The volume of single-asset hotel deals doubled to $7.3 billion in the first half of 2004, reports Jones Lang LaSalle Hotels. The company reports 58 transactions above $10 million, representing 72,886 rooms with an average price per key of $100,698 in the first half of 2004.
“The U.S. last saw this level of hotel transaction activity during the REIT boom of the late 1990s,” says Melinda McKay, senior vice president at Jones Lang LaSalle Hotels. McKay expects full year transaction volume to register nearly $10 billion. “That would represent a 48% increase over last year’s level of $6.7 billion, and almost three times the 2002 volume.”
Jones Lang LaSalle credits the high volume of activity to a slew of factors: the number and types of buyers, the amount of equity chasing hotels and the availability of favorable debt and growing interest by owners to bring properties to market.
“Jones Lang LaSalle Hotels has arranged one-third of all single asset hotel transactions that traded at prices greater than $10 million during the first half of the year,” says ------------Art Adler, managing director and CEO-Americas for Jones Lang LaSalle Hotels. “Larger assets, as well as multi-billion dollar portfolio transactions, are more prevalent in this market where major urban and resort hotels, and those being sold subject to brand and management, are trading”
However, there are still not enough assets on the market to satisfy the enormous weight of the capital in the system, Adler adds. Indicators suggest that the U.S. transaction volume will continue to rise throughout 2005.
Public companies represented the most active buyers in the marketplace, winning 49% of the deals through midyear. Private equity and opportunity funds accounted for 41% of the transactions.
“Private equity and opportunity funds are allocating a higher proportion of capital to the lodging sector due to a lack of competitive returns in other asset classes, as well as the ability to place significant debt on hotels, resulting in strong cash-on-cash returns,” says McKay.
From the investor standpoint, hotels provide strong risk diversification by asset type, strong comparative returns, a good annuity income stream and an exceptional counter-cyclical position, according to Adler. “Therefore, it is not surprising that institutional and pension fund money is increasingly attracted to the sector.”
Competition among lenders to place capital has driven sharply divergent spreads. As a result, lenders are offering typical rates of 200 to 300 basis points over LIBOR (and even better in some cases), while loan to value (LTV) ratios also are climbing. High quality urban and resort hotels are fetching proceeds of up to 10 times NOI, at pricing of between 175 and 225 basis points above LIBOR. This level of proceeds is driven by strong debt service coverage ratios, valuations that place property values below replacement cost, loan-to-value of 70% to 75% and market conditions wherein operating fundamentals have stabilized and show clear signs of improvement, making such loans less risky than other property types.
Cap rates have also continued to tumble. The average cap rate on 30 transactions in the first half of 2004 was 7%. The deals represented $1.8 billion. By comparison, more than $500 million in transactions executed by Jones Lang LaSalle Hotels had an average cap rate of 6.2%, according to Adler.