Overall Investor Expectations Bullish; Regardless of Anxiety and REIT Envy

May 6, 2011 -  (Denver, Colorado):  Annually, the members of the hotel industry's preeminent think tank, "LIIC - The Lodging Industry Investment Council," are surveyed to develop a list of the major hotel investment opportunities and challenges of the coming year.  This exhaustive survey results in the LIIC Top Ten; a highly regarded profile of investment sentiment and attitudes for the lodging industry for the forthcoming 12 months.

Altogether, the members of LIIC represent acquisition and disposition control of billions of dollars in lodging real estate.  The hospitality industry's most influential investors, lenders, corporate real estate executives, REIT's, public hotel companies, brokers, and significant lodging equity sources are represented on the council.  LIIC serves as the leading industry think tank servicing the hospitality business (www.liic.ws).

This year's survey was compiled by LIIC's co-chairman, Mike Cahill.  Mr. Cahill is CEO and founder of HREC - Hospitality Real Estate Counselors, a leading international hotel and casino advisory and brokerage firm specializing in lodging property sales, debt refinancing, consulting, appraisals, and litigation support (www.hrec.com).

1.  Hotel Investment Market To Peak in 2015:  Improving revenue fundamentals, increasing availability of debt financing, and continued strong interest from equity investors in purchasing hotels will continue to drive an already upward trending lodging investment market for the next five years.  When will the party end?  39% of LIIC responders believe hotel real property values will peak in 2015.  29% predict a shorter cycle (2014 peak) but a roughly equal percentage, 24% believe peak values will not be realized till 2016 or beyond.  Overall, anticipation is that we are in the beginning of a solid, gradual long-term upward ride that will economically benefit all market participants.

2.  Lodging Real Estate Values Are Only Going Up:  98% of respondents believe that hotel real property values will increase over the next 12 months, with 61% of total responders predicting a significant increase of over 5%.  This is an acceleration of the trend indicated in the 2010 survey and supports the concept to aggressively buy now.  The Luxury hotel category appears to be poised for the greatest value growth in the coming year.

3.  Better Quality Hotel Product Available, If You Can Get It:  In sharp contrast to the 2010 Survey, 2011 finds that 46% believe that the quality of hotel product on the market for purchase is "excellent/above average."  In total, 81% believe hotel real property available for purchase is average or better quality.  For comparison, 64% believed that market product available for acquisition was below average quality in 2010.  However, the amount (volume) of facilities on the market is still lagging, with 46% believing that the quantity of product is "below average or low."

4.  Lodging Transaction Volume to Increase Dramatically:  Comparing anticipated calendar 2011 overall hotel asset sales volume to forecasted 2012 levels, 39% believe that the over market will grow over 20%.  29% believe transaction volume to increase 10% to 20% and 26% anticipate growth of 5% to 10%.  General consensus is that market movement, fluidity, and volume will be robust and improving over the foreseeable future.

5.  It's a New Ballgame!:  LIIC members solidly believe we are firmly implanted in the beginning of a new lodging investment cycle, with 51% playing in the first of two innings and 46% further along, coming to the plate in innings three and four.  However, anxiety was clearly evident among responders with deep concerns over inflation, real job growth, escalating operating costs, and oil prices.

6.  REIT Envy and Bitterness:  For the first time in ten years of surveys, investors looking to acquire Upper Upscale and Luxury hotels appears to be separated into two worlds:  the REIT's versus Private Equity.  Clearly, the REITs are currently the dominant buyers and the Private Equity world is bitter and jealous.  Survey write-in comments from Private Equity consisted of a variety of emotions ranging from: "How could they pay that much?" to "They produce illegitimate pricing expectations," and "Stupid buyers more concerned about making a move than overpaying."

7.  Acquisition Debt Returning?:  The ability of buyers to acquire mortgage financing for purchasing hotels appears to be improving.  48% of responders believe that they will be able to use acquisition debt funding to buy hotels on a levered basis over the next 12 months.  Cash may still be kind, but debt leverage opportunities are improving and should push real property pricing upward.

8.  Interest Rates to Rise:  58% of the LIIC think tank believe hotel interest rates (senior debt) will increase over the next 12 months and many are concerned about the impact interest rate increases may have in the short term (buying) on their exit strategies (selling).  On the other hand, 68% believe loan/value ratios are also increasing (natural extension of more loan competition).  So, debt is anticipated to become more expensive but you will be able to get more of it.

9.  Equity Return Rates Are Stabilizing:  More than half of responders believe unlevered equity rates of return will be stable over the next 12 months.  The remaining 50% are equally split between increases and decreases.  Based on past surveys, it appears that buyers have been the major factor narrowing the bid/ask spread dominating the market in 2008/2009; after they acquiesced to major downward adjustments to their equity yield expectations in 2010.

10.  Occupancy and ADR Fundamentals Continue to Improve:  Hotel revenue trends are still forecasted bullishly; with 94% believing average room rate levels will grow (39% forecast over 5%) and 89% anticipating occupancy increases for the lodging industry at large.

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LIIC - The Lodging Industry Investment Council at www.liic.ws

Co-Chairmen

• Mike Cahill, CEO & Founder, HREC: [email protected]
• Sean Hennessey, CEO, Lodging Investment Advisors:  [email protected]
• Jim Butler, Partner, JMBM - Jeffer Mangels Butler & Mitchell, LLP:  [email protected]