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National Report--Brokers concede buyers see a brighter future ahead and are willing to pay more for hotels because profitability in the lodging industry has improved. Add that to the fact that sellers have tempered their expectations, and transaction volume gets a boost while buyers and sellers try to meet their strategic needs.
Mike Cahill, president of Hospitality Real Estate Counselors, said there's a shift in who's buying and selling. Some companies that were sellers in 2001- 2003 are becoming buyers this year.
"These companies want to hold on to these assets," Cahill said. "We've seen more movement from the buyers than the sellers. Hotels are selling on lower [capitalization] rates."
David Mumford, president of Mumford Co., said the majority of sellers are corporations and the majority of buyers are entrepreneurial owner/operators that own five or fewer hotels. More than 80 percent of the transactions Mumford Co. handled last year and in the first quarter of this year involved corporations pruning their portfolios.
Al Calhoun, partner with Thompson Calhoun Fair, said there are two trends occurring with transactions. One is that Hilton Hotels Corp. and Marriott International products are in high demand, buyers are willing to pay for them and cap rates are being pushed down on those hotels. The other is that there have been other hotels suffering financially; and there's a lot of them because of the terms of the loans, which are due in '05 and '06. Calhoun said owners are faced with the choice of having to put money into their hotels to get more financing or selling.
Bob Hunter, president of Hunter Realty, said most of the sales he's been involved with are one-offs. Hunter said many buyers don't have the money to purchase three or more properties at once.
Steve Marx, president of Hotel Source, said there's a shift of many buyers looking for hotels in secondary and tertiary markets because of their stable performance.
"We see regional management companies continue to be strong buyers," Calhoun said.
Art Adler, managing director of Jones Lang LaSalle Hotels, said individual buyers or groups of individual buyers are buying lower-end hotels. Hunter said there are fewer buyers for full-service hotels and the further down the chain scale the more buyers there are.
During the last six months of 2003, sellers offered their hotels at 1999/2000 prices, according to Toni Viens, executive director of Hotel Brokers International. Viens said that while the prices reflected the two best years of the hotel industry, occupancy and revenue per available room hadn't fully recovered from the recessionary years of 2001/2002.
"Even with occupancy and RevPAR still somewhat soft, what allowed the buyers to purchase at such high prices was the fact that interest rates remained low," Viens said. "This resulted in hotels transferring at fairly low capitalization rates, while still allowing the buyers a reasonable equity return."
Hunter said many companies are more interested in hotels that are in the same region as their headquarters, so they're selling properties in their portfolio that don't fit their geographic desire.
Another reason for selling properties is that a company might not have the critical mass it needs with a certain brand in its portfolio. Also, a seller might be someone who's looking at requirements from the franchisor to dump millions of dollars into the hotel for renovations, so he or she decides not to spend the money and sells the property.
Properties that companies are selling are viewed as nonstrategic assets, which means different things to different companies. For example, anything not branded as a Wyndham might be nonstrategic for Wyndham International. Hotels that aren't producing a lot of cash flow could be nonstrategic assets for public companies. Owned hotels might be nonstrategic for a company like Hilton Hotel Corp.
Also, real-estate investment trusts are churning assets--buying hotels that are accretive or selling hotels to pay off debt.
Calhoun said not all hotels sold are in bad shape or need to be rebranded.
"The economy makes hotel owners look at what they want to be and what they want to own," he said. "Stress makes owners focus."
[c] The pie chart shows transaction volume (greater than $10 million) by location, according to Jones Lang LaSalle Hotels. The largest proportion of sales ($2 billion) occurred in urban markets. A significant proportion of assets ($1.9 billion) were sold in secondary and tertiary markets. The price per key ($80,000) in those markets was the lowest of the four groups. Resorts had the strongest average price per key ($246,000).
Airport 3%
Primary Urban 38%
Secondary/Tertiary Urban/
Suburban 35%
Resort 24%
Note: Table made from bar graph.
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