‘Trophy Hotels’: Record Sales Break All the Rules

Oil heiress Caroline Rose Hunt was stunned, the story goes, when she got four offers in April for her 92-room Hotel Bel-Air at more than $1 million a room.

Never before had a hotel in the United States sold at the $1-million-a-room mark, and Hunt thought her 1940s landmark was only worth in the $600,000-a-room range, said Chris Leinberger of Robert Charles Lesser & Co., a Los Angeles-based real estate consulting firm.

A Tokyo company, Sekitei Kaihatsu, closed escrow in late May at a total purchase price of about $110 million, or $1.1 million a room.

“I don’t know how they justified paying so much,” said an appraiser with a national real estate firm, which estimated the hotel’s value a year ago for some potential buyers at $47.5 million.

The sale of the Bel-Air is the latest in a buying frenzy, fueled mainly by foreign investors, of America’s blue-chip hotels, or what analysts call “trophy hotels,” at prices that don’t seem to make economical sense.

Said Maurice Robinson, senior manager of real estate consulting in the Los Angeles office of KPMG Peat Marwick, which handles accounting for Hunt’s Rosewood Property Co.:

“For 90% of the hotels, which sell from $100,000 to $200,000 per room, the same rules of buying and selling apply. But for the top 10%, the trophy properties--the four- or five-star hotels--there is no economic justification.”

Using the rule of thumb that an investor should get one-tenth of 1% of the purchase price as a daily room rate, the Bel-Air should get $1,100 a night per room. But the average room rate is $375, said Robinson. And daily rates won’t change soon, manager Paul Zuest said.

Clearly, Sekitei Kaihatsu bought for other reasons.

“There are four reasons why people buy at these prices, beyond the value of the yen versus the dollar,” said Paul DeMyer, national director/hotel consulting at Kenneth Leventhal & Co. in Los Angeles. Other hotel experts among the dozen queried agreed.

The first reason: A trophy hotel is like an art asset. “This has nothing to do with value but with owning something for pleasure or satisfaction,” DeMyer said.

“These hotel properties are glamorous and appeal to the egos of people,” Robinson said. As examples, he cited the La Costa Resort Hotel & Spa, which he said was sold in September, 1987, to “a golf fanatic,” with title taken by Shinko Sports of Japan, and the Beverly Hills Hotel, purchased a month later by the Sultan of Brunei.

Sol Leonard, a national partner in the Los Angeles office of Laventhol & Horwath, a Philadelphia-headquartered international accounting and consulting firm, pointed out that Donald Trump also bought The Plaza in New York last year for personal, not economic reasons.

Added Leinberger:

“This is an extension of the businessman’s desire to own a restaurant or a pro baseball team. If you’re in the big leagues now, you want to own a luxury hotel.”

These buyers are what Bill Bahrenburg, chairman of New York-headquartered Morgan Stanley Realty, which handled the Bel-Air sale, terms “the Forbes 400 ego buyers.”

And Leonard singled out the increase in world travel as a related element:

“If you want to be a factor in your own country, you want to be a factor where people from your country stay when not in your country. Hence, American hotel operators are expanding overseas, and foreigners are coming over here.”

“There is a need for all major players to have a presence in key markets,” said Earl Reiss of Cushman & Wakefield in New York. The Hyatt Regency Maui, which a Japanese company bought in April, 1987, from an American firm, was given as an example of this.

The second reason trophy hotels are purchased at eyebrow-raising prices: Buyers are looking at the trade value.

As DeMyer explained it, purchasers may not make money while they own the hotel, but will make a profit when they build or sell.

“Buyers of trophy properties don’t just look at the bottom line,” said Dave Daley, a partner with the Arthur Andersen Real Estate Services Group. “They factor in the appreciation in value of the real estate.”

What DeMyer termed “ego green-mail” can bring a quicker profit, as when the Sultan of Brunei was outbid on the Beverly Hills Hotel by Marvin Davis, who made a $40-million profit months later, in 1987, when he sold the hotel to the sultan.

Strategic Location

A third reason for a trophy sale: It may be a strategic buy.

“Stouffer bought the Stanford Court for a princely sum,” DeMyer said, “but the hotel is strategically located in San Francisco, and the Stanford Court is a name that enhances the Stouffer image. This might enable the company to charge higher rates at all its hotels.”

Another strategic buy was the Peninsula Group’s purchase of Maxim’s in New York.

“The Peninsula Group paid an enormous amount, but Maxim’s enhances the Hong Kong Group’s global market strategy,” DeMyer explained. The Peninsula Group also expects to operate the $100-million Belvedere in Beverly Hills, on which work is under way.

Other strategic buys mentioned were the April, 1986, purchase of the Santa Barbara Biltmore, now the Four Seasons Biltmore, by the Four Seasons, a Canadian hotel operator/owner, and VMS, a Chicago investment firm, and the October, 1986, acquisition of the Beverly Wilshire in Beverly Hills by Regent International of Hong Kong.

The fourth reason for trophy sales: Buyers acquire the properties for long-term investment reasons.

“Capitalists from Hong Kong, Taiwan and Japan are looking at the long-term horizon,” DeMyer said. “They think in generations--50, 75, 100 years--before trading.”

So if there are no profits now, there will be, they feel, in time, he added.

Optimistic Outlook

In general, hotel experts are equally optimistic.

New York real estate broker Steve Brener predicts that the Plaza could sell within five years at $1 million a room “if the economy continues.”

And Jim Burba, a partner in the Los Angeles office of Pannell Kerr Forster, a Houston-based worldwide accounting/consulting firm, said that in a few years, even Checkers, the new name of the renovated 62-year-old Mayflower--expected to open at the end of this month at 5th Street and Grand Avenue in downtown Los Angeles, and Loews Santa Monica Beach Hotel, which opened last Monday, might sell at a premium.

“Merv Griffin could probably sell his Beverly Hilton now for more than $200,000 a room,” Robinson said. Griffin paid $170,000 a room in December, 1987.

Said Jim Needham, chairman of tourism, hospitality and consulting in the Seattle office of New York-based Arthur Young, an international accounting and consulting firm:

“The Japanese have a billion-dollar-a-day surplus, and they’re still looking to make investments. . . . Japanese, Korean and other foreign investors have deep pockets, and they’re willing to pay inflated prices beyond reasonableness.”

Often, he added, the purchase is as much for a hotel’s reputation as for its actual amenities.

“I believe the rate of growth in the pace of Japanese investment in U.S. real estate must inevitably slow,” said James Mooney, managing director of New York-based Landauer Associates, an international real estate counseling company, “but I believe it will remain at a high level at least as long as the yen stays strong and the Japanese government’s policy stays favorable.”

Leinberger sees a bubble ready to burst:

“The Japanese are overpaying for most things because of their inflated property and stock market. Every $1 of profit a company makes in the U.S. is equal to three times that amount of profit in Japan, and that’s silly. Land in Tokyo is worth $100,000 to $150,000 a square foot. It’s worth $600 to $700 a foot in downtown L.A.

‘Prognosis . . . Is Great’

“Things can’t be out of sync like that forever.”

But Burba said:

“Japanese sources may dry up, but others will replace it, because the market is growing and stable politically here, and the prognosis in California, especially, is great.”

As David Berens, whose Texas hospitality company was just acquired by Arthur Andersen, put it:

“They’re not making any more sites like that of the Hotel Bel-Air, so the values of such trophy hotels will continue to rise.”

MAJOR U.S. ‘TROPHY HOTEL’ SALES

No. of Date Hotel Rooms Owner Sold Hotel Bel-Air 92 Sekitei Kaihatsu, a 5/89 Japanese firm Beverly Hills 256 Sultan of Brunei 10/87 Beverly Wilshire 381 Regent International 10/86 Hotels, Hong Kong Four Seasons 228 VMS of Chicago and 4/86 Biltmore (formerly, Four Seasons, Canada Santa Barbara Biltmore) La Costa Resort 450 Shinko Sports, Japan 9/87 Hotel & Spa; Carlsbad, Ca. Maxim’s, New York 250 Peninsula Group, 9/88 Hong Kong Plaza Hotel, 800 New York investor 3/88 New York Donald Trump Stanford Court, 402 Stouffer Hotel Co. 1/89 San Francisco (owned by Nestle Holdings, a unit of a Swiss firm) Hyatt Regency, Maui 800 KM Hawaii (owned 4/87 by a Japanese firm)

Price Hotel Per Room Hotel Bel-Air $1.1 million Beverly Hills 711,000 Beverly Wilshire 230,000 Four Seasons 254,000 Biltmore (formerly, Santa Barbara Biltmore) La Costa Resort 519,000 Hotel & Spa; Carlsbad, Ca. Maxim’s, New York 500,000 Plaza Hotel, 507,000 New York Stanford Court, 268,000 San Francisco (leased land) Hyatt Regency, Maui $91,000