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Investors Jump Back Into Rebounding Hotel Market

With Hospitality Fundamentals and Profits Swinging Back Up, Investment Funds and Institutions Are Joining REITs In the Buyer's Circle

With the U.S. hotel sector firmly in recovery mode, the number of large hotel investment sales has continued to rise in the second quarter. More properties are coming onto the market in response to a growing amount of capital seeking hotel investment, with private-equity funds, institutional buyers and other types of buyers joining REITs in the competition for high quality lodging assets.

The already-hot pace of deals seems to have accelerated in recent weeks. According to preliminary CoStar data, approximately $4.21 billion in hospitality properties have sold or gone under contract in 132 sales since April 1 of this year. Nearly a dozen of those deals involve hotel portfolios or high-end properties that have closed at a price of $100 million or more.

"The transaction environment remains extremely competitive," said Douglas Kessler, president of Ashford Hospitality Trust Inc., which along with joint venture partner Prudential Real Estate Investors took ownership of the 28-hotel Highland Hospitality portfolio earlier this year through a consensual foreclosure for $1.277 billion.

"The depth of the buyer market is increasing and includes REITs, investment funds, insurance companies, pension plans, private equity and offshore buyers," Kessler said during the Ashford’s recent earnings conference call.

A new survey of hotel investors and lenders also reflects bullishness and optimism in the marketplace. According to the recent Hotel Investors' Gauge by STR (Smith Travel Research) Analytics and, 81% of investors surveyed are actively pursuing acquisitions -- even though 28% currently hold delinquent assets. More than half of respondant believes that occupancy will return to prior peak levels by 2012, with ADR recovering by 2013.

The results indicate that most investors are predicting a quick recovery for the industry, which is one of the factors driving the increased transaction activity in recent months,

"Moreover, despite the reported dearth of available debt for commercial real estate, roughly two-thirds of the lenders surveyed are willing to finance lodging acquisitions, albeit at more stringent terms than what was offered just a few years ago," said Stephen Hennis, director of STR Analytics.

The survey found 62% of lenders who responded are willing to fund new acquisitions, despite the fact that 62% have worked out delinquent loans, 38% have foreclosed upon properties, and 60% now control assets that have been foreclosed upon.

As hot as the office investment sales market has been of late, hospitality investment is even hotter, noted CoStar Senior Real Estate Strategist Chris Macke.

"First-quarter 2011 hospitality sales volume was 109% above the same period in 2010, making it the hottest property type based on sales volume increases versus 2010," Macke said.

"This makes sense as the 24-hour nature of hospitality leases results in hospitality net operating incomes (NOIs) more quickly reflecting improving economic conditions, providing investors with earlier insight into the income growth potential on the horizon than other property types," Macke continued. "Combined with the dramatic drop in NOIs and valuations during the downturn, this has made for an ideal environment to facilitate increased sales volume."

Hotel operators are clearly poised to take advantage of those big improvements in fundamentals. As of the first quarter, owners throughout most of the 54 largest U.S. markets tracked by CoStar and its forecasting unit, Property & Portfolio Research (PPR), had already started to push room rates upward.

The recovery remains uneven, with only a handful of metros sporting high occupancies showing consistent rent gains over the past year. Still, with occupancies much improved from their cyclical lows and increasing further, CoStar forecasts that room rates should increase across the board in 2011.

Occupancy gains alone have been enough to stoke sizable growth in revenue per available room (RevPAR) in the top 54 markets, according to CoStar. For the week ending May 21, the U.S. lodging industry reported its strongest weekly performance since early April, said Steve Hood, senior vice president at Smith Travel Research (STR).

The industry recorded an 11.6% gain in RevPAR, rising to $67.52 for the week. National hotel occupancy rose 6.2% to 65.4%, and the average daily rate (ADR) increased 5.1% to $103.23.

The RevPAR pop this year has attracted buyers looking to capitalize on the property type’s relatively quick recovery in asset-level performance, CoStar Real Estate Economist Jeff Myers said in a recent report on hotel fundamentals.

"The market for transactions is heating up rapidly," confirmed Arthur Adler, managing director and CEO-Americas for Jones Lang LaSalle Hotels, which has closed several large deals this year -- most recently the acquisition of two properties totaling 282 rooms by Texas-based FelCor Lodging Trust, Inc. from Morgans Hotel Group for $140 million, or $496,454 per room, on May 23.

With hotels bearing a disproportionate amount of distressed CMBS debt compared to other property types, a significant portion of lodging deals involve troubled properties.

In one of the largest of these transactions, Chatham Lodging Trust and Cerberus Capital Management, LP bought the Innkeepers USA portfolio of 65 properties from Innkeepers and Apollo Investment Corp. in a bankruptcy sale in May for $1.13 billion, or about $124,599 per room. Also last month, private equity fund KSL Capital Partners of Denver bought the 293-room Intercontinental Montelucia Resort & Spa in Paradise Valley, AZ, for $115.6 million, or $394,439 per room, in an REO sale from Eurohypo AG.

Though plenty of buyers are targeting heavily discounted distressed assets, well-located core-quality hotels are also selling regularly and the value of these deals has caused the average price per room in the market to begin trending upward.

"So far this year, there have been more than 35 upscale, full-service hotels traded in large urban areas throughout the U.S., with total transaction volume exceeding $4 billion, marking a staggering 250% increase, from $1.3 billion in the same period last year," Adler said. "Manhattan is on the forefront of hotel transactions, with year-to-date sales in the city topping $1 billion, representing a quarter of national upscale urban hotel trade volumes."

Texas based FelCor Lodging Trust, Inc. bought two properties totaling 282 rooms from Morgans Hotel Group for $140 million, or $496,454 per room, on May 23. 

brought to you by CoStar.

Posted - 3 days ago

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