ATLANTA—Bruce Lowrey has been through his share of economic cycles in the hotel industry. Lowrey, co-head of lodging investments for DB Capital Ventures of Vienna, Virginia, summed up the state of the industry in one sentence during last week’s 22nd annual Hunter Hotel Investment Conference: “There is a space between recession and recovery, and that is recapitalization.”
Lowrey told the audience of the conference’s “The New R Words—Recovery and Recapitalization” general session that the hotel industry is in the early stages of the economic recovery. Recapitalization for acquisitions is taking place.
Panelists concurred there are times that call for an aggressive attack—although it might seem counter-intuitive at the time.
“At times defense translates into offense,” said Jonathan Benowitz, managing director of Columbus, Ohio-based Rockbridge Capital, which invests in the hotel industry as a borrower and a lender.
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| Ross Bierkan of RLJ Development (left) looks on as Miguel Alandete of GA Resource Captail discusses the state of recovery. |
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Hotel owners with properties facing uncertain futures because of the tough economy need to be among the most aggressive owners, said Greg Gregory, principal with Atlanta-based Abacus Advisors.
“Understanding where you really are on a true rational basis and taking actions to preserve what value you have (is important),” he said.
“Don’t wait until the last minute when things are almost hopeless,” Gregory added. “Start talking to your lender early. Know what their limits are.”
Cash flow is king
Gregory said cash flow is king for hotel owners.
“Maximize cash flow,” he said. “Operate as efficiently as possible. Analyze each line of your business. The more positive the cash flow is the more ability you’re going to have to work with your servicer. If it’s a negative cash flow story, you’re in a weak position.”
Gregory said owners who are good operators and have a good story to tell about cash flow can often retain management duties for a hotel even if they can’t retain ownership because of unreachable debt-maturity issues.
Ross Bierkan, executive VP of development for RLJ Development, said his company is ready to take the plunge into more investments, but has only dipped its collective toe in the water at this point of the cycle.
“We’re on defense,” said Bierkan, whose company owns about U.S. 130 hotels. “We resolved ’08 and ’09 (debt) maturities, now we’re looking at resolving ‘010 maturities. … We’re sitting on about a billion (U.S. dollars) in capital to deploy in this situation to make lemonade out of lemons. We’re being patient.”
A typical distressed deal
The panel discussed a theoretical deal in which a hotel was acquired for US$20 million in 2006. Details included the property carrying a US$15-million debt, US$1.5 million net operating income and a 7.5 capitalization rate. By 2009, the NOI dropped to US$1.3 million, and the loan is coming due in June 2010.
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| “At times defense translates into offense,” said Jonathan Benowitz of Rockbridge Capital. |
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Lowrey described the situation as dire. “The lender and servicer say it’s not even worth the debt anymore,” he said, adding that the owner might be able to get a US$7-million loan—definitely not enough to cover a complete refinancing.
“This is a fairly typical deal—there’s a lot of these out there,” Bierkan said. “The ability to bring equity to the deal is a big factor.”
RLJ set aside some capital for this eventuality, although Bierkan said he is “sensitive that a lot of folks can’t do that.”
Gregory said the hotel could immediately be put through to a special servicer because a servicer doesn’t have as much latitude to restructure debt as the special servicer does. But there is a caveat.
“When that loan goes to special servicing, it gets very expensive,” Gregory said. “The special servicer gets a huge fee compared to a servicer.”
He said there’s one possible action for an owner to take: Consider going to a special servicer and have them refer you back to a servicer because they’ll know who can get things done.
If the situation ultimately calls for a divesture of the asset, owners should prepare themselves for the worst, according to Gregory.
“The one disconnect for an owner … the better your asset is that every buyer on the market wants, the special servicer will want more (fee),” he said. “Lenders and servicers are discounting the future value story not much beyond the inflation.”
Gregory warned that peak value for hotels won’t return for 8 to 10 years.
Benowitz said it’s important for owners to not bury their heads in the sand when facing difficult decisions.
“Having a plan works,” he said. “What doesn’t work is (saying) ‘the market stinks, I’m doing the best I can, I don’t have any money, show some pity on me.’ You have to have the right people that can roll up their sleeves, be a little creative and look under lots of stones.”
Most lenders don’t want to take control of an asset and it’s in everybody’s interest to work out a solution—so creativity is welcomed, Bierkan said.
