| By: Carrie Russell, AACI, RIBC - HVS International -
Canada
To say that 2006 was a robust year for hotel sales would be an understatement! Total investment in Canadian hotels was higher in 2006 than in any of the last 15 years, with over $2.7 billion in total sales. This is 70% higher than the total investment in 2005 and 37% higher than the last peak in investment in 1997. There were only slightly more transactions in 2006 as compared to 2005 (120 hotels as compared to 111 hotels), but the record investment was driven by Oxford Properties purchase of seven Fairmont Hotels, for a total price of $1.5 billion, or $514,756 per room for the 2,914 room package. While these assets contain additional development potential, the price per room is notable as it represents the highest price per room ever paid for a hotel in Canada. The average price per room for the 2006 sales was $160,205, again a
record number; however, if this is adjusted to remove the Fairmont transaction
the average price per room was $86,502 per room.
 Aside from the Oxford Properties purchase of the Fairmont Hotels, several other assets were sold as part of packages in 2006. Following the purchase of the London, England based Hilton International, by the Hilton Hotels Corporation based in Beverly Hills, California, Hilton Hotels Corporation divested ownership in all of the Canadian hotels acquired in the takeover. The five Canadian properties included the Hilton Toronto Downtown, the Hilton Toronto Airport, the Hilton Montreal Airport, the Hilton Quebec City and the Hilton Saint John in New Brunswick. The latter two properties were purchased by InnVest REIT for a total of $63 million, or $82,031 per room. The total package price was approximately $243 million for 2,267 guestrooms or an average price of $107,000 per room with Westmont Hospitality purchasing three of the five assets. The package purchases continued into October with the Fortis acquisition of four hotels in Alberta and British Columbia which were owned by the Rempel family. The total package price was $51.5 million for 454 guestrooms at the Holiday Inn & Suites in Medicine Hat, Alberta; the Best Western Inn in Medicine Hat, Alberta; the Ramada Hotel & Suites in Lethbridge, Alberta; and the Holiday Inn Express in Kelowna, British Columbia. Sales activity in Canada was also driven by the lodging REITs. Lakeview REIT and Holloway Lodging REIT generated the largest number of transactions in 2006 with eight acquisitions and investment totaling over $59 million and over $92 million respectively. InnVest REIT purchased seven properties with investment of over $139 million. While CHIP REIT noted three major purchases with an investment of $90 million. Legacy REIT made a strategic purchase of an asset in downtown Calgary, the Delta Bow Valley, at a price of $53.5 million, or $134,422 per room. Ontario dominated the country in terms of sales activity with 36 sales and a total investment of over $330 million. The average price per room in Ontario was $83,878 per room. Alberta followed closely behind with 32 sales. Investment in Alberta is sizeable as three of the seven Fairmont properties were in the province. Total investment in Alberta was roundly $1.2 billion, or $254,970 per room. Removing the Fairmont sales from the Alberta numbers results in a total investment in the province of $282 million or $97,272 per room. Including the Fairmont sales British Columbia recorded 23 sales with a total investment of $707 million, or $215,303 per room. Removing the Fairmont sales from the data, investment in British Columbia was $223 million, or $94,960 per room. Quebec recorded a mere 11 sales in 2006 at a price per room of $130,486. The highest price per room paid in the province was for the Residence Inn in downtown Montreal purchased for $178,947 per room for the 190-room property. Aside from the Fairmont sales, and the purchase of a small property in Mississauga that will be converted to a retirement home, the Residence Inn represented the highest price per room paid in the country last year. While capitalization rates are not available for all transactions listed, evidence suggests cap rates in 2006 declined relative to previous years. Numerous full- and limited-service properties in regions throughout the country traded at cap rates below 10%, with the Fairmont transaction (not adjusted for additional development potential) noting a cap rate of 4.7%. The outlook for transaction activity in 2007 is positive although few
would anticipate a repeat of 2006. Hotel investors continue to seek out
properties and there is a ready supply of debt available. The full impact
of the REIT legislation introduced in the fall of 2006 on the ability of
REITs to raise capital is yet to be seen and may put a damper on REIT activity
levels this year. Overall, operating performance is expected to continue
to be strong as demand growth in Canada continues to outpace supply growth,
resulting in occupancy increases and the ability for hoteliers to increase
average room rates. Barring any major shift in capitalization rates, this
increase in profitability will have a positive impact on hotel values in
the year to come.
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