Investor interest remains, but pricing gap slows deals
 
Investor interest remains, but pricing gap slows deals
25 JUNE 2020 8:36 AM

While there are still investors who want to put money into hotels, the shutdown of debt markets and the gap between buyers’ and sellers’ expectations has caused a drastic slowing of deals, according to members of the Lodging Industry Investment Council.

REPORT FROM THE U.S.—The good news is people still want to invest in the hotel industry. The bad news is that’s an increasingly difficult thing to do.

Speaking during a recent online meeting of the Lodging Industry Investment Council, Mike Cahill, principal and founder of HREC, said from his position as a broker, it’s clear interest remains high but buyers and sellers remain far apart.

“There’s still a huge amount of equity that wants to invest in hotels, huge volumes,” he said. “And they’re looking for creative ways to invest. The interesting question, though, is where that bid-ask spread still is and who are the sellers.”

David Duncan, president and CEO of First Hospitality, said uncertainty is currently plaguing the market, which makes pricing—and the potential decision to sell—difficult.

“What the options are a year from now are so unclear,” he said. “There’s human emotion as well as an investment thesis that says, ‘Don’t take precipitous actions until you have some visibility to what that is.’ I think there’s going to be a lot of pushing this down the road.”

North Central Group CEO Jonathan Bogatay agreed that a lot of current investors are just trying to survive until they get to the other side of this crisis, and lenders—particularly in the CMBS market—seem inclined to enable that because they have no motivation to start seizing assets.

“So, it’s about how do we save face and figure out a workout that’s going to allow the current borrower to stay on the deal,” he said.

In terms of the institutional ownership space, Kate Henriksen, co-chief investment officer for RLJ Lodging Trust, said that while her company is well-capitalized following the sale of 47 properties, many other real estate investment trusts have “serious liquidity issues.”

Asked what that will mean in terms of transactions, she said more M&A in the space is likely.

“I don’t think we’ll necessarily see any more REIT-to-REIT (deals), but I would think there’s going to be more REITs taken private,” she said.

The state of debt
While a lot of the traditional lending options aren’t available right now, Cahill said lenders are looking to get creative to get deals done, and there is capital available—whether it’s termed runway, rescue or bridge debt—to help investors makes it to the other side of the crisis.

“Over the next 12 months until transactions pick up, that’s going to be a tremendous need for hotel owners, especially those midsized owner-operators,” he said. “We’ve had in the last five day 13 calls from equity capital that wants to provide rescue capital at a certain rate of return to help through the next two years then exit. It’s obviously not that easy, but the good part is that means people want to invest in hotels.”

Duncan agreed there’s a great deal of opportunity for that capital specifically, because the bid-ask gap remains so wide.

“This debt avoids price agreement,” he said. “Nobody really has to agree what the value is, and it’s probably the most needed commodity to extend.”

He noted that for full-service hotels in particular, the potential losses over the next year in terms of gross operating profits “can be stunning.”

“In prior recessions, of which I’ve been through a lot of them, there wasn’t literally a big bracket around keeping the hotel running before you talked about the debt service,” he said. “So I think there’s potential for it to become quite ugly in the workout restructure model because of the loss in full service.”

There may be, said Jim Butler, founding partner at Jeffer Mangels Butler & Mitchell. His firm has a long history of working with large lenders, and he believes many lenders are trying to push out dealing with the issue of defaults into at least the third quarter. He also noted that the slow reaction from CMBS loans in special servicing is simply because the market wasn’t prepared for the wave of defaults.

“They are inundated with hundreds and hundreds of loan modification requests, and they weren’t staffed up,” he said. “They’ve two to 15 (people). ... I think people will really begin addressing it at the end of this year or beginning of this year. It will take that amount of time for the gap begins to really sort itself out.”

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