LOS ANGELES—Hotel transaction volume in the United States is increasing—but that doesn’t mean this deal flow comes easy, panelists said Tuesday at the Meet the Money Conference.
Tom Fisher, chief investment officer and executive VP for real-estate investment trust Pebblebrook Hotel Trust, said there has been little deal activity in the top 10 or 15 markets in the United States since late summer/early fall of 2011.
Pebblebrook now targets 15 markets across the U.S. for deals, down from the 20 markets the company was looking into when it went public in December 2010.
“We’re all searching for pricing clarity right now … I think the markets are eager for us (REITs) to set the pricing again.” By comparison, Fisher said there does seem to be a lot of deals being struck in secondary and tertiary markets, and those markets are experiencing “more rational pricing.”
Fisher said sellers are testing market pricing dynamics. “The asking price is basically the debt balance” of the asset in some cases, he said.
Mark Elliott, senior managing director at Hodges Ward Elliott, described the first half of 2012 as “a bit sluggish.”
But he said buyers should be ready for an “onslaught” of properties marketed for sale.
“There is an increasing amount of capital coming available, which I think will draw out the sellers,” he said.
Jim Merkel, president and CEO of RockBridge Capital, said the company is “opportunistic” in looking for transactions in the top 50 to 100 markets in the U.S. University markets are particularly valuable to RockBridge because they are more resilient, Merkel said.
Craig Wrench, president and CEO of Washington Real Estate Holdings, said the company is investing in top 25 U.S. markets. “Our motto is: ‘strong borrower, strong location, strong asset,’” he said.
Hotel performance
The panelists were optimistic that hotels will soon return to peak 2007 levels.
“We actually think it’s real soon,” Elliott said. “Some markets like Oahu (Hawaii) and Denver may have already returned. We still see some of the gateways lagging behind.” Sustained low supply levels is a big reason why hotel performance will ramp up, he said.
Fisher also was optimistic, saying a return to peak could occur during the next 12 to 24 months.
When prompted to discuss when peak profit levels would return to the hotel industry, however, Merkel said, “I don’t really know about that … That doesn’t really matter to us.” When evaluating deals, RockBridge looks at potential over performance, he said.
Regardless, Merkel sees multi-year demand growth that will pass prior peak levels.
“This is more of a business-oriented recovery,” Merkel said. The company also is keeping an eye on employment levels, which could impact the hotel sector’s recovery.
Financing
The availability and pricing is a big component of the hotel transactions market, and panel moderator Tom Engel, founder and president of TR Engel Group, asked the participants to discuss what they’re seeing in the debt markets.
Fisher said Pebblebrook is a conservative borrower and will not go beyond 50% to 55% loan-to-value. Meantime, the mezzanine markets are showing debt yields of between 8% and 12%, Wrench said.
Elliott said first mortgage financing is available at LTV of between 55% and 65% with debt yields of 11% or 12%. Increasingly available capital could lead to a significant increase in deal flow this year, he said.
Earlier in the day, Jones Lang LaSalle Hotels’ Executive VP Greg Hartman said U.S. transaction volume will reach $14 billion in 2012; price per room during the first quarter increased by 8.1% to $186,700.
“Today is a good time to capitulate the hotel,” Merkel said, and that could lead to top and bottom-line increases.
