Hotel Mavens Make Smarter Buyers

NEW YORK CITY-Felcor Lodging Trust’s Monday announcement that it was acquiring two Midtown properties from Morgans Hotel Group Co. is “emblematic of a legacy publicly traded hotel company that has evolved over time,” industry consultant Daniel Lesser tells GlobeSt.com. “They’ve clearly gotten away from the suburban Holiday Inn ownership mode and segued into more upscale, urban locations.”

More than that, though, FelCor’s $140-million purchase of the Royalton at 44 W. 44th St. and the Morgans at 237 Madison Ave., at about 60% of replacement cost, says that “smart hotel investors see tremendous upside in this product type and in these market types,” says Lesser, founder of locally based LW Hospitality Advisors. He adds that the Irving, TX-based REIT’s two Midtown buys—its first in New York City—and its $98.5-million acquisition of the Fairmont Copley Plaza in Boston this past August show that it recognizes the value of acquisitions in markets with high barriers to entry.
“FelCor knows and understands the hotel business; they specialize in the sector,” says Lesser. “They’re not like some investors who only dabble in the sector part-time.”

The fact that the sector is attracting both lodging mavens and smart real estate players that don’t focus exclusively on the sector is telling, Lesser says. “It’s very interesting how the hotel investment arena has gone from being perceived as a four-letter word to a new darling in a very short time,” he says. “It’s during these up markets that you start seeing players in the space that aren’t necessarily focused on the space.” They’re drawn to the sector by “the superior risk-adjusted returns” that are possible with hotels.

The smartest acquisitions being made lately separate the wheat from the chaff in hotel buys. “It’s clearly been the experienced folks who know enough to stay in the business,” Lesser says. “And frankly, the ones that get in during the early the part of the cycle are the ones that are really going to reap the benefits.” He points to the “epic appreciation” coming to hotel valuations in the near future now that the economy appears to be recovering and new supply is in check.

Moreover, Lesser says plays such as the two Felcor acquisitions in Manhattan demonstrate the value not only of markets with high entry barriers, but also of product with high barriers to entry. “Replicating assets like that is not all that easy,” he says. “Putting up limited-service properties in downtown urban cores is easier; we continue to see that, especially in New York. It does contribute to new rooms. But the fact remains that boutique-type hotels such as the Royalton and Morgans aren’t nearly so easy to develop and finance.”

New York itself remains “an under-hoteled market,” in Lesser’s view. “Even with the rash of development that went on in the recent past, look at the total number of rooms in New York and compare and contrast that to Orlando or Las Vegas. Even looking at the occupancy rates in New York versus the national average tells you that New York is under-hoteled.”