CHICAGO— Just how fast is the transaction pace in the hotel industry? It might be more productive watching paint dry during the wave of property-improvement plans permeating the business.
Panelists speaking on the “Repositioning to Succeed” general session during the Midwest Lodging Investors Summit last week have been patiently champing at the bit waiting for deals to materialize, but they remain optimistic even as the up-and-down commercial mortgage-backed securities market has failed to wow them.
“It’s like a very fast moving iceberg,” said Steve Van, president of Prism Hotels & Resorts. “Sixty-five percent of loans that have come due this year have not paid off, so they’re still in the pipeline. Something’s going to have to happen to them some day.”
“Our acquisitions motto is ‘make haste … slowly,’” said Bill Reynolds, senior managing director of MHR Capital, who has made a career out of being a value-add investor. “We’ve looked at 100 (hotels), and we’re buying one. Debt’s cheap, but the deals aren’t there.”
Van agreed, adding that there’s been a drought in the market for 300- to 400-room full-service hotels that need repositioned. “We see a few of those but not a lot,” he said. “Everybody says they’re looking a lot, but they’re not buying a lot.”
Bill DeForrest, president and CEO of Lane Hospitality, said owners are being cautious about how quickly they’re giving up on assets because many of them were burned during the last recovery when they sold too soon and didn’t cash in on increased hotel valuations.
|Steve Van of Prism Hotels & Resorts said there are a lot of people looking for hotel assets but not a lot of buyers.
“The stronger balance sheet owners that have a lot of other investments feel they can hold on,” DeForrest said.
However, the deals that are taking place are in large part because of the PIPs that require loads of cash to meet brand standards, according to DeForrest. Owners know there is a need for extensive capital and a rebranding of the property, but getting the right price for an asset is the sticking point.
Back to the peak? Not quite yet
The panelists had varying opinions after moderator Biff Hawkey, senior VP of development at Hostmark Hospitality Group, asked if 2013 is when average daily rate reaches previous peak levels, which will lead to more confidence when making deals.
“If you throw inflation in, we’re like 2016,” Van said. “
“Certainly by 2014, if not ’13, there has to be some activity,” Reynolds said.
“I do think we’ll see some activity later this year,” DeForrest said. “There is a belief that we do know what the new normal is. I don’t think we have an expectation of getting back to where we were.”
Paul Kirwin, president and CEO of Northcott Hospitality and AmericInn, said because the industry has already experienced gains in demand, there won’t be significant movement again until 2015.
“The ability to lift average rate will stagnate,” he said. This means, he said, revenue per available room will move in the 3% range instead of growing 4% to 6%, which has happened the last three years.
Kirwin said the industry is in a bit of a Catch-22 situation because of the limited supply growth.
“Until you see hotels getting built, you’re going to see this bid-ask gap,” he said. “People want to build, but they have to get capital out of existing assets to build. You have to harvest it out of certain assets. In ’13 and ’14, it’s going to sort of muddle along.”
Reynolds said lenders are warming up to the industry, but there’s not a lot of warmth for value-add deep turnarounds—which happen to exist in great quantity.
“It’s the most uncertainty that I’ve ever seen,” Van said. “It was clear back in the (Resolution Trust Corporation) days when you just get rid of (underperforming assets). Nobody knows what’s going to happen. You don’t want to sell now because you may look like a fool next year.”
“Instead of doing 10 or 20 deals a year, if you do one good deal, that’s good,” he added. “A lot of people are scaling back expectations.”
Van said at some point the Federal Deposit Insurance Corporation is going to make banks and special servicers push hotels off their balance sheets, and when that happens, deal volume will increase.
DeForrest said the big advantage the hotel industry has is that there are not many other great places to put capital to work and get a reasonable level of return.
“There’s a lot of capital that would love to come into the business,” he said. “Once people realize they have to get these assets moving, capital will come in.”
He also said there is plenty of capital waiting to build hotels, but at the moment most markets can’t absorb new supply.
DeForrest said the lack of clarity coming from Washington is making it difficult for hoteliers to make their own decisions. With issues ranging from pool-lift requirements to a GSA per-diem overhaul, the hotel industry is often left scratching its collective head.
“How do you plan for some of this stuff?” he said. “If we get through the next election cycle, maybe we’ll get some relief.”
Taking care of business … every day
Meanwhile, each of the panelists’ companies operates hotels and is always searching for a high profit margin. Hawkey asked them to identify the greatest opportunity, excluding personnel, for achieving more profits.
“A full-service hotel has to do something more creative and interesting with your (food-and-beverage department),” DeForrest said. “I used to feel that way about fitness centers. I would tell a GM that the fitness center isn’t any good, and he’d say, ‘Don’t worry. Nobody ever uses it.’ I feel that way about F&B now.”
Van said hotels must fend off real-estate tax increases being levied by cash-strapped communities. “You have to protect yourself,” he said.
Kirwin said hotels need to look no further than the Internet to increase profits. “You have to get off the (online-travel agent) train as fast as you can,” he said. “When you’re repositioning a hotel it’s an incredibly remarkable tool, but it does cost money. You can’t live off a 25% discount.”