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Size no longer matters . . . at least in the hotel industry. Is the entire hotel industry now in play? What the experts have to say.

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29 January 2007
Hotel lawyer on private equity investments in the hotel industry. In my most recent article, I talked about two deals that could profoundly affect the very makeup and direction of the hotel industry. (See, “Two deals that may change the lodging world forever“). Of course, these two transactions are the leveraged buyouts of Equity Office Properties (EOP) and CNL Hotels & Resorts (CHL).

With recent takeover rumors circling InterContinental Hotels Group (IHG), I have recently written on about what these rumors mean. (See, “What do the InterContinental takeover rumors mean? Why IHG? Why now? Who will win the bid?“) Some have been saying recently that even Hilton is now on the block. Are the CNL and EOP deals the harbinger for the entire hotel industry — that every major hotel company could be in play?

Here’s why size may no longer impose any limit on acquisitions. . . and why Marriott, Hilton, Starwood, and all the other hotel companies could be up for grabs.

How could this be? Here’s how and why.

The short answer is that the lodging industry has experienced record profit growth the past three or four years, and cap rates — although near historic lows for the hospitality industry — still look very attractive compared to other real estate types and other industries.

There are almost unlimited amounts of capital looking for a “home” or place to invest. And the private equity capital is now being put together in amounts previously unimaginable. This is discussed in some detail in my prior posting (“Two deals that may change the lodging world forever“).

But to better understand this and the implications for our hospitality industry, I talked with John V. Arabia, a Principal of Green Street Advisors, an independent research firm concentrating exclusively on the securities of publicly traded real estate companies, including both hotel REITs and C-Corps. John Arabia is one of the best known and most highly respected analysts covering lodging, and he has written many research reports on individual companies as well as industry trends and topics.

John says that until recently, the larger hotel companies, including both the large hotel C-Corps and REITs, were generally considered too big to be acquired by private equity firms despite their strong interest in the lodging sector.

But John now says, “This situation has more than likely changed in light of the recent bidding war for Equity Office Properties between Blackstone and a group led by Vornado Realty Trust. Blackstone’s most recent all-cash offer of $54 per EOP share translates into a total enterprise value of $38.3 billion, including debt, and would be the largest private-equity buyout in history.”

By comparison, the largest hotel C-Corps — such as Starwood, Marriott and Hilton — each have total enterprise values ranging from “only” $18 to 30 billion, while Host Hotels, the largest hotel REIT, has assets valued at roughly $20 billion.

While size may matter to some, size no longer seems to be a deterrent to taking the large public hotel companies private given the flood of capital currently being raised by private equity firms.

Hotel privatization is likely to continue or accelerate.

OK. So the private equity guys could buy hotel companies if they wanted to. But why would they bother?

The answer is that hotel companies and hotel properties appear to be a bargain to private equity investors.

John Arabia describes this as “the current disconnect between public and private pricing for hotel real estate.” John notes that on average, public hotel REITs have recently traded at high-single-digit to low-double-digit discounts to Net Asset Value (NAV). That means that private-market hotel buyers are willing to pay more for properties than institutional investors in public hotel REITs. That is likely to lead to more private equity leveraged buyouts.

Last week at ALIS (the Los Angeles hotel investment conference), Christopher J. Nassetta, President and CEO of Host Hotels & Resorts, said it slightly differently. Commenting on the CHL and EOP transactions, he said, “There is a fundamental mismatch of valuations in public and private markets. You are seeing transactional activity that rationalizes this mismatch.”

And Jacques E. Brand, Managing Director & Co-Head of Corporate Finance, Deutsche Bank, commented that “The capital markets have grown more sophisticated over the years as relates to lodging and gaming. Lodging and hospitality will raise more money because markets are getting more comfortable with the industry, management and performance.”

Nassetta also noted that there are much higher pension allocations to lodging now. Pension fund money is more “sticky” than other capital. It is not permanent, but it may take years to increase or decrease allocations to real estate and lodging.

Monty J. Bennett, President and CEO of Ashford, just raised $2.4 billion to buy a 51-hotel portfolio from CNL hotels says, “The public is now accepting different plays. . . different kinds of companies. We could not have raised our money 10 years ago.”

Monty calls the deal a “transformational investment” for Ashford. And what a deal! The price per key was $177,000 per room on average, and $215,000 per room for some great select service properties. Monty says, “We think we bought at about a 7 cap rate on a trailing basis. It also improves the quality of our already great portfolio.”

Where does it lead? Where does it stop?

So if Ashford — a great company, but not previously regarded as a “giant” — can raise $2.5 billion to buy 51 hotels as part of a $6.6 billion buy out of CNL . . . and if Blackstone or Vornado can raise more than $38 billion to buy EOP, what are the limits?

Well, Starwood Capital’s CEO, Barry Sternlicht, said it in plain English: ” We will see more privatization in the next 12 months. There is no barrier of size anymore. Everyone is in play.” He added, “There is a lot of money in the Gulf States.” (And he meant the United Arab Emirates, not the states on the Gulf of Mexico!) In fact, he put the trend in global perspective when he said, “Because of the foreign exchange rates, the United States — the whole country — is ‘on sale.’ It’s a 30% off shopping spree for foreign investors.”

In my last posting (“Two deals that may change the lodging world forever“), I noted that some experts now think even $100 billion companies could be bought in leveraged buy outs. There may be no limits, or as some would say, “Size does not matter any more . . . at least in private equity buy outs.”

As always, Laurence S. Geller, President and CEO of Strategic Hotels & Resorts (now an NYSE REIT), has a unique way of summing up the sea change in private equity buyouts and its implications. At the Los Angeles ALIS conference, Laurence said, “Size is not everything. It is just performance!”
Well said, Laurence! All investors seek performance and the private equities have noticed the stellar performances of many of our industry’s star players. This should be a very interesting year for our industry, to say the least.


Our Perspective.
We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $87 billion of hotel transactions, involving more than 3,900 properties all over the world. For more information, please contact Jim Butler at or 310.201.3526.

Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $87 billion of hotel transactional experience, involving more than 3,900 properties located around the globe.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.

Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim’s books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.

Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at or 310.201.3526. For his views on current industry issues, visit

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