US Lodging: Fall 2011 Report Card
There is no shortage of recent news and events which have cast dark clouds on the future of the world. A global economic crisis, rising tensions in the Middle East, and U.S. political uncertainty and rancor have all contributed to a broad crisis of confidence. If the U.S. economy is not currently in a recession, it is certainly at the cusp of slipping into one. On the positive side, despite high unemployment and a largely languishing real estate market, U.S. corporate profits are strong. The 2012 election will produce either a reinvigorated Obama administration, or a new government in Washington DC. Either way, many believe a new era with positive momentum will unfold after the balloting, with American corporations finally deploying cash from liquid balance sheets.
Despite a sluggish economy, U.S. hotel operating metrics have remained positive and many prognosticators anticipate a continuation of this trend. I believe that if in fact we experience another recession, the macroeconomic effects of a double dip will not bode well for short term industry metrics. However, development of U.S. hotels will remain relatively muted for the foreseeable future as economics do not justify new building, and with the exception of EB-5 Immigrant Investor financing and public/private partnership opportunities, construction debt capital will be difficult to obtain for such initiatives. Until the middle of this past summer, the perceived long term upside in the lodging sector resulted in heighted transaction activity and pricing of all types of hotel assets. In particular, major hotel assets situated in gateway U.S. markets were highly sought after by lodging centric REITS that enjoyed the ability to raise relatively low cost capital through IPO’s and follow-on offerings. Recent turmoil in world capital markets and a hyper-sensitive stock market has resulted in significant declines in hotel REIT share prices, that subsequently led to the inability to now acquire assets. Several hotel REITs including LaSalle Hotel Properties and Ashford Hospitality Trust have recently been trading at large discounts to unlevered asset value, and have announced stock repurchase programs. Management of these entities perceives a strategic opportunity to create shareholder value by selling assets and reinvesting in their own portfolios.
LW Hospitality Advisors (LWHA) continuously monitors the major U.S. hotel sale transaction market. The
LWHA YTD Q3 2011 Major U.S. Hotel Sales Survey illustrated below, includes 83 single asset sale transactions over $10 million each that are not part of a portfolio allocation. These transactions totaled more than $6.7 billion, and include over 26,000 hotel rooms with an average sale price per room of approximately $260,000. By comparison, the YTD Q3 2010 survey identified 67 transactions totaling more than $3.5 billion including 18,900 hotel rooms with an average sale price per room of $185,000.
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Trade activity of U.S. lodging assets declined dramatically during this past Q3 2011 as illustrated on the following table:
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It is interesting to note that during Q3 2011, in addition to a dramatic decline in total number of trades and total dollar volume of major sales, the average size deal was more than 50 percent below prior quarters of the year. Furthermore, the average price per room sold in Q3 2011 was significantly below prior quarters of the year.
Other notable observations from the 17 major deals included in the LWHA Q3 2011 Major U.S. Hotel survey are as follows:
• Thirteen transactions or more than 75 percent, included assets located on both U.S. coasts and Hawaii;
• Six transactions or more than one third, included assets located in California, and
• The Hyatt on Capitol Square in Columbus, Ohio traded for 35 percent or $10.5 million lower than what it previously sold for during 2007.
Several previously announced noteworthy U.S. hotel sale transactions that were slated to close during Q3 2011 have yet to be effectuated including:
• Host Hotels & Resorts $442 million acquisition of the Grand Hyatt in Washington DC;
• LaSalle Hotel Properties $405.5 million purchase of the Park Central in New York;
• Chatham Lodging Trust’s $24.9 million acquisition of the Residence Inn Pittsburgh University Medical Center.
Several previously announced noteworthy U.S. hotel sale transactions have reportedly been terminated during Q3 2011 including:
• Host Hotels & Resorts contract to acquire the St. Regis Monarch Beach in Dana Point, CA
• Cerberus Capital Management and Chatham Lodging Trust in August abandoned a $1.12 billion deal to buy Innkeepers USA Trust which includes 64 hotel assets
Despite a sluggish economy, U.S. lodging industry fundamentals continue to be fairly strong. Given a myriad of global and domestic issues, the verdict on short term future industry performance is far from clear. Any downturn in U.S. hotel metrics that may occur will be moderated by limited new hotel development. Share prices of publicly traded hotel focused REIT’s do not currently justify acquisition activity, and they are effectively now out of the market. Large sums of raised private capital funds, and overseas investors from throughout the globe are now better positioned to deploy capital into hard U.S. assets including hotel investments, which have traditionally offered superior risk adjusted returns. The world is awash with liquidity, which to some extent will back fill the void left by REITS who until recently were flush with cash and extremely acquisitive. The United States has always been, and will always be the safest place on the planet to invest. Furthermore, urban 24/7 markets such as New York, Boston, Washington DC, and San Francisco are highly sought after as many hotel assets trade at below replacement cost. Finally, when one considers the recent trade of the W London – Leicester Square at roughly $1.6 million per room, U.S. inner city hotels appear relatively inexpensive.
Daniel H. Lesser is president & CEO of New York City-based LW Hospitality Advisors LLC. He may be reached at email@example.com. Opinions expressed in this article are the author's own.