Plateau in Hotels a Good News/Bad News Story

hotel-online.com/press_releases/release/plateau-in-hotels-a-good-news-bad-news-story by Daniel Lesser

NEW YORK CITY—Primary US lodging metrics during the first half of 2016 reveal that after five consecutive years of above average increases in occupancy, average daily rate and profits, hotel performance appears to be reaching a plateau. While growth is clearly decelerating, there is also no evidence of a decline in US hotel fundamentals indicating that the current cycle has ended.

The US hotel industry is currently a good news / bad news story.

The good news is that:

The US economy is demonstrating resilience in spite of global economic uncertainty; The US central bank is holding off on raising short-term interest rates until the economic outlook is more evident; Energy prices including gasoline remain below historical levels which has led to stronger leisure travel; Foreign capital continues to enter the US seeking safety and superior risk adjusted returns for long term investments such as hotels; The pipeline of legacy 10-year CMBS loans originated between 2005 and 2007 will continue to mature this year creating a variety of recapitalization opportunities for new money seeking yield; Construction financing for new hotel development is now scarce and difficult to obtain which places a damper on the entrance of new supply to the market; Airbnb is facing potentially crippling regulations with numerous state and local regulators, and struggling to prove its platform is not promoting discrimination.

The bad news includes:

For many years now, US GDP and Jobs growth has been tepid; There has been a marked weakness in US corporate travel thus far in 2016; Brexit initially shocked global markets but rebounded shortly thereafter; however, in its wake an enhanced level of uncertainty is creating market instability; Hotel supply has increased and select markets such as New York, Houston, and Miami are experiencing the consequences of too much product being introduced within a short time frame resulting in a dampening of room rate increases; The strong US dollar has created negative pressure on the amount of foreign visitation to America; Airbnb has signed agreements with three major travel management companies namely, American Express Global Business Travel , BCD Travel and Carlson Wagonlit Travel that will allow it’s 2 million listings in 31 countries be added to these companies’ corporate travel programs; The pipeline of legacy 10-year CMBS loans originated between 2005 and 2007 will continue to mature this year while refinancing options are unclear as sales of commercial mortgage-backed securities have fallen to levels not seen in more than a decade; Availability of CMBS hotel financing has been nearly nonexistent thus far this year;

1/4 For developers, construction financing for new hotel development is now scarce.

The LW Hospitality Advisors (LWHA) Q2 2016 Major US Hotel Sales Survey includes 50 single asset sale transactions over $10 million, none of which are part of a portfolio (click here to download sales highlights.). These transactions totaled roughly $4.7 billion, and included approximately 13,400 hotel rooms with an average sale price per room of $350,000. By comparison, the LWHA Q2 2015 Major US Hotel Sales Survey identified 56 transactions totaling roughly $4.5 billion including 16,800 hotel rooms with an average sale price per room of nearly $267,000.

With 10 major hotel sales, Florida has been by far the most active transaction market followed by New York with 9 trades, and California with 6 sale transactions. The $65 million sale of the 49 room Capella Hotel in Washington DC has by far set a new per room high water mark of roughly $1.3 million per key in Washington DC. Additionally the $315 million sale of the 462 room LondonHouse in Chicago has set a new per room high water mark of roughly $697,000 per key in Chicago eclipsing last years $600,000 per room trade of the Waldorf Astoria Chicago. Finally, it is worth noting the sheer size of the $780 million single asset trade of the 1,230 room Hyatt Regency Waikiki Beach Resort & Spa in Honolulu, HI, which has skewed upward the total sales volume during the second quarter of 2016.

While the US lodging industry is projected to continue experiencing increases in performance metrics, the gap between increasing demand and growing supply is narrowing. Demand growth is decelerating and barring a black swan unforeseen event, fairly stable occupancy levels are anticipated, while increases in average room rates are expected to continue to facilitate a rising RevPAR, albeit at a moderate pace. Despite strong fundamentals during the first half of 2016, hotel investment has been subdued due to perceived concerns that a dramatic slowdown to an already tepid US economic expansion is forthcoming in the near future. The market has talked itself down which has resulted in a widening of bid/ask spreads for desirable hotel investment opportunities. I believe that as time passes, when looking in the rear view mirror, last year’s pricing of US hotel properties will clearly become known as the peak.

I have been privy to information regarding select transactions that provide empirical evidence of price erosion of various US hotel assets. For no reason other than negative market perception, I have seen contract prices reduced between five and twenty percent. A recent $100 plus million hotel sale is noteworthy in that one year ago the seller rejected a bona fide offer of 15 percent more than the amount of the current sale price. In addition to the seller, the institutional broker, who on both occasions marketed the property for sale, confirmed that although during the last twelve months, the subject property and its sub-market’s performance metrics have improved, today’s lower closing price was due merely to an impression by investors of a market value correction.

Although several recent US hotel trades indicate value erosion during the past six to twelve months, it is important to note that there is insufficient evidence to support a broad, national market price correction. While some assets may currently be experiencing negative pricing pressure, not all hotels and/or markets have been subject to such a phenomenon. Lodging is a neighborhood business and underlying fundamentals can vary widely amongst submarkets. Values of irreplaceable hotels in high barrier to entry 24/7 and/or resort markets remain robust.

While on average US hotel prices are expected to remain stable for the balance of the year, broad market trends cannot be directly applied to an individual asset. Numerous factors influence the value of a specific hotel asset including a property’s age, condition, location, amenities, reputation, and replicability. While during the near term some hotel assets and/or submarkets may experience declining property values, others will continue to endure rising prices.

2/4 Daniel H. Lesser is president and CEO of LW Hospitality Advisors LLC. The views expressed here are the author’s own.

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This article originally appeared on GlobeSt.com and is reprinted with permission of the author.

About Daniel Lesser

Daniel H. Lesser, President & CEO of LW Hospitality Advisors LLC (LWHA), brings more than 35 years of expertise in a wide range of hospitality operational, investment counseling, valuation, advisory, and transactional services. He provides services to corporate, institutional, and individual clients as well as public agencies on all facets of hospitality real estate including: litigation support and expert testimony, site evaluation, highest and best use analysis, appraisals for mortgage, acquisition, and portfolio management, workout strategies, operational analysis, development consulting, property tax assessment appeal evaluations, economic impact studies, fairness opinions, deal structuring, and negotiation of management and franchise agreements. Mr. Lesser had been retained in connection with a broad variety of lodging assets throughout the Americas, as well as in Europe, the Middle East and Asia.

Contact: Daniel Lesser

[email protected] / 212.300.6684 x101

3/4 - YTD Q2 2016

Q1 Sheraton Grand Phoenix Phoenix AZ 1000 $300,000,000 $300,000 TLG Phoenix LLC City of Phoenix

Q1 FireSky Resort & Spa Scottsdale AZ 204 $62,500,000 $306,373 Classic Hotels & Resorts KHP Fund I, L.P.

Q2 Holiday Inn Express & Suites Napa Valley- American Canyon CA 101 $10,800,000 $106,931 American Koyu Corporation Lake Street Ventures American Canyon Q1 San Simeon Pines Seaside Resort Cambria CA 60 $11,000,000 $183,333 Pacifica Hotels Bonser Family

Q2 Sheraton Cerritos Hotel Cerritos CA 203 $42,000,000 $206,897 Continental Asset Management Sunstone Hotel Investors, Inc.

Q1 Holiday Inn Express Hotel El Dorado Hills CA 93 $14,435,000 $155,215 N/A N/A

Q2 Redbury Hotel Hollywood CA 57 $41,000,000 $719,298 Vulcan Inc. Pebblebrook Hotel Trust

Q1 Hotel La Jolla La Jolla CA 110 $40,000,000 $363,636 Khanna Enterprises Ltd. Westport Capital Partners LLC

Q2 Manhattan Beach Marriott Manhattan Beach CA 385 $78,000,000 $202,597 JV Cerberus Real Estate Capital Management & HMC/Interstate Manhattan Beach, L.P. Westmont Hospitality Group Q1 Doubletree by Hilton Sacramento Sacramento CA 448 $38,500,000 $85,938 Brighton Management Westmont Hospitality

Q1 San Diego Marriott Mission Valley San Diego CA 350 $76,000,000 $217,143 Wheelock Street Capital LLC Host Hotels & Resorts Inc.

Q2 Holiday Inn Express Simi Valley Simi Valley CA 96 $11,750,000 $122,396 Silver Creek Properties LLC Pacifica Cos

Q2 TownePlace San Diego Carlsbad/Vista Vista CA 94 $15,000,000 $159,574 Fortune Hospitality LLC TMACK Melrose LLC

Q2 DoubleTree Denver Aurora Hotel Aurora CO 248 $14,800,000 $59,677 O'Reilly Hospitality Management Garrison Capital

Q2 Capella Hotel Washington DC 49 $65,000,000 $1,326,531 CTF Development International Castleton Hotel Partners I LLC

Q2 DoubleTree by Hilton Washington DC Washington DC 220 $65,000,000 $295,455 KHP Capital Partners Xenia Hotels & Resorts

Q2 St. James Suites1 Washington DC 197 $78,300,000 $397,462 Durant Berkeley Partners LLC 24th and K Street Associates LLC

1) Transaction encompassed a sale of 197 unit hotel that for the past 15 years was leased to George Washington University which is now expired.

DANIEL H. LESSER 570 SEVENTH AVENUE SUITE 805 T. 212.300.6684 WWW.LWHOSPITALITYADVISORS.COM PRESIDENT & CEO NEW YORK, NY 10018 E. [email protected]

Source: LW Hospitality Advisors (LWHA) has compiled the above information from sources deemed reliable, and the information is thought to be correct, however LWHA cannot warrant absolute accuracy of all the data. Use of this information without verification from original sources is at your own risk. 1 - YTD Q2 2016

# OFNO. OF ESTIMATEDESTIMATED ESTIMATEDESTIMATED Q PROPERTY LOCATION BUYER SELLER Q PROPERTY LOCATION ROOMSROOMS SALESSALES PRICE PRICE PRICE/ROOMPRICE/ ROOM BUYER SELLER Q2 Washington Hilton Washington DC 1070 $315,000,000 $294,393 JV Oaktree Capital & Clearview Hotel Capital JV Lowe Enterprise Investors & Canyon- Johnson Urban Fund LLC Q1 Ritz-Carlton Georgetown Washington DC 86 $50,000,000 $581,395 Hersha Hospitality Trust Millennium Partners

Q1 Hilton Garden Inn Washington DC/Georgetown Washington DC 238 $106,500,000 $447,479 Hersha Hospitality Trust N/A Area Q1 Hyatt Regency Clearwater Beach Resort and Clearwater Beach FL 242 $120,500,000 $497,934 Westmont Hospitality Group Convergent Capital Partners Spa Q1 Holiday Inn Resort Daytona Beach Daytona FL 195 $25,700,000 $131,795 N/A Summit Hospitality Management Group

Q1 Hilton University of Florida Conference Center Gainesville FL 248 $36,000,000 $145,161 Arden Group Xenia Hotels & Resorts Gainesville Q2 Hampton Inn Jacksonville-Downtown-I-95 Jacksonville FL 118 $16,900,000 $143,220 Lowe Enterprises 1331 Prudential Holdings Manager, LLC

Q1 Hilton Key Largo Key Largo FL 200 $62,000,000 $310,000 KHP Capital Partners Blackstone Group LP

Q2 Viceroy Miami Miami FL 148 $64,500,000 $435,811 Al Rayyan Tourism Investment Company Pebblebrook Hotel Trust

Q2 Sagamore Hotel Miami Beach FL 93 $63,000,000 $677,419 JV EL Group & InSite Group N/A

Q2 Sadigo Court South Beach Miami Beach FL 30 $13,000,000 $433,333 Blue Road Eisenberg Development Corp.

Q2 Thompson Miami Beach Miami Beach FL 380 $229,400,000 $603,684 Hyatt Hotels Corporation Geolo Capital

Q1 Edgewater South Beach Miami Beach, FL 49 $23,500,000 $479,592 Marriott Vacation Club El-Ad Group

Q2 DoubleTree by Hilton Hotel Orlando Airport Orlando FL 353 $28,500,000 $80,737 GF Management Columbia Sussex Corporation

Q2 Orlando Airport Marriott Lakeside Orlando FL 485 $67,000,000 $138,144 Columbia Sussex Corp. DiamondRock Hospitality Company

Q1 Embassy Suites Orlando-Downtown Orlando FL 167 $26,000,000 $155,689 Paradise America LLC HEI Hotels & Resorts

Q1 Four Points by Sheraton Studio City Orlando FL 301 $23,000,000 $76,412 Equity Management Partners, Inc. Hotel Capital LLC

Q2 Castillo Real St. Augustine FL 60 $10,250,000 $170,833 JV Impact Properties & DeBartolo Development MSB Hotels III

Q2 Hilton Tampa Downtown Tampa FL 520 $101,000,000 $194,231 CrossHarbor Capital Partners N/A

DANIEL H. LESSER 570 SEVENTH AVENUE SUITE 805 T. 212.300.6684 WWW.LWHOSPITALITYADVISORS.COM PRESIDENT & CEO NEW YORK, NY 10018 E. [email protected]

Q1 DoubleTree by Hilton Hotel Tampa Airport - Tampa FL 489 $45,000,000 $92,025 Florida Department of Transportation Blackstone Group LP Westshore2 Q2 Hampton Inn & Suites Atlanta Airport East Point GA 119 $14,500,000 $121,849 N/A N/A West/Camp Creek Pkwy Q2 Hyatt Regency Waikiki Beach Resort & Spa Honolulu HI 1230 $780,000,000 $634,146 Mirae Asset Global Investments Blackstone Group LP

Q2 LondonHouse Chicago3 Chicago IL 462 $315,000,000 $681,818 Union Investment Real Estate JV Oxford Capital Group & Angelo Gordon

Q1 Hotel Lincoln Chicago IL 184 $70,000,000 $380,435 Nakash Holdings JV Walton Street Capital & AJ Capital Partners Q2 Indianapolis Marriott Downtown Indianapolis IN 611 $165,000,000 $270,049 JV White Lodging Services Corporation & REI LaSalle Hotel Properties Investments Q1 Hilton Cincinnati Airport Florence KY 306 $14,200,000 $46,405 Westmont Hospitality Group Blackstone Group LP

Q1 Mandarin Oriental Boston MA 148 $140,000,000 $945,946 Mandarin Oriental Hotel Group Anglo Irish Bank Corp.

Q1 Aloft and Element Hotels Lexington MA 259 $54,000,000 $208,494 N/A Rockwood Capital, LLC

Q2 Embassy Suites by Hilton Baltimore Hunt Hunt Valley MD 220 $20,000,000 $90,909 N/A Xenia Hotels & Resorts Valley Q1 Hampton Inn & Suites Lansing West Lansing MI 86 $10,500,000 $122,093 Lightstone Value Plus Real Estate Investment N/A Trust III Inc. Q2 Ramada Bloomington Minneapolis Airport/Mall Bloomington MN 250 $18,500,000 $74,000 Port Authority of the City of Bloomington 400 Management Group Area4 Q1 Home2 Suites by Hilton Minneapolis Bloomington MN 107 $12,670,000 $118,411 Lion Hotel Group United Properties Bloomington Q1 Marquette Hotel Minneapolis MN 281 $74,500,000 $265,125 JMI Realty Cornerstone Real Estate Advisors

Q2 Hilton North Raleigh/Midtown Raleigh NC 333 $41,900,000 $125,826 JV Kane Realty & Fortress Investment Group N/A

Q2 Ashworth by the Sea Hotel Hampton NH 107 $14,500,000 $135,514 Linchris Hotel Corp. Colwen Hotels

2) Property includes a leased free standing 10,500 square foot restaurant. 3) Transaction encompassed a sale and 25 year leaseback 4) Property purchased with intent to close and demolish improvements

DANIEL H. LESSER 570 SEVENTH AVENUE SUITE 805 T. 212.300.6684 WWW.LWHOSPITALITYADVISORS.COM PRESIDENT & CEO NEW YORK, NY 10018 E. [email protected]

Q2 Palms Casino Resort Las Vegas NV 710 $312,500,000 $440,141 Station Casinos LLC/Red Rock Resorts, Inc. JV Leonard Green & Partners & TPG

Q2 Aliante Casino Hotel & Spa North Las Vegas NV 200 $380,000,000 $1,900,000 Boyd Gaming Corporation ALST Casino Holdco, LLC

Q2 Hilton Long Island/Huntington Melville NY 305 $53,000,000 $173,770 Navika Group of Companies JV Dow Hotel Co.& PGIM Real Estate

Q2 11 Howard New York NY 221 $170,000,000 $769,231 Commerz Real AG RFR Realty

Q2 70 Park Avenue New York NY 205 $67,600,000 $329,756 Ponte Gadea KHP Capital Partners

Q2 Chelsea Pines Inn New York NY 23 $13,750,000 $597,826 Icon Realty Management Jay Lesiger

Q2 Herald Square Hotel New York NY 96 $40,250,000 $419,271 Life Hotel One LLC Mitchell Holdings Q2 Holiday Inn Midtown 57th Street, New York NY 596 $148,800,000 $249,664 Woodridge Capital Partners Jaseme Associates LLC

Q2 Milburn Hotel New York NY 137 $69,400,000 $506,569 Empire Hotel Group Melvin Newman

Q2 NYLO New York City New York NY 291 $140,000,000 $481,100 Ashkenazy Acquisition Corp. Lehman Brothers Holdings Inc.

Q2 Andaz 5th Avenue New York NY 184 $215,200,000 $1,169,565 Takenaka Corporation Hyatt Hotels Corporation

Q1 Hotel Elysee5 New York NY 103 $55,000,000 $533,981 BD Hotels Elysee Operating Corp.,

Q1 Sheraton Tribeca New York New York NY 369 $158,000,000 $428,184 Ascott Residence Trust Management Ltd. JV Greenfield Partners & Magna Hospitality Group Q1 Village Latch Inn Hotel Southampton NY 67 $23,000,000 $343,284 Beechwood Organization Marta and Martin White

Q2 Holiday Inn Hotel & Suites Lima Lima OH 116 $11,000,000 $94,828 N/A N/A

Q1 Hilton Garden Inn Lake Oswego OR 179 $33,530,000 $187,318 Interwest Capital Corporation LNR Partners LLC

Q1 Hotel Monaco Portland OR 221 $114,000,000 $515,837 Hospitality Properties Trust Intercontinental Hotels Group

5) Transaction ecnompassed easehold owner with 25 years remaining acquiring leased fee position to end up with a fee simple position.

DANIEL H. LESSER 570 SEVENTH AVENUE SUITE 805 T. 212.300.6684 WWW.LWHOSPITALITYADVISORS.COM PRESIDENT & CEO NEW YORK, NY 10018 E. [email protected]

Q1 Residence Inn Philadelphia/Conshohocken Conshohocken PA 137 $26,500,000 $193,431 Hersha Hospitality Trust Brandywine Realty Trust

Q2 Hyatt Place Philadelphia/King of Prussia King of Prussia PA 129 $13,000,000 $100,775 JV DoveHill and Wurzak Hotel Group Hersha Hospitality Trust

Q2 Courtyard Providence Warwick Warwick RI 92 $12,400,000 $134,783 Lightstone Value Plus Real Estate Investment N/A Trust III, Inc. Q1 Courtyard by Marriott Clemson SC 110 $16,500,000 $150,000 Midas Hospitality N/A

Q1 Hilton Brentwood/Nashville Suites Brentwood TN 203 $28,500,000 $140,394 LBG Music City LLC Tuckers Hotel Investments LLC

Q2 GuestHouse Inn & Suites Nashville / Music Nashville TN 108 $16,550,000 $153,241 Magna Hospitality Group N/A Valley Q1 Hampton Inn & Suites Nashville Downtown Nashville TN 154 $58,000,000 $376,623 JV LCP Group LP & SEDCO Capital MR Hotels LLC

Q2 Radisson Hotel & Suites Austin TX 413 $130,000,000 $314,770 JV Square Mile Capital & Sydell Group & Yucaipa Forestar Group Cos. Q1 Radisson Hotel & Suites Austin Downtown Austin TX 413 $130,000,000 $314,770 Austin Lakeside Hotel Owner LLC Forestar Group

Q2 Holiday Inn Express & Suites Irving Conv Ctr - Irving TX 128 $10,500,000 $82,031 N/A Summit Hotel Properties, Inc. Las Colinas Q1 Equinox Golf Resort & Spa Manchester Village VT 195 $75,200,000 $385,641 Carey Watermark Investors HEI Hotels & Resorts

Q1 Bellevue Marriott Bellevue WA 384 $186,900,000 $486,719 Carey Watermark Investors 2 HEI Hotels & Resorts

Q1 Sheraton Bellevue Hotel Bellevue WA 179 $42,700,000 $238,547 PMF Investments Driftwood Hospitality Management

Q2 Courtyard Seattle Downtown Seattle WA 250 $84,500,000 $338,000 Washington Real Estate Holdings, LLC Ashford Hospitality Prime, Inc.

Q2 Seattle Airport Marriott Seattle WA 451 $91,000,000 $201,774 AWH Partners Host Hotels & Resorts Inc.

Q1 Hotel 1000 Seattle WA 120 $83,500,000 $695,833 Loews Hotels & Resorts JV Thayer Lodging Group & Provenance Hotels Q1 Springhill Suites Seattle Seattle WA 234 $74,100,000 $316,667 Moody National REIT II, Inc. Moody National Cos

Q2 SpringHill Suites Green Bay Green Bay WI 127 $18,300,000 $144,094 Lightstone Value Plus REIT III Green Bay CS Hotel Group LLC

DANIEL H. LESSER 570 SEVENTH AVENUE SUITE 805 T. 212.300.6684 WWW.LWHOSPITALITYADVISORS.COM PRESIDENT & CEO NEW YORK, NY 10018 E. [email protected]