for hotels and resorts in the segment have risen to new heights. Luxury asset[*]  transactions are surpassing record levels, with prices flirting with, if not surpassing the $1 million per key level on many a deal. Nevertheless, despite high prices, investors are not shying away from the sector. Quite the contrary, transaction levels for U.S. luxury hotels and resorts are at an all-time high. Over $5 billion in luxury lodging facilities have already changed hands through September of this year. Another $1.5 billion in luxury assets are expected to trade in the 4th quarter, bringing the year’s total close to $7 billion. The bulk of these properties are being acquired by the usual suspects like Host Hotels & Resorts, Lodging Capital Partners, and Strategic Hotel Capital. However, many other lodging investment groups are “upgrading” their portfolios with luxury assets as well. Companies that have historically focused on moderate and upscale commercial hotels, including Ashford, HEI, Highland, and Sunstone, have recently expanded their portfolio into the luxury sector as they find high-end properties to be appealing investments.
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U.S. Luxury Lodging Transactions

Source: Hospitium

High Entry Fee

Buying into the luxury sector is certainly not easy from a financial perspective. The average price per room for a luxury hotel through the first three quarters of 2006 was approximately $490,000. If you think that price is steep, the cost to develop a new luxury hotel or resort is not for the faint of heart either. The ten luxury lodging assets that have opened in 2006 or are set to open by year end cost in excess of $578,000 per key. In comparison to the increasing development costs, the climbing sale prices will continue to look like bargains.

Construction costs declined in 2001 and 2002 due to the national recession. However, the recovery and other external factors like Hurricane Katrina have had a significant impact on costs over the past four years. Since 2002, the average cost per room for luxury hotel projects has increased an average of 13.3% annually. During this period, the average cost per unit has jumped from $351,000 in 2002 to an astounding $578,000 per unit in 2006. While construction cost increases are anticipated to taper, they are still expected to increase at 4.7% annually, which is higher than the forecasted rate of inflation over the next four years. By 2010, the average cost per room to construct a new luxury lodging facility is estimated at $696,000 per key.
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U.S. Luxury Lodging Facilities
Development Cost per Room

Source: Hospitium
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The decision for many companies to buy luxury assets rather than build new is well justified by the replacement cost ratio. While the ratio today might be 84.8% ($490,000 ÷ $578,000), that assumes you can decide to build and open the property instantaneously. The reality is that the time lag between buying and building a full-service luxury hotel or resort is roughly four years on average. A company can purchase a property today and theoretically receive a current return on investment; or develop a new property over the next few years and open in an unforeseeable lodging environment. As a result, comparing today’s average price to the average cost of properties opening today is inaccurate. By comparing the price-per-room trend to a cost-per-room curve that lags by four years, current acquisitions appear to be even more of a bargain. The ratio of today’s price-per-room to the projected cost-per-room of projects opening in 2010 is 70.4% ($490,000 ÷ $696,000). 

Residential Necessity

Rising construction costs may have limited the feasibility of many new hotel projects, but the pace of luxury hotel development has accelerated. In order to make economic sense, most luxury lodging assets are being developed with saleable residential units to subsidize the development. At a recent conference, it was implied that new luxury hotels are no longer feasible without a residential component. While this may not be completely true in all cases, it is clear that luxury hotels with residential units are now the norm rather than the exception. Between 2000 and 2004, roughly 1/4 of new luxury lodging facilities possessed a residential component. However, of all the luxury hotel projects anticipated to open between 2006 and 2009, almost 70% of luxury lodging projects will contain residential units of some type.
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Source: Hospitium
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Even many existing properties are also taking advantage of the high-priced residential market. Prominent properties like the Hotel del Coronado and InterContinental Chicago are in the process of adding residential structures.

It is also important to note the reduction of rooms inventory that has resulted from the attractive returns on residential real estate. The Drake Swissôtel New York is being torn down to make way for a new condominium complex. The St. Regis Los Angeles has closed and will likely have the same fate. The St. Regis New York and St. Regis Aspen have converted a portion of their hotel rooms to fractional units. The Plaza in New York is undergoing a $350 million transformation from an 805-room behemoth to a more intimate 282-unit hotel with 152 residences. Many other urban hotels and destination resorts have residential plans as well.

More Brands, More Projects

Many luxury hotels possess their own brand identities, like the Palace in New York or the Beverly Hills Hotel. The uniqueness of many luxury properties prevents them from fitting the mold of a brand. Moreover, a large portion of luxury hotels are historic properties that have been around longer than the current market environment that is inundated with brands. In some cases, their individual trade names, like the Greenbrier or the Broadmoor, are as recognizable as any of the top hotel brands. Approximately 42% of existing luxury hotels and resorts are independent.

However, there is a growing tendency to brand luxury projects in order to gain instant name recognition and good will for new properties. Of the properties slated to open between 2006 and 2009, 72% will be affiliated with a brand.

At one point the landscape of luxury hotel brands was very narrow with Four Seasons and Ritz-Carlton being the preeminent players and some of the more exceptional Hyatt and Westin assets entering the fray. While these brands are still dominant in terms of market presence, they are no longer the only major players. In the past few years, Fairmont, Omni, and Starwood’s St. Regis/Luxury Collection have gained ground in the luxury arena. Moreover, with the new growth initiatives of other well-known luxury monikers like Conrad, InterContinental, Mandarin Oriental, Shangri-La, and Trump, coupled with the introduction of new brands like Montage, Solis, TWELVE, and the Waldorf=Astoria Collection, luxury lodging supply is booming.
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U.S. Luxury Lodging Brands
Market Share
Independent 41%
Other 22%
Ritz Carlton 11%
Four Seasons 7%
Hyatt / Park Hyatt 6%
St Regis / Luxury Collection 4%
Fairmont 4%
Omni 3%
Westin 3%
Other includes: Conrad, Doubletree, Gaylord, Hilton,  Jumeriah, JW Marriott, Langham, Le Meridien, LXR, Loews, InterContinental, Mandarin Oriental, Montage, Peabody, Peninsula, Prince, Raffles, Regent, Renaissance, RockResorts, Sheraton, Sonesta, Sutton Place, Trump, TWELVE, Waldorf=Astoria Collection, and Wyndham.
Source: Hospitium
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However, while there are more projects in the pipeline now than those spurred by the prior market upswing, the average size of these projects is much smaller. Between 2000 and 2004, new luxury hotel projects that opened average 307 rooms. Projects that have recently opened or are currently planned to enter the market between 2006 and 2010 average only 250 rooms. This equates to roughly 20% fewer rooms per development.

The Emergence of a New Development Cycle

The development pipeline rebounded much more quickly from the recession in 2001 and 2002 than it did from the recession in the early 1990s. Following the prior recession, there were very few new projects in the works for several years. Luxury supply growth between 1993 and 1998 averaged a mere 0.6% annually. The next stream of luxury hotel development did not begin until 1999. That wave of openings ended in 2004, but a new surge has quickly sprouted up in 2006.

In 2006, over $1 billion in new luxury hotels will enter the market, signifying the arrival of the next phase of luxury developments. In the proceeding years through 2009, another $7.7 billion in new luxury hotel projects are expected to open. Supply growth for the luxury sector is projected to average 3.9% annually through 2010, which is below the 4.5% average annual supply growth from 1999 through 2004. 
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U.S. Luxury Lodging Supply
New Rooms Entering the Market

Source: Hospitium

The Next Wave of Mega-Resorts

Extra Large is Not Just a Shirt Size 

Mega-resorts[†] require a hefty investment of both time and money, yet they can be some of the biggest cash cows in the industry. While they often lack intimacy, mega-resorts are factories that churn out room nights, banquets, golf rounds, and spa treatments in bulk quantities.

Mega-resorts are not a new breed of properties in the lodging industry. They have been around since the early part of the 19th century, with renowned properties like the Breakers, Boca Raton, the Broadmoor, the Greenbrier, and the Hotel del Coronado among the first large-scale resort projects.
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The Broadmoor in Colorado Springs opened in 1918 and was one of America’s first mega-resorts. Photo Courtesy of The Broadmoor.

The 1,000-room JW Marriott Orlando Grande Lakes opened in 2003 and is part of a resort complex which also includes the 584-unit Ritz-Carlton Orlando Grande Lakes, a 40,000  square-foot spa, and an 18-hole championship golf course. Photo Courtesy of Marriott International.
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There are only 124 mega-resorts in the United States, yet they comprise almost 100,000 guest rooms (roughly 800 rooms each). The vast majority of these properties are situated in warm weather climates to attract guests year-round. Arizona, California, Florida, and Hawaii are home to 86% of the properties in the segment, with Florida being the predominant location by a large margin.
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U.S. Mega-Resort Locations
Florida 41%
Hawaii 22%
Other 11%
Arizona 7%
California 6%
Source: Hospitium
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Time and Cost Limit New Construction

Due to their size and extensive facilities, these large group houses can take a decade or longer of planning and construction before opening. Moreover, it costs hundreds of millions of dollars to construct such resorts. The long timeframe and large capital outlay are deterrents to many developers. This provides an inherent barrier to entry within the segment. Thus, mega-resort supply growth is typically below that of most other lodging segments.

The development of such projects slowed significantly in the 1990s with new mega-resort rooms supply averaging only 0.9% annually from 1990 to 2000. However, that has changed in the current decade. Between 2000 and 2006, mega-resort rooms increased by 2.5% annually on average, still a relatively low growth pace. This momentum is expected to continue through 2010 as several large resorts are currently under construction or scheduled to break ground in the near future. Over $5 billion worth of mega-resorts will open over the next four years.

The recent peak in mega-resort openings occurred in 2002 when 6 new properties opened, adding 5,583 new rooms to the market. Between 2001 and 2003, twelve of these large developments opened containing 10,380 units. The next phase of major openings is anticipated in 2009 and 2010. Over the two-year period, eight new mega-resorts totaling 8,710 rooms are slated for completion. There are also several large projects on the drawing board for beyond 2010, but it is too early at this point to predict which ones will come to fruition and what their timing will be.
 

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U.S. Mega-Resort Rooms Supply
New Rooms Entering the Market

Source: Hospitium

[*]Luxury lodging assets are defined as hotels and resorts with facilities and service levels equivalent to or better than the Mobil 4-Star and AAA 4-Diamond criteria.

[†] Mega-resorts are defined as full-service lodging facilities with 500 rooms or more and located in resort destinations; excludes casino properties.
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Hospitium is a hotel consulting firm that specializes in the upscale and luxury sectors of the lodging industry. From the early stages of development or deal negotiation through asset disposition, Hospitium delivers timely and useful research, analysis, and insight that assist the various needs of owners, developers, management companies, and financial institutions. Hospitium provides a wide array of advisory services and products, including feasibility studies, due diligence, underwriting, appraisals, and strategic planning.

Stephen Hennis has over twelve years of experience in the analysis of lodging investments. Prior to becoming Managing Director of Hospitium, Mr. Hennis served as Vice President of Hospitality Investments for Lowe Hospitality Group and Destination Hotels & Resorts. During his tenure at Lowe, he was involved in the underwriting, negotiation, and acquisition of over $400 million in luxury hotels and resorts. Mr. Hennis previously served as Vice President and Director of Research for HVS International where he specialized in the analysis and valuation of large portfolios for cross-collateralized securitizations and oversaw the redevelopment of HVS’ analytical models. At HVS, Mr. Hennis appraised and evaluated over 500 lodging facilities. Mr. Hennis is a graduate of the University of Denver’s School of Hotel, Restaurant & Tourism Management.

Data and information for the Lodging Ledger is collected by Hospitium, LLC. Hospitium, LLC is merely a conduit for the data, and assumes no responsibility or liability for its accuracy, usability, confidentiality, or other matters related to this survey. Information herein is believed to be reliable and has been obtained from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Use of the data herein may not be resold, distributed or otherwise utilized for commercial use or profit without the expressed written consent of Hospitium, LLC.

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Contact:

Hospitium, LLC
Stephen R. Hennis, CHA 
Managing Director
14234 West 86th Drive
Arvada, Colorado 80005
303.506.0250
shennis@hospitium.com

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