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Quality sells.

It has been two years since the "turnaround" began ending the 2001-2003 lodging industry recession. Starting in the third quarter of 2003, occupancy levels started to rise, followed by strong ADR growth in 2004 and 2005. Given the strong improvements in top-line performance, net income grew 11.4 percent in 2004 and is projected to increase another 19.4 percent in 2005. Concurrent with the improvement in industry fundamentals, investors gained confidence in the industry and started to purchase well-performing hotels, as opposed to bottom-fishing for distressed properties.

Analyzing the transactions that have occurred during the first six months of 2005, we find a continuation of the trading of quality hotel properties. Based on data collected by PKF Hospitality Research that compares hotel transactions that occurred during the first half of 2005 to those that occurred in the first part of 2004, the profile of hotels bought and sold has remained relatively constant. In general, the typical hotel currently involved in a transaction is a middle-aged, chain-affiliated property, with 106 rooms. For reference purposes, the typical hotel transacted during the first part of 2003 was a 35-year old property with 76 rooms and had a 44 percent chance of not being affiliated with a chain.

We believe the 22-year median age of the current sample indicates that buyers are acquiring hotels that have reached stabilization, but still have "upside" potential worth paying a premium for. Today's buyer does not appear to be interested in purchasing a poor performing hotel and having to spend the money and time to rehabilitate the business and facilities.

The one benchmark that has changed significantly is the sales price. The median sales price-per-room for hotels sold in the first six months of the year grew from $36,292 in 2004 to $50,000 in 2005. Since the facility profile of the hotels has remained constant, it is the confidence of the investors in future profit growth that must be driving the prices higher.

All property type categories reported strong increases in median sales prices, except the all-suite properties. Further analysis of the data reveals a shift towards mid-tier all-suite hotels (Comfort Suites, AmeriSuites) as opposed to upscale brands (Embassy Suites, Sheraton Suites). On the other hand, the median sales price for hotels with more than 226 rooms grew nearly 70 percent, another sign of confidence in the lodging sector.

Look for a continuation of the purchase of established solid performing hotel assets at premium prices due to the following factors:

* Projections of strong profit growth

* Limited supply growth due to increasing construction costs

* Favorable returns compared to other real estate sectors

* An abundance of funded investors.
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Publication:Quarterly Trends in the Hotel Industry (USA)
Date:Sep 1, 2005
Previous Article:What to budget for 2006.
Next Article:2006 U.S. lodging industry: performance to remain strong as growth slows.

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