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 Profile of Hotel Ownership in the
San Francisco Bay Area

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By Anwar Elgonemy – Jones Lang LaSalle Hotels

January 26, 2004 - Jones Lang LaSalle Hotels has undertaken a survey of hotel ownership in the San Francisco Bay Area. The survey analyzed the Bay Area’s largest hotels by major markets: the City of San Francisco, SFO Airport, Silicon Valley, East Bay, and the North Bay/Sonoma/Napa.

San Francisco Bay Area Hotel Ownership

REIT 27%
Private Hotel Company 21%
Opportunity/Equity Fund 13%
Publicly Traded C-Corp 13%
High Net Worth Individual / Family 11%
Developer / Partnership 10%
City 3%
Pension Fund Advisor 2%
Source: Jones Lang LaSalle Hotels

The survey conveys that REITS, such as FelCor Lodging Trust, Host Marriott Corporation and MeriStar Hospitality, own 27% of the major hotels in the Bay Area. As REITs in total own a relatively large percentage of investment-grade hotels in the region, their impact on the ownership landscape has been dramatic. However, reduced earnings have temporarily limited this group from conducting any critical mass of acquisition activity in recent years, except on a very select basis. 

Why did REITS end up being the majority owner of hotels in the Bay Area? The concept of the "paired-share" (including "paper-clipped" and "stapled") REIT proliferated in the 1980s, and a handful survived after Congress legislated the structure’s demise in 1984. These structures - whereby a hotel-operating C-Corporation was paired with a hotel-owning REIT, essentially giving the former the tax advantages of the latter - were behind a spate of hotel acquisitions in the Bay Area and the nation in the 1990s. REITS went on a Bay Area buying spree also due to their inherent advantages: favorable tax treatment, liquidity and diversification, as well as their access to capital.

Private lodging companies (i.e. Hyatt Hotels & Resorts, Stanford Hotels Corp. and Woodside Hotels & Resorts) comprise 21% of the Bay Area’s lodging ownership pie, followed by publicly traded C-Corps (namely Hilton Hotels Corp. and Starwood Hotels & Resorts) and opportunity/equity funds (such as Blackstone Group, Oaktree Capital Management and Strategic Hotel Capital), both tied at 13% of hotel ownership in the Bay Area. Opportunistic investors seek properties where they can add significant value before reselling them, often within a holding period of between two to five years. 

The balance of the ownership pie is comprised of high net worth individuals/families (11%), developers/partnerships (such as Millennium Partners and Leisure Sports, among others) with 10%, local cities (lessors) at 3%, and, lastly, pension fund advisors (i.e. Cornerstone and Lowe Enterprises) with 2% of Bay Area lodging assets. 

San Francisco has the oldest hotels in the Bay Area, with an average property-age of 36 years, compared to the SFO Airport market which has the newest hotels, with an average property-age of 17 years. Projects at the older San Francisco properties that didn’t receive renewal funding in time to stop deterioration, and the problems they spawned, were spreading across the budget sheets in 2003. However, once the gradual recovery gets into motion in 2004, hoteliers should return to freer-spending ways and deferred maintenance will move to the front burner. Untapped upside should then be monetized.

The largest hotels in the Bay Area are in San Francisco, with an average size of 513 rooms, compared to the North Bay/Sonoma/Napa market which has smaller, more intimate properties, with an average of 192 guestrooms.
 

Market
Average Age of Hotel
Average 
Size of Hotel
Highest Percentage of Ownership
City of San Francisco
36 years
513 rooms
REITS (26%)
SFO Airport
17 years
366 rooms
REITS (29%)
Silicon Valley
18 years
310 rooms
REITS (33%)
East Bay
22 years
264 rooms
Private Hotel Companies (40%)
North Bay/Sonoma/Napa
27 years
192 rooms
Private Hotel Companies (46%)
Source: Jones Lang LaSalle Hotels 
Bay Area survey includes sample of 117 major full-service hotels/resorts with a total of 41,565 rooms.

There is little doubt that REITs will remain popular to institutional investors who seek liquidity and diversification, but who do not have the stomach (or experience) for direct acquisitions. REITs will also remain popular for individual investors and retirees, particularly when government bonds and money market rates are at comparative lows (which is the current environment). In particular, as the stock market recovers, REITs should regain expansion capacity.

According to the most recent Jones Lang LaSalle Hotels Investor Sentiment Survey, hotel investors indicated their strongest buy rating for the U.S. property sector in three years. San Francisco tops the list as the most desirable city in which to own, with an 86.7% "buy" score, followed by New York at 70.6%. 

On the sales side, there is a considerable amount of capital in 2004 that is geared toward hotel investment, and it’s an opportune time to prepare a disposition strategy. In many investors’ minds, the U.S. hotel performance should improve this year, with the hotel sector turning out to be more appealing than other lagging real estate sectors. With REITS once again gearing up for acquisitions, and opportunity/equity funds possibly considering dispositions, the San Francisco Bay Area hotel market is bound to experience increased transaction activity in 2004. 

Jones Lang LaSalle Hotels, the world’s leading hotel investment services group, provides clients with value-added investment opportunities and advice. In 2003, its success story includes the sale of 13,263 hotel rooms to the value of US$2.6 billion in 60 cities and advisory expertise on 119,814 rooms to the value of US$18.8 billion across 281 cities. Jones Lang LaSalle Hotels’ services include transactions, mergers and acquisitions, financial advice and capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection and industry research. Jones Lang LaSalle (NYSE: JLL) is the world’s leading real estate services and investment management firm, operating across more than 100 key markets on five continents. www.joneslanglasallehotels.com

Anwar Elgonemy, based in San Francisco, draws on over 10 years of hotel investment advisory experience. Since joining Jones Lang LaSalle Hotels in 2001, he has been involved in hotel transactions, debt placements and asset management assignments. Anwar holds an MBA from Thunderbird, The American Graduate School of International Management, and is both a licensed commercial real estate salesperson and appraiser. 


 
Contact:
Anwar R. Elgonemy
Jones Lang LaSalle Hotels
One Front Street, Suite 300
San Francisco, CA 94111
DIRECT LINE: (415)699-3347
FAX: (415)421-7736
Anwar.Elgonemy@am.joneslanglasalle.com
www.joneslanglasallehotels.com
Also See: San Francisco Lodging Investment Review / Anwar Elgonemy / June 2003
The San Francisco Hotel Investment Climate in the Post-Tech Boom Paradigm / Anwar Elgonemy / Oct 2002


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