Long Small Hotels, Short Large Hotels

The price of hotels showed particular strength in the Mid-Atlantic, Pacific, and West South Central regions, while other regions experienced positive growth albeit at a slower rate relative to the previous period. Hotels in non-gateway cities posted higher quarterly gains relative to those in gateway cities, increasing 2 percent compared to a drop of 4 percent for gateway hotels. With regard to yearly prices, hotels in non-gateway cities increased 21 percent as compared to a rise of 1 percent in gateway cities. The transaction volume on all hotel transactions (both large hotels and small hotels combined) mimicked the previous quarter’s sales volume. The prices of small hotels appear undervalued (while those of large hotels appear overvalued), based on both 3-year and 5-year moving averages. Mortgage volume for hotels fell slightly for the most recent quarter, while the the cost of hotel debt financing has continued to rise quarter to quarter, as well as year over year. In short, lenders are requiring relatively more compensation for hotel loans relative to the 10-year risk-free rate due to increased perceived risk. The rise in borrowing cost will dampen enthusiasm for undervalued hotel properties, since our EVA and SVA metrics continue to indicate that the cost of borrowing exceeds the return for hotels. Looking toward the next quarter, our near-term leading indicators of hotel price performance indicate that we should expect slower or declining price momentum for large hotels but not necessarily for small hotels