Jones Lang LaSalle Hotels reported today that the transaction volume ofÊ hotels grew to $12.9 billion for the full year 2004, reaching an all-time high, and nearly doubling the volume of 2003. The company reports 155 transactions with a value of more than $10 million, representing 109,600 rooms with an average price per key of $117,991 in 2004.
Earlier this year, the company forecasted that full year transaction volume would reach the $10 billion mark. At $12.9 billion, transaction volume reached a 92.5% lift over the 2003 level of $6.7 billion, and almost four times the 2002 volume. This volume is an historic high, with the closest levels in recent history coming duringÊ the REIT boom years of 1997 and 1998.
The figures were compiled from Jones Lang LaSalle Hotels’ comprehensive database, which includes U.S. hotels sold for more than $10 million. The firm has a unique perspective of the hotel transactions market, having arranged almost one fourth of all single asset hotel transactions which traded at prices greater than $10 million during 2004.
“The appeal of hotels as an asset class and subsequent strength in capital market activity is due to a combination of factors: a strong economic and lodging industry recovery picture, particularly compared to other real estate sectors; low, albeit rising, interest rates and a highly competitive debt market, which has resulted in dramatically improving spreads; the number and diversity of buyers, including off-shore investors; and an increasing interest by owners to bring properties to market,” said Arthur Adler, managing director and CEO-Americas for Jones Lang LaSalle Hotels.
Portfolio transactions in 2004 increased by $3.9 billion - two and one half times that of the total 2003 portfolio transaction volume. “This increased volume can be attributed to several key portfolio transactions, including the Blackstone/ESA deal and the CNL/KSL transaction,” said Melinda McKay, senior vice president for Jones Lang LaSalle Hotels.
The report shows that single-asset transactions commanded a significantly higher price per key relative to portfolios, with a 71.5% premium to portfolio transactions at $159,879 versus $93,240. “This is primarily due to the type of assets associated with the ESA transaction and the record number of single-asset trophy deals recorded during the year,” said McKay.
Nine of the Top 10 Single-Asset Hotel Transactions Breach $100 Million
Jones Lang LaSalle Hotels’ research shows the prevalence of large single asset hotel transactions in 2004, with nine of the top 10 breaching $100 million. El Ad Group, a private equity firm, closed the largest with the acquisition of the 805-room Plaza Hotel for $675 million. “While notable given its sheer size and price per key, the value of this transaction had little to do with hotel economics and more with the strength of the New York residential market, as The Plaza will be converted mostly to residential condos,” Adler said.
The ten largest single-asset hotel transactions averaged a price perkey of $450,000, almost four times the overall average of $118,000. The highest price per key for a single asset in 2004 was $1.1 million, paid for the Mayflower Hotel in New York City, which was purchased with the intent to convert the entire block to a mixed-use condominium project.
“The Plaza and the Mayflower transactions were the rule rather than the exception in New York,” said Adler.Ê “Of the seven hotels for which Jones Lang LaSalle Hotels arranged the sale in New York during 2004, three are slated for residential conversion.”
Capitalization Rate Averages 7.1% for 2004 - An Historic Low
Capitalization rates exhibited historic lows in 2004. The average cap rate on 56 separate transactions on which Jones Lang LaSalle Hotels has cap rate data, representing $3.1 billion in deals, was 7.1% in 2004. This comprised a mix of encumbered and unencumbered assets.
“In comparison, for the 24 transactions which Jones Lang LaSalle Hotels closed that had some level of income support, valued at more than one billion dollars, the average cap rate was 5.0%,” Adler said.
Top Hotel Buyers and Sellers in 2004
Blackstone ranked the top player in hotel acquisitions for 2004,
acquiring approximately one quarter of total transaction volume. Dominant players for the single asset transactions include: Host Marriott (purchased 1,175 rooms valued at $501 million); Highland Hospitality (acquired 3,242 rooms valued at $377 million); Diamond Rock Hospitality (bought 1,570 rooms valued at $208 million); and Ashford Hospitality Trust (purchased 1,644 rooms valued at $190 million).
On the seller side, the Blackstone/ESA and CNL/KSL transactions played a major role in the 2004 landscape, comprising more than 40% of total transaction volume. In addition, other top sellers in terms of sheer volume were Prince Alwaleed (who sold the Plaza Hotel), Orville International Limited (disposed the Mayflower Hotel), and Fairmont
Hotels & Resorts (Fairmont Kea Lani).Ê Notable key sellers in respect to total number of hotel rooms sold include Wyndham International (disposed 4,267 rooms valued at $401 million), and Host Marriott (disposed 2,747 rooms valued at $196 million).
Forecast for 2005
The factors that led to last year’s record volume will remain active in 2005. “Investors have been particularly interested in the hotel real estate market given its positive risk-return characteristics relative to other forms of real estate, particularly after lackluster returns from some of the other asset classes,” said McKay.
“We predict a sustained level of transaction activity in 2005, in the magnitude of $9 billion, or even higher if major portfolio acquisitions occur again,” said Adler. “While this does not match the volume of 2004, due to the major portfolio deals, we expect significant single-asset transaction volume as owners bring properties to market to exploit the strength of the capital markets. Investor demand for hotel assets will keep upward pressure on prices, with modest interest rate increases having little effect as investors mitigate the risk of such increases by acquiring interest rate caps.”