By: Maurice Robinson, Principal and Barbara Boultinghouse, Manager, Summer 1996

The current wave of hotel investors has revived the moribund market of the early 1990s. The saviors have been the real estate investment trusts (REITs) and hotel management companies - particularly those teamed with private equity sources or with access to public markets. To a lesser degree, domestic institutions and foreign investors have also propped up the hotel acquisition market, but they have been sellers as well as buyers in the current wave.

Buyers

Among the REITs most actively buying full service hotels are Patriot American Hospitality, Starwood Lodging Trust, and FelCor Suite Hotels. REIT buyers of mainly limited service hotels include RFS Hotel Investors, Hospitality Properties Trust, Equity Inns, Innkeepers USA Trust, Winston Hotels, Sunstone Hotel Investors, Jameson Inns, and Humphrey Hospitality. REITs have been extremely active in the market, and many are purchasing hotels for a fraction of the original construction cost. Their access to low cost capital has been advantageous in winning bidding wars on sough after properties. The REIT buying spree is expected to continue for the next 12 to 18 months.

A sampling of hotel companies either buying for their own account or on behalf of strategic investment partners include Host Marriott Corporation, ITT-Sheraton Corp., Hilton Hotels Corporation, Doubletree Hotels, CapStar Hotels, Interstate Hotels Corp., Bedrock Partners, Wyndham Hotels & Resorts, Omni Hotels, Hyatt Hotels, Richfield Hospitality Services, Prime Hospitality Corp., Bristol Hotel Company, Servico and HEI Hotels. There are several others. Many have capital held in reserve that was amassed through recent public offerings of stock. These firms are tapped into the deal pipeline and can move quickly, although their return expectations are generally a bit higher that the REITs. One advantage is that in cases of owner/operator companies , all management fees are captured in-house, thereby increasing their yields.

Among the investment funds and investment intermediaries that are buying or investing include Lowe enterprises, Prudential, Equitable, Colony Capital, and AEW. Principally, though, they are buying on behalf of major pension fund clients.

Foreign investors who have recently been active include CDL Hotels, His Royal Highness Prince Al Waleed Bin Talel, Regal Hotels, and other groups from Asia. On balance, however, today’s foreign owners, particularly Japanese owners, are more often selling than buying.

The advantage in hotel acquisitions will remain with those investors, with access to cash who are able to close a deal quickly. As long as the REIT and public market “window” is open, these entities will likely continue to be the most active buyers of hotels. How long will the window stay open? We think it may be as long as another 12 to 18 months.

Sellers

The sellers in this active market are becoming rarer. many distressed properties have already been worked out or sold. Now that there has been an increase in buyers, there are less hotels on the market. There are, however, certain owners that are more likely to sell than others.

The profiles of most active sellers can be characterized as foreign investors and institutions - particularly the Japanese, U.S. insurance companies, and some of the strategic investment funds.

The market has been anticipating for the past few years that foreign owners, particularly the Japanese, would dispose of their troubled hospitality assets. While some assets have been sold at deep discounts, it turns out that waiting the extra few years actually increased the values of many of these hotel assets sufficiently enough to justify prices today that are attractive enough to warrant selling.

There have also been U.S. insurance companies and institutional investors that have held onto hotel properties in order to obtain increased in their value. They have renovated, put in new management, and waited for the real estate market to recover. That market recovery is here, and many of these institutions may soon be sellers.

These investors are also selling properties that either do not fit their overall strategy or have increased in value enough to warrant disposition. The sales proceeds are being used to reinvest in other properties that more neatly match their investment strategies of the next several years.

Summary

Hotel prices have been increasing in the past few years. Supply is now more closely in balance with demand. And, individual property performance has greatly improved, too. Combined, this market recovery continues to limit the number of sellers and increase the number of buyers. The high - profile hotels most recently for sale have typically attracted between 15 and 20 qualified bidders. The industry adage - the greater the number of bidders, the higher the sales price - has proven true in 1995 and is expected to continue well into 1997.

Regarding the near future, it is expected that REITs, hotel companies, and institutional investors seeking steady returns will be the most active buyers. High-yield investment funds and financial institutions - both foreign and domestic - will be the most active sellers.

At some point in the future, perhaps in 1998, the window of opportunity will close on the ready access to capital in the public markets, and there will be fewer enthusiastic buyers in the market which might trigger some sell offs. At that point, the institutional, opportunistic, and foreign investors will re-emerge as buyers, and the cycle will begin again.

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1996 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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