Evolving Structures In U.S. Hotel Ownership - Jones Lang LaSalle Hotels Publishes Hotel Topics - Changing Ownership Structures
NEW YORK, - Jones Lang LaSalle Hotels recently published Hotel Topics - Changing Ownership Structures. The report compares and contrasts hotel ownership structures in the world's primary regions - The Americas, Europe and Asia Pacific - and explores future structures that will likely be implemented given the requirements of investors.
"Hotel owners come in all shapes and sizes. More recently, however, in the United States we have seen the development of mega-players that have influenced the dynamics of hotel acquisitions and development," said Melinda McKay, Senior Vice President of Jones Lang LaSalle Hotels, who authored the Americas portion of the report. "The size, type and even identity of top owners today looks very different from five years ago."
The report explores the benchmarks in U.S. hotel investment structures, as illustrated in the table below:
TRACING THE HISTORICAL HEAVYWEIGHTS IN THE USA - The mega-owners of today have grown through a combination of acquisition, development and mergers. In pure transaction terms, Host Marriott dominated the 1998 table, swallowing $2.2 billion of hotel assets in one year alone. In 1999, Strategic Hotel Capital was the most active buyer. In 2000, a number of key players vied for top place, while 2001 clearly belonged to Blackstone who acquired almost $1 billion in hotel assets in a single transaction. The relative dearth of activity in 2002 has meant little opportunity for high profile headlines, although CNL Hospitality remained active, acquiring eight hotels, all but one from Marriott International. Indicative of the inactivity in the REIT market, Host Marriott bought its first hotel since May 2000, the Boston Marriott Copley Place for a reported $214 million in June 2002.
A look at the top 10 owners now versus five years ago underscores this transformation. Only three of the current top 10 owners were ranked in the 1997 tally, Host Marriott, Tharaldson Enterprises and Lodgian. Host Marriott has consistently ranked as the largest owner in the United States, and despite the usual inertia of size, has achieved one of the fastest growth rates over the period (much of which was concentrated in 1998).
THE FUTURE OF U.S. HOTEL OWNERSHIP - "The hotel industry has witnessed such prolific change in the composition of its ownership structure over the last five years, the question of what the pattern may look like in the future is compelling," included Arthur Adler, Managing Director and CEO-Americas, of Jones Lang LaSalle Hotels. "Since REITs became inactive in late 1998, changes in tax laws have encouraged new forms of hotel investment techniques. In the five years to come, the most important changes and new forms of hotel ownership are most likely to be related to sources and cost of capital, liquidity and returns."
THE DEMISE OF TRADITIONAL REITS? - Although REITs in total own a relatively small percentage of investment grade hotels in the United States, their impact on the ownership landscape over the last five years has been dramatic. However, volatile stock prices and reduced earnings have limited this group from conducting any significant acquisition or development activity. Compounding this is their somewhat restrictive structure that limits the amount of retained earnings for ongoing capital costs and growth. As a result, it is unlikely that this ownership structure will grow markedly in the future.
"REITs will remain popular to institutional investors who seek liquidity and diversification, but who do not have the stomach (or experience) for direct acquisitions," said McKay. "REITs will 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 will regain expansion capacity."
PRIVATE PLAYERS TAKE THE EDGE - The majority of recent acquisition activity has been sourced from private equity players, such as partnerships and LLCs. Their ability to raise capital has not been stymied by share price devaluations. In addition, this investment structure appeals to institutional investors familiar with hotel investing given often superior rates of return.
According to Art Adler, in general, the industry is likely to witness more private and institutional capital flowing to hotels. "The carrot is the superior risk-adjusted return in comparison to other forms of real estate. According to the NCREIF index over the long term (10 years) hotels well out-performed all other forms of real estate, achieving an annual compound total return of 12.3%, compared with 8.8% for all properties," he added.
A FLOOD OF PENSION FUND MONEY? - Hotels represent a classic contrarian play for pension funds. Currently however, the sector is not well understood by this traditionally conservative investment source. But interest is growing. The question therefore is how would their capital be best deployed? REITs represent a viable alternative for these investors, at least initially, to access the high return potential of the sector without being exposing to too much volatility (and risk). Current investment by pension funds in hotel REITs is limited.
"Alternatively, a return hungry pension fund could invest in private equity funds, which provide the opportunity for greater return," stated McKay. "Knowledge of the vagaries associated with hotel investment (or at least an advisor with such experience) remains indispensable. Privatization of pension funds could provide the trigger to a major influx of retirement dollars to the lodging industry."
Canada is in just such a process and depending on its success, this could be replicated not only in the United States, but also throughout the world.