GlobeSt.com EXCLUSIVE: Hotel Buyers, Sellers Prep for Strong Run

"It's a good year to sell and a good year to buy. That's the kind of equilibrium that we have in the market right now," Arthur Adler, managing director and CEO of the Americas for Jones Lang LaSalle Hotels, tells GlobeSt.com of trading that's much akin to seven years ago. The hotel market, he says, is breaking out of the gate for another strong five-year run. "The hotel market is at a trough and investors like buying at a low point," he says of the stepped-up pace.

Last year, 55,189 hotel rooms in the US brought in $6.7 billion or an average of $121,000 per key, says Melinda McKay, senior vice president of research and advisory for Jones Lang LaSalle Hotels, which tracks sales of $10 million or more. This year, 63,000 rooms are projected to trade with the average price per key rising to $127,000, she says.

The buy side is stacked with regional players and REITs, new and established. And in this buying cycle, institutional and private equity investors are shopping with operating partners at their sides. There is a deep well of capital backing hotel plays in a world where borrowed money is cheap and recovery's knocking on the sector's doors.

"You know what you have today and it's only going to get better," Adler says of the alternative investment outlook. "Hotels for sophisticated investors enjoy a premium over other forms of real estate. If you can hold through the downturns and time the exit, you can do very well."

Timing the exit is just what two of Texas' top hoteliers have been doing for at least a year with non-strategic assets. FelCor Lodging Trust Inc. of Irving is down to 35 hotels on its "to go" list, having marked its first sale this year with the 160-room Holiday Inn in Plano, 20 miles north of Dallas, to a regional buyer, Dahya Hospitality LP. The asset was one that FelCor acquired with the Bristol Hotel Co. merger in 1998.

The 21-year-old hotel at 700 E. Central Parkway, assessed at $3.2 million, is closed for a full-scale renovation while the new owner negotiates with the UK's InterContinental Hotels Group in Atlanta about keeping the Holiday Inn flag. The talk among small hotel operators in Plano is that parent flag will stay, but the Holiday Inn version might be different when it reopens.

FelCor will sell three more before the quarter ends and probably another 10 or more this year. And, there's no doubt that more will be pulled from the 16-hotel inventory in Dallas. "We've indicated as part of our long-range investment strategy that we expect to reduce our exposure in Texas and Dallas," says Richard J. O'Brien, FelCor's executive vice president and CFO.

The Dallas-headquartered Wyndham International Inc. is holding sales contracts for another three hotels, all due to close before midyear and generate $24 million gross for the till. So far this year, Wyndham has raked in $133 million gross from a nine-property portfolio with 2,249 rooms and has another 21 up for grabs, including a select few of its Wyndham brand. Last year's take from 18 sales grossed $234 million.

Joseph Champ, Wyndham's CIO, says properties are trading for 30% to 80% of replacement costs. The lower end of the spectrum belongs mostly to the regional buyer, who's in the game for repositioning.

"Buyers are becoming more aggressive, more willing to pay prices at a percentage of replacement and more forward looking," Champ says of a swing that has brought the bid-ask spread closer together. In many cases, the hot topic at the bargaining table is the retention of the flag. The recent $133-million sale to USAA has the Doubletree flag in place for 13 to 15 more years, he confides.

"We feel like we're getting strong prices for what we're selling," Champ stresses. "If we're not, we're not selling. It's definitely a market that's firming up. I think you'll see a lot more transactions this year than last year."

Adler says FelCor and Wyndham are employing strategies much like any good hotelier these days as they seize market opportunities whether it's for geographical diversification, trading up or the normal churning of the portfolio. Both hoteliers are applying net gain to debt reduction as FelCor continues down a path to grow via upscale, resort-type properties and Wyndham follows a plan to focus on its high-end branding and pull away from third-party names.