DEALTALK-U.S. hotel sales start up,frustrations remain

* Hotel deals could hit $6 billion in 2010- Baird


* 'Awful lot of frustration out there'- advisor

* Public lodging REITs better positioned to buy hotels

Hotel transaction volume in the United States looks set to surpass the prevailing forecast of $3.5 billion this year, as aspiring investors grouse about stiff competition and higher-than-expected prices for choice hotels.


Through May, hotel investments amounted to about $2.2 billion, much of which has been the province of publicy-traded lodging real estate investment trusts (REIT), according to a Baird Research note published in late May.

By year's end, the value of hotel transactions in the United States will top the earlier $3.5 billion estimate from hospitality firm Jones Lang LaSalle Hotels, analysts said.

At the current pace, sales could hit at least $5.5 billion for 2010, if not $6 billion, a feat that would put deal volume on par with 2003 levels, Baird said. This figure includes outright hotel sales as well as purchases of debt.

"We've seen a very good pick-up in the deal flows in the last couple of months," said Jacques Cohen, principal of Euro Capital Properties, which bought the famed Watergate Hotel last month. [ID:nN27111650]

He added: "Prices have gone up quite a lot as well."

Hotel deal volume hit a 10-year low in 2009 as banks held back their lending and hotel revenue plummeted. At that time, experts had predicted a wave of distressed hotel sales in 2010 as these properties faced looming debt payments.

But this has not happened so far.

DISTRESSED DEALS?

 Banks have shown a willingness to help borrowers restructure their loans. Now, as business travel picks up and room rates rise, the outlook for the lodging sector has become brighter, forcing potential buyers to pony up more money than they anticipated.


For example, some investors pinned the value of the Raffles L'Ermitage-Beverly Hills hotel at $30 million, said Alan Reay, president of consulting firm Atlas Hospitality.

The five-star property near Rodeo Drive went for about $45 million in March, according to the Baird note.

"There's still a lot of money chasing relatively few distressed deals," Deutsche Bank analyst Chris Woronka said.

Of the more than 40 hotel sales highlighted by Baird, just 13 were "stress induced." These distressed sales accounted for $1 billion, or roughly half of deal activity this year.

"There's an awful lot of frustration out there," said Robert LaForgia, principal of advisory firm Apertor Hospitality and the former chief financial officer of Blackstone Group- owned (BX.N) Hilton Worldwide, previously called Hilton Hotels Corp.


Public REITs have been able to snatch up properties more readily than their private counterparts, helped by their access to the public markets.

Seventy-one percent of hotels sold this year have been bought by public REITs, Baird said. Currently, public REITs own just 4 percent of U.S. hotels.

DiamondRock Hospitality (DRH.N) and Hersha Hospitality (HT.N) have been among the REITs that have recently purchased hotels or hotel debt.

DiamondRock bought the $69 million senior mortgage loan secured by the 443-room Allerton Hotel in Chicago last month. The property was declared a Chicago landmark in 1998.[ID:nASA00E32]

These transactions are indicative of the narrowing chasm between what buyers and sellers believe is a fair price. But experts are quick to point out it is the buyers that have had to bend to the will of sellers.

"I haven't seen this plethora of hotel deals that everyone has expected to see in the market," LaForgia said.