Gates, prince in deal for Four Seasons

By Kimi Yoshino and Roger Vincent

Feb. 13, 2007 12 AM PT

Times Staff Writers

A $3.37-billion deal announced Monday by billionaires Bill Gates and Saudi Prince Alwaleed bin Talal to buy the luxury Four Seasons Hotels Inc. underscores a frenzy by well-heeled investors to acquire hotels and lodging companies worldwide.

The investment trend is the result of a worldwide economic boom that has sparked a surge in global demand for business and leisure travel, a sharp turnaround from the slump after the 2001 terrorist attacks.

The economic surge also has generated massive wealth for private and institutional investors eager to put their money to work in a hotel business that is benefiting from huge demand and steady income but has limited ability to build more hotels.

The lack of new properties makes it harder for travelers to find an available room. And when they do, the rates are higher, averaging $272 a night for luxury accommodations.

That has pushed hotel sale prices to record levels. Last year, the Four Seasons Hualalai Resort on the Big Island of Hawaii set a U.S. record, with a price tag that works out to $2.2 million a room. The W Union Square in New York and part of the historic Hotel del Coronado on San Diego Bay both sold for more than $1 million a room.

“Obviously the $1 million room is no longer a barrier for entry,” said Jan Freitag, vice president of Hendersonville, Tenn.-based Smith Travel Research. “It’s no longer unusual on the upper end of the market. There’s very strong demand and very little new supply. Those are the underlying forces that shape the industry as we see it in 2007.”

Building a hotel from the ground up can be a years-long headache that requires navigating through local bureaucracies and neighborhood spats. Buying a completed hotel can be a ready-made moneymaker.

“Many investors who bought U.S. hotel assets during 2005 saw their equity double in the following 12 months -- attracting more investors to hotel real estate,” according to a report released in January by brokerage firm Jones Lang LaSalle Hotels. Hotel stock prices also have surged.

Last year also marked the third consecutive year of record property sales, the report notes. For the first time in 20 years, the trend is occurring throughout every major region of the world.

In 2006, hotel real estate investment was $72.5 billion, 63% higher than in 2005.

Hotels in Southern California, where real estate values are among the tops in the country, have fetched some of the highest prices. Just last month, the Sheraton Universal Hotel in Universal City sold for $122 million, or $280,000 per room, well over twice what it last traded for in 2003. The Fairmont Miramar in Santa Monica was sold for about $210 million last summer, putting it near the all-time high for California on a per-room basis: almost $700,000.

Investors are attracted to the regular income hotels produce, said Kevin Mallory, senior managing director for consulting firm CB Richard Ellis Hotels.

The hotels can still be purchased for less than it could cost to build them even though prices are hitting all-time highs, Mallory said. It also allows investors to sidestep rising construction costs and the difficult process of winning government approvals. The land that is available is often snatched up for residential and office uses, he said.

High-priced hotel sales make sense for both sellers and buyers, Mallory said, making for a “unique point in time.”

“There is so much money out there and they want to be part of the game,” Freitag said. “Basically, every lodging company is in play. It used to be five years ago, if someone wanted to raise $1 billion for a fund, that was a lot of money. These days, if someone has a compelling business case to raise $10 billion, it’s not that hard.”

Under the terms of the deal for Toronto-based Four Seasons, the world’s largest luxury hotel operator with 73 properties in 31 countries will be taken private by a group of investors that includes Gates’ Cascade Investment, Kingdom Hotels International and Four Seasons Chairman and Chief Executive Isadore Sharp. Prince Alwaleed, a nephew of the late King Fahd and eighth on Forbes magazine’s list of the world’s richest people, owns Kingdom Hotels. Last year, he acquired Fairmont Hotels & Resorts Inc.

The investors will pay $82 a share for Four Seasons. That represents a 28% premium over the company’s share price before the investment group’s offer was disclosed in early November. The stock declined $2.52, or 3%, on Monday to $81.36,.

The transaction values the company at $3.8 billion, including the assumption of debt.

It’s a smart investment, said hotel consultant Alan Reay of Atlas Hospitality, adding that Four Seasons is “consistently ranked the No. 1 hotel company in the world.”

“It has great brand loyalty,” Reay said. “Whether you are in London, Los Angeles or Tokyo, you know you are staying at a best hotel.”

The luxury market is the highest-performing lodging segment. Room rates on average increased 7% in 2006 over the previous year, while rates at luxury hotels increased by 9%, according to reports by Smith Travel Research.

Baby boomers, whose days of backpacking through Europe and sleeping in youth hostels are long past, are fueling that trend. People aged 45 to 64 have the highest propensity to travel, and they are healthier and wealthier than ever.

“They prefer more comfort” now, said Bleecker Seaman, managing director of Lowe Enterprises Investors, a Brentwood-based real estate company that has invested more than $600 million in hotels in the past three years.

As a result, Seaman said the forecast remained strong into 2008: “We still feel confident that there are legs left in the business. We have been in a very positive cycle with a lot of momentum.”

roger.vincent@latimes.com

kimi.yoshino@latimes.com

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Expensive rooms

Here are the most expensive hotel acquisitions on a price-per-room basis, along with location and year acquired:

* Four Seasons Resort Hualalai; Ka’upulehu-Kona, Hawaii; 2006;

$2.26 million per room

* W Hotel Union Square; New York; 2006; $1.06 million

* Swissotel the Drake; New York; 2006; $0.89 million

* Ritz-Carlton Laguna Niguel; Dana Point; 2006; $0.86 million

* The Mark; New York; 2006; $0.85 million

* Plaza Hotel; New York; 2004; $0.84 million