Hotel assets to return to past cycle’s focused buyers
 
Hotel assets to return to past cycle’s focused buyers
18 MAY 2020 8:26 AM

Investors who have focused on the hotel industry for the past 10 years will have huge advantages when distress inevitably comes onto the market, with many owners excited as to the challenges and opportunities therein.

GLOBAL REPORT—Investors are upbeat about the opportunities likely to come their way when the COVID-19 crisis is over or at least made more manageable, and sources said knowledge and experience are key to future success.

Keeping an eye out for opportunities, managing and maintaining current assets, and being open to renegotiating with partners will help keep investors ahead, sources said.

During a Hospitality Tomorrow Episode 2 panel discussing how investors are looking at the crisis, Cody Bradshaw, managing director and global head of hotel asset management at Starwood Capital Group, said there will be bargains available.

“(The hotel industry) is not an easy asset class to enter. You need the expertise and experience,” he said. “From an asset standpoint, it is finding those opportunities and turning them into something that has resonance, and those already focused on the sector will have the advantage.”

Frank Croston, co-founder of Hamilton Hotel Partners, said good management is paramount.

“Asset management is there to safeguard the investment of the owner,” Croston said. “We need to support hotel teams regardless of whether they are standalone or branded, but for me the biggest unknown is how we restore confidence in the traveling public.

“Some of that will stem from the government, but we might be more reliant on the short-term memories of guests.”

Anders Nissen, CEO of Pandox AB, said he is confident in his firm’s operating model.

“Eighty-five percent of our hotels are leases, all of them based on turnover, and most have a minimum, which I think is an excellent model, and the lower margins will not be so low if we change the F&B exposure,” Nissen said.

He added F&B will create revenue when hotels partially reopen, but that will likely come with increased expenses to adhere to social distancing guidelines.

Reopening his company’s hotels is something Bradshaw is eagerly anticipating.

“We will rethink our operating model, and I am quite excited about the challenge of reopening these hotels, at lower occupancies and working with managers to see how we can secure revenue,” he said. “F&B is a big target area, as are labor costs, which are typically 50% of costs. And rethinking all our brand standards.”

Nitty gritty
Bradshaw said major considerations will include the possibilities of waiving loan covenants, analyses of cash burn and tapping into any available government funds.

“Most private equity has cash,” he said. “We have been in the longest run in hotel-asset-class industry history, a series of funds over a 10-year period that performed well and provided cash and credit sub lines. There is no stress on our legacy funds, which is helpful.

“Some equity will shift capital allocations across real estate classes, and (at this point of the cycle) exposure (in hotels) is somewhat limited and allows us to focus on opportunities that come and on distressed debt, special circumstances and lending.”

The panelists said the transactions landscape is currently still, but it won’t be for long.

“I suspect 2021 will be a very busy year,” Bradshaw said. “At the moment, (investors) are on the phone and watching the news.”

At the same time, hoteliers must get their “hands around the cost side very quickly,” Nissen said.

“The priorities are to secure liquidity and evaluate investments and maintenance. We are ready to react if that is needed, taking over distressed partners,” he said.

A helping hand would be offered by most to help owners with costs, panelists said.

“I do not care about brand standards if I can be honest. … If they had value, we already had them, and if they had no value, we got rid of them,” Nissen said.

Croston said owners need their brands’ help more than ever.

“We, too have had that dialogue with brands on not insisting on or policing standards,” he said. “Brands need to get even closer to owners, many of whom will face liquidity challenges. It is one thing opening but losing less money than you are now, but you’re still not making a profit,.”

Panel moderator Michael Hirst, consultant at CBRE Hotels, said government advice is one thing, but hoteliers may not wish to reopen if they lose more money by doing so.

“You have to open and let the market come to you, as very few people will book a closed hotel,” Croston said. “This may all play into the hands of global brands as they have the potential to differentiate themselves on a sanitary basis. All are doing a lot of work there, but that also is a cost to owners.”

Hirst said it would only take one outbreak of the coronavirus at a hotel chain for confidence in that chain to plummet.

Market view
The opportunities in the industry at the tail end of the virus or afterward might be made more interesting as the cycle was already at its end, panelists said.

“I did not like the patterns of the hotel industry in January,” Nissen said. “I saw a lot of new, different money, which is not good in the long run. Being active in too many things might not be a good approach.”

He added most of that rogue capital has left.

“It is super-exciting. New money always comes in too late, and that leaves opportunities for those who have always been there,” he said.

Croston said the first wave of distress will come from lease structures under strain, as many of those structures’ income falls to zero.

“The client will not be able to serve the rent, even if there is the best intentions from all,” Croston said. “The more traditional freeload owner, borrower, will have longer, not a worry to the end of the year or next year when the bank’s forbearance comes to an end.

“We tend to co-invest with our capital partners, who have a lot of dry powder. A huge question is how do you underwrite well when the short term is so uncertain? It will belong to those who can look five years out.”

Bradshaw agreed.

“A wave of distress will hit the industry,” Bradshaw said. “You have to have a lot of conviction in your bases, as it will be hard to predict (revenue per available room). 2007 and 2008 was all about the banks’ fee leveraging. This crisis is about the great restructuring.”

Demand
Croston said he would be surprised if the industry returned to 2019 levels of revenue and profit before 2023.

“That would be quite aspirational. I’m most concerned in the short term about gateway cities,” he said.

Bradshaw said there would be a rough year or two, “but the math is on our side on a global perspective, as the slice of the pie keeps increasing. The real boost we will get is from the drying up of funds for new development, 1% or less than 1% supply growth, which bodes very well in a low-interest environment.”

Nissen said the pent-up domestic demand over most of Europe is a positive sign.

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