June 11, 2010
Beth Kormanik
The recent trends in transaction volume shouldn't be surprising, but they still aren't pleasant.
Anne Lloyd-Jones, managing director at HVS, shared the statistics: In 2007, there were 300 major transactions, defined as $10 million or higher, at $200,000 per room. In 2008, that dropped to 120 transactions and value fell 12 percent. In 2009, only 44 transactions occurred, and the price fell to $128,000 per room.
This year could be poised for a turnaround. At the end of April, the industry had seen 21 transactions, and is on track for 90 transactions by the year's end.
The brokers who negotiate these deals reported signs of a recovering market during a discussion of the subject at the NYU International Hospitality Industry Investment Conference this week. Their bullish predictions put the number of transactions exceeding 90.
"The pace has picked up," said Mark Fair, managing director, Jones Lang LaSalle Hotels. "Our pipeline as far as listings has doubled."
Peter Dannemiller, executive vice president of Hodges Ward Elliott, agreed the pace will quicken. As debt begins to mature, he predicted more hotels will come for sale.
"We definitely see the pace picking up, and we see that continuing into 2011 and '12," he said. "Performance is starting to improve, which is attracting old and new capital into the market."
Less encouraging, according to Lloyd-Jones, is that price per room has dropped by one-third since this time a year ago. She wondered if the drop represented trends in value.
Fair believes the decrease reflected the nature of the assets being sold. Luxury properties were largely taken off the market, and the low price per key reflects assets that need a lot of capital. This year, he predicted price per key will fall to $100,000 or less. But that's not an indicator of value, he said, just what’s on the market.
Dannemiller is not so sure.
"They will draw a line in the sand: 'This asset is worth X,'" he said of sellers. "There is a floor where a lot of assets won’t trade on a per-key basis."
So who are the sellers these days?
Jose Alvarez, managing director, Molinaro Koger, said they are owners of properties in secondary markets that need a lot of cash flow. He reported that most of the full-service hotels that his firm has sold have had no debt. The sellers were big corporate owners who have no leverage and have the ability to sell. They are strategically testing the market as cash flow improves, he said, and he expects more properties in these situations will be coming to market soon.
Financial sellers have not been too active so far, Dannemiller said, but he expected to see more of them in the market in 2011. He called the sales that have occurred "me too" offerings: owners of underwater assets who have seen other properties sell and want to unload their own.
"The few transactions that have occurred have inspired others," he said.
More servicers are asking about their larger assets, according to Thomas McConnell, senior managing director, Global Hospitality Group, at Cushman & Wakefield Sonnenblick Goldman. His firm is doing more valuations in anticipation of a sale.
"Bank take-backs, insurance take-backs and servicers will be the majority," he said. "You’ll see culling from investment funds."
Lloyd-Jones asked the brokers which assets are the most marketable.
Dannemiller identified them as the upper-tier, select service properties in the top ten major metro areas. Urban locations are more attractive and resorts are still somewhat out of favor, he said. The sales have also tended to be all-cash, but buyers are starting to see more financing available today.
While new financing is available, Alvarez cautioned that credit markets are only opening up for specific types of assets in specific markets. At his firm, eight of ten full-service hotels sold recently were all cash. The buyers plan is to finance in three years.
"I can't remember the last time we accepted a contract representing a seller of a property that was contingent on a buyer achieving financing," he said.
Fair said the number of all-cash buyers has increased. While one or two may have shown interest in a property last year, now there are six or eight. The increased competition has erased some of the premium that all-cash buyers could expect in past years.
"You have enough of a market and pricing power to get the pricing to the same level as leveraged buyers," he said.
While properties in New York and Washington, D.C., along with other select cities remain the most desirable, even hotels that are not cash-flowing can find buyers.
"Everything is marketable and sellable at a price," Fair said. "Non-cash-flowing or negative cash-flowing properties, we have a number of them on the market. If there is a rebranding opportunity, a capital fix in the market that is viable, those are marketable. They’re not necessarily financeable right now, or you have to get creative, [but] they’re very much marketable. They’re a lot of what I see trading in the near term."
McConnell said: "They’re probably some of your better value buys, if you know what you’re doing."
He also pointed out that the debt market "seems to be thriving." During 2009, his firm sold only a couple of sizeable assets, but it has done 25 refinancings over the last 18 months.
Alvarez agreed that buying debt has picked up, in part because so few physical assets have been on the market.
Lloyd-Jones asked brokers how they would advise a deep-pocketed cash buyer to invest the money.
Fair's advice was to identify markets with the greatest job growth for the next three years, and then seek out upscale, well-branded, select-service hotels. He would spread the money around in chunks of $10 million to $25 million and stage spending it over the next two to three years.
McConnell also advised buying several select-service hotels, the younger the better.
"Then," he said, "if I could peg it to a year prior to when what I paid for it starts to equate to what it costs to build again, I'd sell it. That's the danger in those markets. Right now you can buy them cheaper than you can build them."
Dannemiller suggested this simplest plan: Find the best asset available in New York or Washington, D.C., and buy it.
