'Investors in US lodging should not lose sight of potential threats to the market.'
By Daniel H. Lesser|April 20, 2007 at 01:48 PM
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A result of the favorable US lodging industry performance during the recent past has been an unprecedented level of transactional activity both in terms of corporate entity and property level deals.
Many publicly traded brand hotel companies, which historically owned and operated property, continue to dispose of owned real estate assets while focusing on growing more predictable management and/or franchise fee income, as well as expanding their distribution networks and overall critical mass. Many publicly traded pure hotel investment firms continue to acquire assets while also pruning their portfolios and disposing of non-core assets and/or selling hotel properties where they are able to “bake in” recent rapid appreciation gains.
In addition, private equity firms, taking advantage of continued inexpensive debt, have utilized high levels of leverage to continue to be major acquirers of corporate hotel enterprises and large portfolios of hotels. Furthermore, with institutional investors under pressure to “get money out,” coupled with the significant amount of foreign capital flowing in to the US from all parts of the world, investment in the domestic lodging industry is anticipated to provide superior risk adjusted returns when compared to other investment options.
Given that the outlook for the US lodging industry remains positive with profits anticipated to continue to grow to record levels, capital, both debt and equity, will continue to robustly flow into the sector. Rising cash flows through both market factors (i.e.: ADRs increasing above underlying inflation levels), and ever more sophisticated asset management techniques should more than offset anticipated modest increases in capitalization rates which cannot compress much further.
The CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major US hotel sale transaction market (above $10 million single asset, not part of a portfolio allocation). Of 20 such trades that occurred through the first quarter of 2007, the largest single-asset US hotel sale thus far this year was the $575-million acquisition by a joint venture between Morgan Stanley Real Estate Fund V US, Trinity Investments LLC and Dowling Co., of the Makena Resort which includes the 310-room Maui Prince Hotel in Makena, HI. On a per-room basis the transaction equates to $1.85 million; however, it is extremely important to note that the sale included in addition to the hotel, two 18-hole Robert Trent Jones Jr. golf courses, 1,317 acres of vacant land, and the stock of the Makena Wastewater Corp.
Another noteworthy transaction during the first quarter of 2007 includes the $952,000 per room acquisition by Larry Ellison (CEO of Oracle Corp.) of the 21-room Casa Malibu Inn in Malibu, CA. In addition, “celebrity capital” continues to enter the sector as evidenced by recent US hotel investments made by Bill Gates, Michael Dell, Earvin Johnson, Shaquille O’Neal, Paul Allen, and Andre Agassi and Stefi Graf.Other interesting observations relative to the First Quarter 2007 Major US Hotel Sales survey include:
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