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[Enterprising Investor]

Hotels Lacking Amenities Lure Buyers Seeking High Returns (6/19/14)

Hotels with the fewest amenities are proving among the most attractive to U.S. lodging investors as they search for higher returns.

Blackstone Group LP (BX), the world’s largest alternative-asset firm, is close to an agreement to buy a group of select-service hotels from Clarion Partners LLC for about $800 million, adding to its already sizable portfolio of such properties, a person with knowledge of the deal said yesterday. Barry Sternlicht’s Starwood Capital Group said today that an affiliate agreed to acquire TMI Hospitality Inc., including more than 180 limited-service hotels owned by the Fargo, North Dakota-based company.

Investors are drawn by the lower operating costs and higher returns at select-service hotels compared with more upscale properties. The segment -- which lacks restaurants and have limited beverage and other service offerings -- includes brands such as La Quinta, Super 8 and Days Inn. Purchasing such properties and boosting their profitability is often easier than acquiring and remaking higher-end hotels.

“The returns are very attractive and the financing for these deals is much easier and cleaner to underwrite,” said Samantha Fisher, a Los Angeles-based senior vice president at investment-services firm Jones Lang LaSalle Hotels. “Limited service doesn’t have a big food and beverage component. These things can almost run themselves. Whoever is the buyer doesn’t have to put much into them to see returns quickly.”

Highest Total

Last year’s $6.2 billion in select-service hotel deals was the highest total since before the last recession, according to Jones Lang LaSalle data. The sector accounted for 30 percent of all U.S. hotel-transaction volume in 2013, on par with the peak years of 2006 and 2007. Jones Lang expects transactions to grow to $6.5 billion this year.

Starwood Capital’s acquisition of TMI Hospitality’s properties for an undisclosed amount adds to the 103 select-service hotels Starwood and its investors already own.

The purchase “offers Starwood Capital the exciting opportunity to build on our investments in select-service and extended-stay lodging,” Suril Shah, senior vice president of acquisitions at Starwood Capital, said in a statement today.

NorthStar Realty

Among other buyers in the sector is NorthStar Realty Finance Corp. (NRF), which said earlier this month that it bought 47 limited-service hotels for $933.9 million in a joint venture with Chatham Lodging Trust. Also this month, American Realty Capital Hospitality Trust Inc., said it’s paying $1.93 billion for a group of 126 hotels, most of which are limited-service properties, including Hampton Inn, Hilton Garden Inn and Homewood Suites locations.

Photographer: Aaron M. Sprecher/Bloomberg

A Hampton Inn & Suites advertisement is displayed on billboard along Interstate 45 in Galveston, Texas.

Andrew Backman, an American Realty spokesman, and Joe Calabrese, a NorthStar Realty spokesman, didn’t return telephone calls seeking comment on their companies’ purchases.

The U.S. hotel industry has recovered since the financial and real estate market meltdown. Room rates in the first five months of this year hit a record, according to Jan Freitag, senior vice president at research firm STR Inc. This year through May, the average price for a hotel stay nationwide jumped to $113.58 a night, up 4.1 percent from a year earlier, according to Hendersonville, Tennessee-based STR.

Blackstone’s agreement would be for 47 extended-stay Residence Inn and Homewood Suites hotels, with a majority located in the top 25 U.S. markets, said the person with knowledge of the negotiations, who asked not to be identified because the deal hasn’t been completed.

Hampton Inn

Christine Anderson, a spokeswoman for New York-based Blackstone, declined to comment on the talks. Paula Schaefer, a spokeswoman at New York-based Clarion Partners, didn’t return telephone calls seeking comment.

The deal would follow a transaction in September, when a Blackstone affiliate agreed to buy 16 hotels, including Hampton Inn and Holiday Inn Express properties, from Hersha Hospitality Trust for $217 million. Blackstone’s $1.3 billion acquisition of hotel owner Apple REIT Six Inc. was completed last May, which followed a $1.9 billion deal in 2012 for the Motel 6 and Studio 6 budget chains.

The Apple REIT Six hotels “generate 15 to 20 percent more revenue than the competitive set they compete against, they have higher gross operating profit margins and they offer very attractive cash-flow yields,” A.J. Agarwal, senior managing director at Blackstone’s real estate division, said in an interview last year. “We’re just economic investors, focused on providing the best returns for our limited partners, and these assets accomplish that.”

Goldman Sachs

American Realty is acquiring the Equity Inns lodging portfolio from subsidiaries of Whitehall Real Estate Funds, which are sponsored by Goldman Sachs Group Inc. (GS) The purchase consists of 126 hotels with 14,934 rooms in 35 U.S. states.

“There has been a large amount of money pent up, and finally big portfolios this year and last have come to market, and investors had a possibility to go after them,” said Fisher of Jones Lang LaSalle Hotels. “Everybody is seeing that operating performances are still going up, that there is still growth. I suspect we’ll see more of this.”

To contact the reporter on this story: Nadja Brandt in Los Angeles at [e-mail]

http://www.bloomberg.com/news/2014-06-19/hotels-with-few-amenities-lure-investors-seeking-higher-returns.html