Larry Wright, president, Wright Investment Properties [left] and Earle Jones, co-chairman, MMI Hotel Group, discuss the effect of construction costs.

NATIONAL REPORT—This year is shaping up to be a lukewarm year for hospitality companies to go public and a hot year for buying and selling, according to some analysts and industry leaders who keep track of the market.

"It's been a fairly stable market in support of meeting the demand for initial public offerings and the lodging industry is performing very well for the public equity markets, but in general there does not appear to be an appetite for many more public companies," said Bjorn Hanson, global hospitality industry managing partner for PricewaterhouseCoopers. "So, any new IPOs will have to be companies that have some special appeal in the marketplace."

He said that until 2001, there was a much stronger appetite in the market for lodging IPOs.

Hutchison, CNL HOTELS

"It's not a bad environment, now, but it's not as good as then," he said.

PWC is forecasting two to five U.S. lodging IPOs in 2006, according to Hanson. There were two in 2005 and four in 2004.

Alter, SUNSTONE

Tom Hutchison, c.e.o. of CNL Hotels & Resorts, agreed with Hanson.

"The private market is valuing companies much higher than the public markets are right now," he said. "The first thing that any company that has an interest in doing an IPO should do is market themselves as a private company simply because there seems to be a much higher value being placed on the multiples that exist in the private companies market."

Alter, PWC

Hutchison's Orlando-based CNL cited market conditions when it postponed its own IPO in 2004. However, CNL has not abandoned the possibility of going public.

He expects lodging IPOs to be much less common in 2006 than they were during the past few years, and believes there will be more consolidation of public companies this year.

"If someone wants to take a company public for liquidity reasons, they can look just as easily to the private markets for a sale of the company," Hutchison said.

Lodging IPOs and mergers

Bob Alter, c.e.o. of Sunstone Hotel Investors, said the capital markets are extremely interested in investing in hotels and that there are plenty of opportunities for companies to raise public money as well as for private capital to acquire hotel assets. He cited the recent acquisition of MeriStar Hospitality by The Blackstone Group as an example of this interest.

Hanson said he expects this year to support a very strong mergers-and-acquisitions market compared with the past few years.

He said until recently, a gap existed between what sellers and buyers were willing to do and that kept the market cooler.

"Sellers kept saying, 'Buy what I sell based on today's cash flow—when the industry is experiencing a very favorable trend,'" Hanson said. "Buyers would say, 'Why would I pay you now for something that may or may not happen? I'm going to discount that in my pricing.'

"So, the sellers had high expectations for price and buyers had lower expectations for price, and there were many transactions not happening because of that spread," he said.

Now that the lodging industry is in its third year of strong growth, much of the increased cash flow that sellers believed would happen and the buyers thought might happen, is actually happening, he said.

Because buyers' and sellers' expectations are closer to meeting, PWC is predicting between seven and 12 merger-and-acquisition transactions this year.

In 2004 and 2005 there were nine, each year, according to PWC numbers.