Have Frenzied Buyers Pushed California Hotels to Bubble Pricing?

Have Frenzied Buyers Pushed California Hotels to Bubble Pricing?

The Orange County Register

Have Frenzied Buyers Pushed California Hotels to Bubble Pricing?
By Jonathan Lansner


Perhaps “For Sale” should go next to the “No Vacancy” sign.

A record flood of dollars is being spent on California hotels this year, a buying binge that has induced the owner of two iconic Orange County luxury resorts to consider a sale.

Strategic Hotels & Resorts Inc. – owner of 18 luxury hotels including the 393-room Ritz-Carlton Laguna Niguel and the 250-room Montage Laguna Beach – said Monday it is “exploring possible strategic alternatives for the company, including the potential sale of the company.”

The news comes as Atlas Hospitality Group of Irvine reports a record $4.4 billion was spent to buy 174 California hotels in the first half of the year. While 13 fewer hotels were sold vs. 2014, this year’s six-month dollar total – up 64 percent vs. 2014’s pace – surpasses the annual total of every year but 2006.

The buying spree certainly raises questions about the sanity of hotel valuations when you note that Atlas’ first-half median selling price for California is up 65 percent in three years. I don’t want to say “bubble” … but you might be thinking it.

This kind of quick appreciation also explains why technology legend Bill Gates’ investment firm, Cascade Investment Inc., recently built a 9.8 percent stake in Strategic and is interested in talking to the hotel owner about possible business combinations. Strategic owns seven luxury properties in California.

“Phenomenal market,” says Alan Reay, who heads the Atlas Hospitality consultancy. “It’s mind-blowing.”

Key to the buying boom is the hotel industry’s record profits, derived from a strong tourism rebound out of the Great Recession. Powerful fundamentals – rising rooms rates and falling vacancies – are attracting buyers who are using low interest rates and plentiful financing to make deals.

But has that enthusiasm gone too far? Highlighting 2015’s first-half investor rush was Strategic Hotels’ $360 million purchase of the 250-room Montage Laguna Beach in January. That was a record price for a hotel in California, at $1.4 million per room.

The industry suffered badly not just from the recession, but from numerous owners overpaying for hotels early in the 2000s. That pushed many hotels into receivership or foreclosure when tourism dried up.

That’s a sharp contrast to the current environment. Analyst Reay thinks tourism’s overall momentum should make today’s high prices pencil out, but he cautions that rising interest rates – or an economic pullback – could cause new owners to regret 2015 deals.

Strategic Hotels – whose portfolio includes San Diego’s Hotel del Coronado and the Essex House overlooking Manhattan’s Central Park – has been a longtime player in Orange County’s luxury hotel scene.

The real estate operator seems in no rush to sell. Its chief executive, Rip Gellein, said in a statement, “We are confident in our strategic plan and the value we have created for our shareholders. At the same time, we are always open to ways in which we can further maximize shareholder value.”

Trading hotels is nothing new for Strategic.

Its ownership of the Ritz dates to 1997, when it was a privately owned investment group that bought the hotel for $225 million. Strategic later spun off a publicly traded real estate investment trust – the current- day Strategic Hotels and Resorts – that did not initially own the Ritz.

In 2006, at the height of the previous hotel-buying boom, the trust bought the Ritz from the private investment group for $330 million. That was roughly $840,000 per room – at the time the second-highest hotel sale valuation in California.

Investors are again paying top dollar for California hotels. In the first half, they liked larger hotels. The statewide median room count of properties sold rose to 60 from 47 in 2014. Meanwhile, the median price paid per room rose 25 percent to $91,000.

Orange County had similar hotel shopping patterns. The number of first-half deals fell by three to 11 compared with a year ago. Yet dollars spent by buyers soared 45 percent to $749 million.

Local investors are paying up for bigger local hotels, too. The median Orange County hotel sold for $32 million – more than triple the typical price of a year ago. Median room count was 145 vs. 61 in 2014.

History will be the final judge of whether today’s buyers are paying too much. Reay admits that if nothing else, it’s a great time to sell. And you know that’s pressuring Strategic to at least consider cashing out.

“I’ve never seen as good a market for selling in the 25 years I’ve been doing this,” Reay says.

Buyers, you’ve been warned

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