REPORT FROM THE U.S.—Hotel cap rates based on trailing 12-month NOI averaged 9.1% during 2012, according to data from STR Analytics, sister company of the Hotel Investment Barometer.
The reading was down slightly from 2011’s average of 10.4% and consistent with 2010’s average of 9.1%—the same as the heady days of 2007.
During the grips of economic tumult during 2009, cap rates rose to as high as 10.6%.
STR Analytics obtains cap rates on approximately 10% of U.S. hotel transactions, according to Steve Hennis, a director at the company.
Cap rates (trailing 12-month NOI)
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| 12.5% | 11.6% | 10.7% | 9.5% | 8.3% | 8.5% | 9.1% | 9.3% | 10.6% | 9.1% | 10.4% | 9.1% |
“Cap rates all depend on the quality of the asset. We are continuously seeing high demand for high-quality products driving low cap rates,” said Robert Habeeb, president and COO of First Hospitality Group, a Rosemont, Illinois-based management, acquisition and development company, via email.
“Most deals we are seeing an average of an 8.5% cap rate. … In 2008, cap rates were all over the board because there was a frenzy of buying,” he added.
Habeeb said he expects cap rates based on trailing 12-month NOI to hold steady for the balance of 2013.
Still a valid metric?
Despite the volatile financial markets during the past several years, most lenders and investors still underwrite using cap rates based on trailing 12-month NOI, according to Hank Jones, founding principal of Kallenberger Jones & Company, a hotel investment consultancy with offices in South Pasadena and Cost Mesa, California.
“That measure is used because it’s a tangible metric that is easy to understand, and it is usually a more conservative approach to value than capitalizing future NOI,” he said.
“It is an easily ascertainable, historical view of the hotels past performance and takes out any less reliable future estimates upon which the hotel asset’s value might be calculated,” said John Bailey, CFO of Dallas-based Prism Hotels & Resorts, which manages more than 55 hotels in the U.S.
When asked if the metric would continue to be used in the future, both Jones and Bailey said yes.
“I think this metric will continue to be used in 2013,” Jones said.
“The methodology has been relatively consistent for years, and there is no need to change,” Bailey said. “What changes is the cap rate itself, which is a calculated metric based on what investors are paying for the hotel in a specific market and for a specific type of hotel.”
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| Dan Lesser, LW Hospitality Advisors |
But not everyone agrees.
Kevin Gallagher, senior VP of business development at Prism, said “as the lending market gets competitive again—it isn’t right now—and there is stiff competition for hotel loans, lenders will start lending on a cap rate on pro forma versus TTM. Most reasonable people believe this is irresponsible of lenders and is at part to blame for the loan defaults we now have, but a loan originator is no different than a Hotel SMERFE salesperson and they have individual goals to hit. Just like a sales person will throw in breakfast, transportation and free meeting rooms when they are desperate to close a deal, loan originators will be just as desperate.”
And Dan Lesser, president and CEO of investment advisory firm LW Hospitality Advisors LLC, said discounted cash flow is a more accurate measurement.
“To establish pricing on such prospects, hotel investors primarily rely upon a discounted cash flow analysis, which factors in a new sponsor’s perceived upside during the holding period,” he said. “The value conclusion of a hotel DCF analysis is then used to measure the implied capitalization rate or rates, based upon historic actual and/or projected NOI by backing into any such conclusion.”
Trailing 12-month NOI, by comparison, is more appropriate for commercial real estate with durable and stable income streams, either in place or projected, Lesser said.
“It is important to note that unlike investors of other types of commercial real estate, such as office and multifamily, sophisticated hotel investors do not formulate pricing decisions using a single capitalization rate applied to one year’s NOI, whether actual or anticipated. Given the lack of long-term leases and the unique feature of a continuous re-pricing of the leasing of transient hotel rooms, theoretically (hotel) assets never stabilize,” he said.
“Furthermore, unlike investors in other types of commercial real estate, such as office and multifamily that produce annuity-type income, hotel investors are typically an optimistic group who seek value-enhancement opportunities,” Lesser said.