Still a Dealmaker�s Paradise 

The Upper-Upscale Sector Elbows
Its Way to the Front
 
 

Deal Pace Remains Strong through the First Half of 2007
Acquisitions Level Sits on a High Plateau
 

The transaction environment for upscale and luxury hotels and resorts is still highly active through the first half of 2007. In the first and second quarters, 177 properties changed hands, an increase over the 158 transactions that occurred in the first half of 2006. The deal volume over the past twelve months remains just slightly below that of calendar year 2006, but still above 2005 levels. With numerous deals already anticipated for the third quarter, we expect the deal-making landscape to maintain a robust level of activity through the end of 2007. 

While the number of properties sold has increased year over year, the dollar volume of transactions declined from $13 billion in the first half of 2006 to $11.6 billion in the first half of 2007. The volume of transactions generally is lighter in the second half of the year. Thus, we project upscale and luxury deal transaction volume to end 2007 just shy of $20 billion.  
 

U.S. Upscale and Luxury Lodging Transactions Since 1996 Source: Hospitium

Global Hyatt Corporation acquired the Hyatt Regency Waikiki for $445 million at a bankruptcy sale. Photo Courtesy of Global Hyatt Corporation

The Battle for Upper-Upscale Domination

Much has been said about the growth in the luxury sector, with Mandarin Oriental, Shangri-La, and Trump expanding in major cities and resort destinations, and new brands like 1, Andaz, Capella, and Solis set to enter the stage. However, the sector that is poised for the most growth over the next few years is the upper-upscale tier, properties positioned between the luxury brands of Ritz-Carlton and Four Seasons and the mainstream upscale chains of Hilton, Marriott, and Sheraton. The upper-upscale hotels are positioned as a more refined, somewhat hip alternative to the more traditional upscale brands, without the stuffiness of the high-end luxury hotels. 

The segment between upscale and luxury has historically been ambiguous, with Hyatt Regency and Westin, as well as some of the higher quality Hiltons and Marriotts, filling the gap. Now there are numerous brands catering to the segment. Over the past few years, InterContinental, JW Marriott, Omni, Renaissance, Westin, and W have expanded their presence domestically. Other upper upscale brands, including Le Meridien and Marriott�s new lifestyle concept, will also spur growth in the segment over the next decade. Below is a snapshot of the existing upper-upscale supply offering plus new additions currently in the pipeline. Westin, W, Renaissance, and InterContinental are each poised for significant growth through 2010.  
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Source: Hospitium

Over the past several years, many historic buildings have been redeveloped into hotels that fly moderate-tier flags. While for the most part these hotels have the standard in-room amenities, their building structures provide more unique settings that are frequently more appealing to guests than their modern full-service competitors. CSM Lodging, First Hospitality Group, Historic Restorations, Kimberly-Clark, and Sage Hospitality Resources have each been involved in numerous historic conversion projects that include moderate-tier hotels.

It is not uncommon for select-service properties in downtown locations to perform as well as, or even outperform, their full-service counterparts in terms of occupancy and average rate. Some select-service hotels have performed so well that they are being repositioned and re-flagged with upscale monikers. The Courtyard Milwaukee Downtown at the Depot recently converted to a Renaissance and the Hampton Inn & Suites Dallas West End is in the process of converting to a Doubletree.

Generally, the select-service properties offer most of the same requisite amenities. Some offer free internet access and complimentary continental breakfast as well, which are key attractions for price-sensitive or budget-oriented travelers. And guests still receive their frequent guest points, whether they stay at the Hilton, the Hilton Garden Inn, or the Hampton Inn.
 

As the market segment�s name suggests, focused-service is focused on filling rooms to generate revenue and profits. Certainly, these hotels do not produce the income streams of a full-service property in terms of restaurant, banquet, and other ancillary revenues, but they have several advantages in terms of profitability. 

With a significant amount of unique local dining options in close proximity to downtown hotels, a select-service hotel is not disadvantaged by limited in-house food service. In downtown locations, a restaurant within a hotel is often overlooked as most clientele prefer to sample the local cuisine at nearby restaurants. In full-service properties, running a typical three-meal restaurant can be a drain on resources and profits. 
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The Milwaukee Road Depot in downtown Minneapolis was redeveloped by CSM in 2001 and included a 227-room Courtyard. The property was repositioned as a Renaissance in 2007.  Photo Courtesy of Marriott International.

Overhead is also scaled back considerably compared to full-service hotels. Payroll is much lighter, with fewer managers and less support staff. Sales and marketing costs are also far less substantial with very little meeting space or ancillary facilities to sell. Focus Mitigates Downtown Market Risks It can be argued that downtown select-service hotels are some of the least risky investments in the lodging industry. The ability of primary moderate-tier brands to capture room nights in major urban locations is a compelling factor to investors.  In some cases, properties have converted from full-service brand affiliations to opt for stronger moderate-tier flags in order to drive room nights. The historic Tutwiler Wyndham in Birmingham, Alabama, recently converted to a Hampton Inn & Suites affiliation. Downtown select-service properties generally attract transient leisure and corporate travelers, while group demand is typically captured by the full-service properties due to their extensive facilities. This makes select-service properties less susceptible to fluctuations in convention demand which many other lodging facilities in downtown markets rely upon for their livelihood.

Certainly, owning a focused-service hotel may not have the same cachet as owning a full-service property downtown. Nevertheless, there is something to be said for the risk limitations that a strong brand with a rooms-only focus and a high customer appeal can deliver in a primary urban location. 

Stephen Hennis has over thirteen years of experience in the analysis of lodging investments. He has appraised and evaluated over 500 lodging facilities, and has been involved in the underwriting, negotiation, and acquisition of over $400 million in luxury hotels and resorts. Prior to becoming Managing Director of Hospitium, Mr. Hennis served as Vice President of Hospitality Investments for Lowe Hospitality Group and Destination Hotels & Resorts where he was involved with acquisitions, dispositions, and development projects. 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 and report templates. He has also worked for Marriott International and Caesars World. 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 publication. 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.

Hospitium, LLC
Stephen R. Hennis, CHA 
Managing Director
14234 West 86th Drive
Arvada, Colorado 80005
303.506.0250
[email protected]