LOS ANGELES—Judging by a spate of recent hotel transactions conducted mostly by publicly traded hotel real-estate investment trusts, market values are running ahead of industry performance fundamentals as owners and operators everywhere are trying to latch on to some sort of economic recovery.
Rick Kleeman, managing partner with Wheelock Street Capital, said during a general-session panel called “What are the real players doing? Industry perspective and transactional highlights” at this week’s Meet the Money conference that while it’s hard to make a sweeping generalization, values involved in recent deals could be considered high.
“I don’t think the market is massively overvalued like in (2006 and 2007), but I think it’s ahead of itself,” he said.
Jonathan Roth, principal with Canyon Partners, said there’s plenty of capital in the market from public REITS and private equity.
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Kevin Colket, VP of acquisitions for Starwood Capital Group, said the transaction situation has been tenuous for the past year.
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“For REITS, it’s cheap money,” he said. “They’re chasing trophy assets and driving cap rates.” He said many private-equity firms are getting into acquisition mode because they formed time-triggered funds several years ago and if the money’s not spent, it’s lost.
Kevin Colket, VP of acquisitions for Starwood Capital Group, said the transaction situation has been tenuous for the past year.
“REITs came in and bought the low hanging fruit, the easy deals to finance,” he said. “There’s a disconnect between value and cash flow. A year ago and two years ago there was no guided value. Now there’s a benchmark.
“The deals done by the REITs give a too aggressive view of what values are.”
Quantitative easing
The panelists agreed government involvement through a program called quantitative easing has played a role in the current hotel-deal environment. The second round of the program is called QE2 and revolves around the government pledging to buy US$600 billion worth of treasury bonds to keep interest rates low and help spur lending and economic growth. The program ends in June.
“It starts with the federal government and how we responded to the crisis we just went through,” Wheelock’s Kleeman said. “It’s flooding the market with billions of dollars. It’s an artificial stimulation driving asset prices on a huge scale. … You have asset prices trying to pull fundamentals a long with it.
“I definitely think (buyers are paying) tomorrow’s prices today,” he added.
“The government has provided so much stimulus that the banks’ balance sheets are looking pretty,” Roth added. “We’re seeing an increase in the number of transactions out there, and that will continue as long as the balance sheets of the banks continue to improve.”
Funds being built
Other entities continue to put funding vehicles together. Rick Frank, senior VP of hospitality at Behringer Harvard Partners, said his firm is raising about US$3 million to US$4 million a day—of which 80% to 90% goes toward for a fund that will primarily be used to acquire multi-family assets. The company’s Opportunity Fund II, which includes hotels, will kick into high gear when the other fund closes in September, he said.
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Jonathan Roth, principal with Canyon Partners, said there’s plenty of capital in the market from public REITS and private equity.
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“We’re going to have a boat load of dollars to invest,” he said. “We do like the same assets as the public REITs. We look at the same things. I emphasize ‘look.’ We have been looking, they’ve been buying. We can’t compete on the pricing side.”
Kleeman’s company looks at multiple asset classes, including hotels, to invest in. It has bought and financed 10 hotels during the past 18 months.
“Within hotels, early on we did financing for one of the REITs when there wasn’t a lot of capital,” he said.
Wheelock is not lending capital today; instead, it is focusing on acquiring individual assets, including three in California. One of the projects, an upper-upscale product in a technical center area in suburban Los Angeles wasn’t attractive to the company at first, but it grew on the executives as they kept looking at demand drivers in the area.
“It had a low cap rate, but what caught our eye was price per key,” Kleeman said. “(US)$125,000 (per key), which was about half of replacement costs.
“It’s an asset-by-asset business, a brick-by-brick analysis.”
Starwood’s Colket called the hospitality industry incredibly volatile and cyclical, and that will benefit those buyers entering the market.
“Most people that are starting to come in are not going to lose money,” he said. “The disconnect between cash flow and value today is the opportunity.”
Starwood has been quite active in the market, and during the past 12 months it has been creative in its financing to get more than 20% unlevered internal rates of return, according to Colket.
Rene Theriault of Goldman Sachs & Company said his company has been actively trying to put out money for new hotel loans for the past 18 months. It is looking to provide deals with five-year and 10-year fixed-rate loans and has loaned money for hotels in various secondary and tertiary markets.
“You can write good loans in any given market depending on supply and demand,” he said.
However, he said fixed-rate loans don’t work for everyone and there has been a recent push for floating-rate debt.
“We’re excited about this,” he said. “We’re looking to do large floating rate loans in major markets. That market is coming back. It wasn’t there six months ago. The market continues to evolve very quickly.”
