June 15, 2010
By Stacey Mieyal Higgins
NEW YORK — Hotel performance and asset prices have a great deal of room for improvement, according to hoteliers on the “Financially Speaking: IREFAC Insiders” panel at the 32nd Annual New York University International Hospitality Industry Investment Conference.
This potential for upside is putting buyers and sellers in a holding pattern, based on the panelists’ forecasts for a pickup in market activity.
Last year, Mit Shah believed Noble Investment Group was going to use up its fund capital. As it turned out, the company just made its first investment in two years last week, according to Noble’s senior managing principal and CEO. “There’s an interesting quote from Barry Sternlicht; he said, ‘The distressed market lasted two months.’ And I’m not sure it lasted that long.”
“Not yet,” Shah said. “We’re extending the fund life on a commitment level for two years. I can’t imagine we’re going to go another year, but it could happen.”
Lonny Henry, the lone lender on the panel, said it’s all about the availability and cost of debt capital.
“We rarely see transaction activity when people are pessimistic about the future performance of hotels,” said the vice chairman of J.P. Morgan Securities. “The financing market is critical.”
The recovery is tracking like the post-9/11 recovery, said Vasant M. Prabhu, vice chairman and CFO, Starwood Hotels & Resorts Worldwide.
“Clearly it’s been sharper than anyone would have predicted six months ago,” he said. “But for transactions, the problem this cycle is that we never got to a market-clearing price. The most active was second quarter of 2009.”
Prices will be higher in 12 months, Prabhu added, after much badgering from co-moderator Laurence Geller, president and CEO, Strategic Hotels & Resorts.
Capital to deploy
“There are a lot of players that have gotten hurt, but there is still a substantial amount of capital out there,” said Majid Mangalji, president of Westmont Hospitality Group. “The bid-ask is one issue, and the second is the expectation of improvement. People are expecting a return on that. Leveraging has come down substantially. … Have we missed it? We are quite surprised at how quickly it has turned around. … You’d be surprised at how much capital is out there buying debt, and the yields have dropped considerably.”
Distressed hotels
Kathleen Taylor, president and COO of Four Seasons Hotels and Resorts, commented on the stability of the real estate in her brand’s portfolio and the number of hotels that were in trouble.
“It’s fewer than people think,” she told an inquisitive Geller. “There was a handful in the Americas. Only one has gone back to the lender, most other ones are done. … The bulk had an issue of (commercial mortgage-backed securities) in North America. There are a couple of issues in Europe with the nationalized banks that adds a complete extra level of complexity.”
It was never an over-leveraging issue outside of the United States, Prabhu said.
“When a hotel opened in 2009, clearly that was not ideal,” he said. “If it had a condo attached, that clearly created issues. If there is distress, it has to do with financing linked to the condos. … If the proceeds were supposed to be ‘XYZ,’ there is not much we can do about that.”
Rates: Sky’s the limit?
Geller posed the question of how high average daily rates could go with the supply slowdown and demand pickup and asked panelists to answer: lower than 2007 levels, at 2007 levels, higher than 2007 levels—and if so, how high?
Shah said they expect to get to nominal 2007 revenue per available room by the end 2013 and could get 10 percent higher than 2007.
Taylor said rate can get higher. “There is room in many markets, but not all markets are created equal,” she said.
Prabhu pointed out that every recovery cycle has peaked higher than the previous one, according to STR data. “If we assume that the world hasn’t fundamentally changed … the timing is unknown, but there is no doubt, it’s much easier to believe we will peak higher than past peaks.”
Mangalji said Westmont is generally underwriting that they will recover to 2007 levels in two to three year’s time. “After that there is only upside,” he said.
Lonny Henry said he believes the STR data will hold true to this recovery in terms of a new peak. “Certainly the public markets are projecting that the industry has substantial growth ahead.”
Geller suggested that there is an opportunity for infinite pricing for the first time ever and that systemic changes will affect the supply-demand situation.
Chuck Henry, co-moderator and president of Hotel Capital Advisers, said: “I think you’re all crazy or just not willing to say it. We’re going to have double-digit rate growth for a couple years in a row, sometime between now and 2015. … By 2015 rates will 25 percent higher.”
