Hotel Online  Special Report
.



..
  The Lodging Ledger

Skyrocketing Transaction Volume and Pricing
.
Investment Timing is Key
.
Post-Acquisition Capital:  Another Big Chunk of Change
.


HOSPITALITY RESEARCH
+
CONSULTING SPECIALISTS
.
Winter 2007

The Sky is the Limit
Transaction Volume and Per-Room Pricing Reach Unprecedented Levels

Close to $40 billion in upscale and luxury assets have traded over the past two years.  The low cost of capital, strong operating results, a highly competitive deal environment, and residential conversion economics have driven the lodging industry into a new investment era over the past couple of years. A total of 262 properties traded in 2006, down slightly from the record 299 assets that traded in 2005. 
.


The Fairmont Scottsdale Princess was one of the largest transactions in 2006
Photo Courtesy of Fairmont Raffles Hotels International
.
Nevertheless, more than $21.2 billion in upscale and luxury lodging facilities changed hands last year, up from the $17.1 billion in transactions in 2005. With several deals already in the pipeline for 2007, there does not appear to be any slowdown in the near future. The upscale and luxury transaction environment is anticipated to remain robust for at least the next 12 to 18 months, if not longer.
.
.
With demand for high-quality assets still brimming, prices continue to climb. The investment appetite for upscale and luxury products has pushed pricing into uncharted territory. The average price per room skyrocketed from $169,000 in 2005 to $242,000 in 2006, a record price point.  Three years ago, many analysts expressed concern about overpriced assets and unjustifiable cap rates. However, many assets that traded hands just a couple years ago look like bargains today. Asset pricing is expected to remain strong over the next two years as the amount of available product on the market is unable to satisfy the mass of capital allocated for upscale and luxury lodging investments.
.

.
The acquisition of the Four Seasons Hualalai topped the price-per-room list in 2006 at close to $1.2 million per unit. The Hotel del Coronado and W New York Union Square also exceeded the $1 million per room mark. Four of the top six price-per-room deals were in Manhattan. Six of the top ten were in urban locations, while four were in resort destinations.
.

Top Transactions by
Price per Room
Property
Rooms
Sales Price
Price/Room
Four Seasons Hualalai 243 $285,400,000 $1,174,486
Hotel del Coronado 679  745,000,000  1,097,202
W New York Union Square 270  285,000,000  1,055,556
Sutton 84  83,500,000    994,048
Drake Swissôtel New York  495  440,000,000    888,889
Mark 180  150,000,000    833,333
Chatham Bars Inn  205  166,000,000    809,756
Four Seasons Georgetown 211  168,900,000    800,474
Ritz-Carlton Laguna Niguel 424  330,000,000    778,302
Hay-Adams 143  100,000,000    699,301
Source: Hospitium
.

The Hotel del Coronado also drew the highest overall sale price at $745 million. The sales of the Drake Swissôtel New York and the Westin St. Francis in San Francisco tied for second position with each hotel trading for $440 million. The top ten largest transactions in 2006 accounted for almost $4 billion in acquisitions, and were evenly split between resort properties and urban hotels.
.

Top Transactions by
Sales Price
Property
Rooms
Sales Price
Price/Room
Hotel del Coronado  679 $745,000,000 $1,097,202
Drake Swissôtel New York   495  440,000,000    888,889
Westin St. Francis  1,195  440,000,000    368,201
Westin Kierland   732  393,000,000    536,885
Crowne Plaza Broadway  770  362,000,000    470,130
Fairmont Scottsdale Princess   651  345,000,000    529,954
Ritz-Carlton Laguna Niguel   424  330,000,000    778,302
Marriott Chicago Downtown  1,192  306,000,000    256,711
Four Seasons Hualalai  243  285,400,000  1,174,486
W New York Union Square  270  285,000,000  1,055,556
Source: Hospitium
.
Among the major cities, New York maintained its top price-per-room ranking with transactions averaging $684,000 per unit.  Washington DC, Hawaii, and Phoenix/ Scottsdale also posted strong per-room values between $421,000 and $464,000. In comparison, San Francisco hotels appeared to be a bargain at $282,000 per room.  While the outstanding performance of the New York hotel market is one factor that has driven pricing upward, the primary factor is the highest and best use. The returns on residential real estate in New York are rather enticing, and many hotels are trading based on non-lodging economics. Consequently, thousands of hotel rooms in the city are being converted to condominiums. Upscale and luxury rooms supply in Manhattan is actually shrinking because of the condo conversion phenomenon.
 
 

.
The Drake Swissôtel New York was one of the largest deals in 2006, selling for $440 million ($889,000 per key). But that’s only part of the story: the new owners plan to raze the historic hotel to make room for a new condominium project. 
Photo Courtesy of Fairmont Raffles Hotels International.

-

.

It is no surprise that primary urban and resort locations possessed the most sought-after assets. With funds geared specifically towards core assets that typically retain their inherent real estate value, this trend will continue. New York experienced the most investment activity last year, with eleven properties gaining new owners. Chicago, San Diego, and Washington each had nine properties change ownership. Atlanta and Dallas, two major metropolitan areas that have been slightly behind on the recovery curve, piqued the interest of buyers in 2006 as the lodging markets appeared to exhibit greater upside opportunities.

The ever-increasing price tags for lodging assets will naturally cause capital placement to shift from acquisitions to development. As prices reach replacement cost levels, development may become a more attractive opportunity for investors over the long term.  However, development is not without its risks. Future market uncertainty, everincreasing construction costs, and the lack of immediate cash-on-cash returns prompt most companies to prefer the cash-flowing assets that are on the market today.

Loews Hotels originally planned to build a new $200-million resort at Lake Las Vegas, but opted to buy and convert the Hyatt Regency Lake Las Vegas instead. Photo Courtesy of Loews Hotels.

Timing is Everything

Shoulda, coulda, woulda. How many hotel investors have looked back on the past few years thinking “If only we had bought that property back in 2002 or 2003…?” The clichés are abundant regarding 20/20 hindsight. A recovery of the lodging industry was predictable following the national recession and the attacks of September 11th, but few, if any, could have predicted the surge in asset values that has occurred over the past five years.

The pending sale of CNL Hotels & Resorts’ assets is of particular note here. Between 2000 and 2003, CNL was the top buyer of upscale and luxury hotels primarily because they had relatively inexpensive equity compared to most buyers at the time. CNL became the subject of much criticism as their acquisitions appeared to be above market pricing. In 2005, the company was unable to successfully execute an IPO and naysayers touted “I told you so.” However, as the hotel investment market has boomed, so did the value of CNL’s assets. Whether or not CNL overpaid for properties in the early 2000s is now irrelevant. However, the fact that they are now selling their assets for a big gain is a testament to the current state of lodging investments.

While CNL is the most obvious owner to have benefited from the current market dynamics, numerous other companies have flipped assets after only a short hold period. The annual appreciation of assets is well illustrated by several property transactions that occurred in 2006.
.

Upscale & Luxury Lodging Facilities
Short - Term Holds

Lincoln Suites, Westin Chicago Michigan Avenue, Hotel del Coronado, Radisson Suites Marco Island, Pan Pacific San Francisco
Conrad Chicago, Hilton Pasadena
The number of two and three years holds will likely increase in 2007 as fund managers aim to generate high returns for their lodging investments while the market is still hot. The last thing they want to do is look back in several years and wish they had sold sooner. After all, you can only recognize the market peak after it has begun to fall.

The 3 R’s of Upside Come at a Big Price
Renovating, Re-Branding, & Repositioning Hope to Reap Returns

While the amount of capital spent acquiring assets in 2006 is impressive, the money that new owners need to invest in their new properties is nearly as striking. More than $2.5 billion will be invested in upgrades, renovations, and expansions to the properties that traded in 2006.

On average, $30,000 will be spent on each room that changed ownership in 2006. That brings the average per room investment to $272,000 for upscale and luxury lodging assets acquired last year. In our analysis of post-acquisition renovation plans, we discovered that roughly 25% of acquisitions in 2006 required very little additional capital to address deferred maintenance, brand requirements, or on-going renovations.  However, some owners are spending as much as $100,000 per key to reposition their hotels.

Noble Investment Group and AEW Capital Management teamed on the purchase of the Sheraton Colony Square in Atlanta, Georgia.  They plan to spend roughly $107,000 per room to turn it into the W Atlanta Midtown.  ING Clarion and Kimpton joined forces to acquire the Holiday Inn Select in Alexandria, Virginia, and are spending approximately $97,000 per room to convert it to the Hotel Monaco Alexandria.

Property Improvement Plans (PIPs) usually account for a significant amount of the capital invested in a new acquisition. Millions of dollars are typically spent maintaining or upgrading to current brand standards. For properties that retained their existing brand, new owners invested $19,500 per room on average for 2006 acquisitions. For hotels converting to a new brand, the cost averaged roughly $41,000 per key.
.


JER Partners plans to give the Stanford Court Renaissance
in San Francisco a $32 million facelift ($81,500 per room)
to be completed by mid-2008. 
Photo Courtesy of Marriott International.
.
U.S. Upscale & Luxury Transactions
Additional Capital per Room
.
Sheraton Altanta Midtown Colony Square, Holiday Inn Select Alexandria, Pointe South Mountain, Hyatt Regency Newport, Hyatt Regency Islandia



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 thirteen 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.

.
Contact:

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

.

.

To search Hotel Online data base of News and Trends Go to Hotel.Online Search

Home | Welcome! | Hospitality News | Classifieds | Catalogs & Pricing | Viewpoint Forum | Ideas/Trends
Please contact Hotel.Online with your comments and suggestions.