April 30, 2009
By Jeff Higley
 

NATIONAL HARBOR, Maryland — Are you thinking of selling your hotel?

Do it now—or be prepared to wait three or four years before you can get fair market price, according to panelists on the “Invest or Divest” panel held during the Asian American Hotel Owners Association conference last week at the Gaylord National Resort & Convention Center.

“If you’re going to be a seller, you should be selling soon.” said Joel Hiser, CEO of Horwath HTL. “If you’re thinking about selling in the next 24 months, I’d be selling now.”

On the other hand, those parties interested in acquiring hotels should completely understand what they can afford when the current frozen capital markets eventually thaw, according to Lee Hunter, COO of Hunter Realty Associates.

“You have to determine what your cost of capital is,” Hunter said. “That will back you out until you ultimately determine what you can pay. What you could afford to buy two years ago might not be the case now. At the end of day it’s what your cost of capital is from an equity perspective that matters.”

The hotels that are being sold in this environment—believe it or not, there are a number of assets selling for less than US$8 million—are using pro formas to determine value rather than trailing 12 months, Hunter said.

Hiser said determining a property’s value can be the most challenging thing for current owners to resolve.

“A lot of people are looking at values declining for two, three or five years,” he said. “You saw a run in the last 10 years on some of the cheapest financing ever in the hotel industry. You’re no longer going to see 6-percent, 10-year fixed financing.

“…A year ago [hotels] they were selling on trailing 12 months,” Hiser added. “Now people are projecting 2009 and buying on a cap rate of 2009.”

Beyond little financing being available, there’s another big problem that is keeping acquisitions in check, Hiser said.

“There’s still quite a spread of owners still dreaming of two years ago and what buyers are willing to pay today.”

Atul Patel, CEO of HMB Management, said owners should be careful not to overload their portfolios during this down cycle.

“This is the time for looking at your own portfolio and adding new—if you can maintain what you have,” he said.

Bharat Patel, chairman and CEO of Sun Development & Management Corporation, said that even though his company traditionally builds hotels to pad its portfolio, he is looking at some acquisition opportunities during this recession.

“You have to have enough capital to take a property and reposition to a better brand,” Bharat Patel said. “Building right now or starting development and opening next year is out of the question. We have 14 under construction now and we’re having difficulty finding new funding.”

Bharat Patel said he expects new competition for acquiring hotel assets as financing becomes available.

“There’s a real good chance that if you like this industry there isn’t any better time than the next 12 to 18 months to get into the business,” he said.

The panelists agreed that there’s one common denominator among successful buyers—bulging checkbooks.

“Cash is king,” Hiser said. “If you have cash or available equity to buy property, you’re going to be in a great position to make acquisitions.”

“In the fourth quarter of this year and first quarter of next year, there will be a lot of opportunity out there on the acquisition side,” Hunter added. “Cash is king. If you don’t have it, raise it. If you have it, raise more.”

One possible way to get some funding is to investigate getting into an FDIC loan pool. According to the FDIC Web site, a loan sale is a commonly used term for the sale of loans or loan pools. Loans acquired by the FDIC from failed financial institutions generally are sold in pools through sealed bid sale or English outcry auction. Typically, sales contain loans that have similar characteristics. The loans are refined into pools according to specific criteria. Pooling considerations may include loan size, quality, type, collateral and location.

“An FDIC pool, you can get them at big discounts,” Atul Patel said.

But Hiser said bidders must be careful when getting into such a loan pool.

“Make sure you get a deep enough discount to make it work,” he said. “It could take a few years and hundreds of thousands of dollars before the foreclosure [of hotels in the pool]. You’ve got to be prepared for that possibility.”