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| Panelists at HDC discuss hotel valuations. From left to right: moderator Shawn A. Turner, Wells Fargo’s Vernon Chi; LW Hospitality Advisors’ Dan Lesser; Aimbridge Hospitality’s Richard Sprecher; and Hunter Realty’s Angelo Stambules. |
NASHVILLE, Tennessee—Hotel valuation experts are staying busy today as industry fundamentals continue to improve. But near-term worries—such as the U.S. election and political unrest in the Middle East—are keeping buyers and sellers cautious, according to a panel of experts at the Hotel Data Conference last week.
“We’ve been extremely busy with all types of work,” said Dan Lesser, president and CEO of LW Hospitality Advisors. “Lots of litigation work. There has been no shortage of hotel bankruptcies and tax disputes, or property owners fighting.”
However, hotel transactions are occurring at a slower pace than in 2011. Panelists said $6 billion in hotel transactions volume was traded in the first half of 2012, less than half of what was moved in the first half of 2011. One factor that led to a slower deal volume was the slowed activity by real-estate investment trusts. Only 16% of hotels in the first half of 2012 were bought by REITs, compared to 33% a year ago.
Instead, hotel brokers are seeing more activity from private hotel investors and developers, said Angelo Stambules, senior VP of capital markets at Hunter Realty Associates.
“The private funds are all very active; they’ve raised a lot of funds,” he said. “There’s no shortage of capital. There’s a wide list of potential buyers out there.”
Lesser added there is an “enormous amount” of foreign investors looking to invest in the U.S. market.
“It’s remarkable,” he said. “The U.S. is still the safest place to invest and probably always will be.”
In terms of sellers, Stambules said there are number of parties who are looking to divest of assets as the hotel industry’s positive short-term outlook is helping them fetch higher market value.
“We’re seeing sellers want to sell in this market,” he said. “They’re pushing some of this product out as fundamentals get better over time.”
Therefore, well-capitalized buyers today are searching for solid assets that have little to no risk—typically full-service assets in high-barrier-to-entry markets backed by a solid brand, said Richard Sprecher, VP of business development for Aimbridge Hospitality, which operates 12 hotels for special servicers and banks.
“There’s no secret, it’s the top three: Marriott (International), Hilton (Worldwide) and Hyatt (Hotels and Resorts),” he said. “The investment guys in New York—they say give us one of those; they don’t say give us a Comfort Inn or an Econo Lodge.”
Financial landscape
The experts said hotel financing today can be rather tricky.
While Vernon Chi, senior VP of the hotel technical services group for Wells Fargo Bank, said the bank is certainly interested in all types of assets, Hunter’s Stambules said valuations today are based on future returns. And with some instability in the economic markets, that can provide some challenges.
Lesser likened the hotel industry improvement to a baseball game, saying “we are in the third inning in a nine-inning game.”
Panelists agreed that the election won’t have as large an impact on the industry as some may think. Whether President Barack Obama wins re-election or Republican nominee Mitt Romney wins the election in November, hoteliers should be able to prepare.
“We’re going to know what’s happening,” Lesser said. “Either we have a new administration or a rejuvenated administration.”
However, Lesser said the hotel industry is “very susceptible” to outside changes, pointing to political unrest in the Middle East as a source of potential setbacks in the future.
“There are a lot of risks out there, but with that risk comes with significant reward,” Stambules said.
Other factors
One area of work still not receiving much attention from hotel lenders or valuation experts is new construction. Chi said Wells Fargo is lending on new-hotel construction in “a limited fashion.” The only debt being issued for new construction is in urban markets with high barriers to entry and to sponsors with good track records, he said.
An increasing cost of property-improvement plans also factors into deal activity today.
While major brands looked the other way for a few years and let owners extend capital-improvement projects, today they’re tightening the leash.
“Now that the fundamentals have changed for a few years in a row, brands are now focusing on what’s a detractor and PIP costs have come in substantially higher than we had been seeing in the past,” Stambules said.
Chi said PIP costs can be so high that the lender is asking whether it makes sense for an owner to partner with a brand today.
