Following are excerpts from the second half of an International Lodging Finance Council roundtable, an exclusive HotelNewsNow.com event that took place at the Hilton San Diego Bayfront during late January at the Americas Lodging Investment Summit.
• Read first-half roundtable highlights in “Lenders: Cash flow essential to debt availability.”
• Read the full transcript.
• Watch video highlights of the second half of the roundtable.
Moderators:
Rob Stiles, executive VP Cushman & Wakefield Sonnenblick Goldman
Mike Cahill, CEO and founder, HREC
Participants:
Tony Premer, senior managing director, Pacific Life Insurance Company
Phil Ribolow, director, Deutsche Bank
Chris Diffley, senior VP, Rockbridge Capital LLC
Signs of thaw
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Rob Stiles
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Stiles: “… What do you see as sort of the bottoming event that’s going to allow the finance community to get a little bit more optimistic that we’re turning the corner?”
Ribolow: “I’d have to say it’s positive (revenue per available room) growth consistently over one to two quarters. I think that will really enable people to say, ‘There’s a clear trend here, it’s up and we want to get into it now because it’s very difficult now.’ You think back to what this conference was like two years ago, it was ‘We’re going to be out of it at the end of the year.’ Then it was next year. Now, what we’re hearing again, ‘Next year.’ So it’s a very difficult segment to jump into and say ‘OK, we’ve hit the trough, this is it, it’s all up.’ We need some clear consistency that it is all up.”
Stiles: “STR is projecting that demand growth will actually be positive this year, close to 2 percent, second half of the year will be above 2 percent. I realize that’s not RevPAR because there is some doubt about momentum on rates, but do you take that as sort of a key signal that demand is actually back in positive growth space?”
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Tony Premer
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Premer: “Absolutely. We feel we are near the trough if not in the trough right now. So the question is how steep do we come out of it. How quickly are we going to come out of it. But I think for us, we get some anecdotal evidence and input from the general managers of the hotels in our book, basically. We talk to them all the time to try and understand what kind of demand evidence are they seeing? How’s the booking pace looking? What do you see happening this season? What do the rates look like? How do you feel about the parameters of your hotel? For us, the conversation we’re having with most (of) the GMs is they’re optimistic, but they’re not seeing real absolute lift quite yet. So, in my mind I feel like we’re near the trough, but I haven’t seen the absolute evidence, out of that group anyway, that we’re on the upward flight absolutely.”
Diffley: “We’ve heard the same thing. You feel like demand is starting to stabilize, occupancy might by the end of 2010 start to grow, and then the question is once you get that stabilization and demand can you start pushing rate. And rate has to come first from the top asset in the (competitive) set. They have to have the confidence to be able to start pushing rate and actually yesterday was the first time I started hearing some folks having success out of that to actually do that. So that’s a good sign and not something we would have heard six months ago, so I agree. The question is when is the group demand, and there is no visibility to that. The booking windows have come down so much and it feels like we’re at the trough. And I think it’s a little gun shy to feel like trying to make a prediction of when we’ll see RevPAR growth.”
Stability of the market
Diffley: “I don’t think it’s helpful that the banks keep getting hit over the head every time they starting trying to get a little bit of stability and they start paying back their money and then all of a sudden they’re getting whacked with special taxes and continue to be bludgeoned in the press isn’t helping with respects of them being able to get out of this.”
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Chris Diffley
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Ribolow: “It’s not happening this year. I really believe that Wall Street will figure out the distribution issue so when this debt does mature, there will be a place to get the securitization market working again. At least that’s the hope. If we keep extending that, the market will up turn and the distribution problem will get solved and hopefully we can refinance all the existing debt without too much dislocation.”
Stiles: “So you see fundamentals, basically bringing cash flow back to distressed assets with that window of time for the market to improve. And then also the securitization market, re-emerging in a different form.”
Ribolow: “Re-emerging and hopefully picking up all the slack.”
The return of liquidity
Cahill: “So you think the two phrases out there, ‘Extend and pretend,’ and what was the other one, ‘A rolling loan gathers no loss.’ So you are saying those guys have the right strategy? Just keep extending, keep extending and something is going to happen to bail out because they’re too big to fail?”
Ribolow: “Nobody wants to take losses, what’s the benefit to that?”
Cahill: “From a capitalist perspective, it gets the market going, it gets transactions occurring, it establishes value, it creates liquidity and it gets the economy moving.”
Ribolow: “On a company-level scale, that doesn’t make any sense.”
Cahill: “But shouldn’t the lenders be thinking of society as a whole?”
Ribolow: “And we do.”
Cahill: “As opposed to just their own portfolio?”
Premer: “It’s the new classic example, we can take all our pain very quickly and acutely or we can take it over time. And I think most people are opting for, let’s take it over time and extend loans. Clearly the pricing for the loans, it’s not the right pricing for the extended loans. They’re not marked to market, but if an institution says let’s continue to push it out and kind of live with this for awhile then that massages the problem, at least temporarily.”
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Phil Ribolow
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Diffley: “The best thing for the industry is more liquidity. The only thing the industry can do is start putting fundamentals in place. If the fundamentals can solidify, that’s one piece out of the picture that maybe we can build on and then maybe liquidity will come. Liquidity, yes, in the markets would be great. But there’s no visibility in that happening in the near term.”
Stiles: “Cash flow will attract liquidity. Again, cash flow can be financed so the industry really needs fundamentally to get back on track, which will happen, and more debt will come out.”
Cahill: “But how long do you think before that actually really happens? If you really look at the RevPAR decline for this year, if you look at the mix of business, if you look at the rate drop, you look at operating cost in terms of utilities, you look at union issues, which aren’t going away.”
Ribolow: “The answer to that is when sellers become more realistic. When sellers will accept that the market value has dropped and will take a price that really reflects that, that a bank would be able to finance it because they would be working off the existing cash flow. So it’s not the financial companies that are causing this, it’s the greedy sellers.”
