Deal flow to ebb in 2015
27 MARCH 2015 6:25 AM
2014 was the year of the mega portfolio transaction, Hunter Hotel Conference panelists. 2015, however, is likely to see smaller and one-off deals take place.
ATLANTA—2014 was a big money year for hotel transactions. The same likely won’t be said when 2015 is said and done, hotel investors said during a general session Thursday at the Hunter Hotel Conference.
During a panel discussion titled “Portfolios … & other interesting transactions,” investors pointed to the billion-dollar-plus transactions that dominated the hotel landscape a year ago. For instance, Jonathan P. Mehlman, president and CEO of American Realty Capital Hospitality Trust, mentioned his company’s near $2-billion deal for the 122-property Equity Inns portfolio.
His company is not done buying, and is raising between $3 million to $4 million a day, he said. By the end of the year, the company expects to raise $1.6 billion of equity. Other investors on the panel echoed Mehlman’s desire to buy, but said volume levels will be lower than what was seen in 2014.
Sujan S. Patel, managing director at NorthStar Realty Finance Corporation, said his company’s focus will be on smaller-sized deals of $50 million or higher.
“There’s a limited arena of big deals,” he said. “This is probably the year of smaller-scale transactions. Clearly, there are groups of people who have built large hotels and some groups might decide to sell them. From NorthStar’s perspective, we are certainly not a seller this year. We will be acquiring.”
Brian Kim, managing director of real estate at Blackstone Group, which owns 200 select-service hotels that as a whole are valued at $5 billion, agreed big deals have moved through the system.
“Last year, people took advantage of an environment where they could exit a tough investment,” said Tyler Morse, CEO of MCR Development. “They said, ‘I have to get this off my books.’ Now we’ve kind of hit the reset button.”
Select service is a particularly sought-after class of hotels, according to the panelists.
Morse said consumers favor select service because of the lower cost of their stay. They normally don’t need to pay for Wi-Fi, parking, etc., at a select-service hotel like they do at a full-service property.
“It’s a great value proposition,” he said. “There’s been a secular shift with consumers from full service to limited service.”
One obstacle in acquiring hotels is that some owners have opted to put long-term debt on the properties. The panelists said they’d rather see debt they can take off and swap in their own capital structure.
“If your plan is to sell in six months, don’t put long-term debt on it,” Patel said.
An attractive debt environment will continue to help spur deals during 2015, the speakers said.
Financing, however, might have flowed a little too freely in the recent past, Morse said. Banks were lending to people who are rookies as it relates to hotel development.
“Those guys were not professionals,” he said. “They were building in the wrong places and screwing up the supply dynamics.” He added that he is seeing more discipline from lending institutions now.
Time to sell
While it is a good time to buy assets, the panelists agreed it is an equally if not more favorable time to sell.
Kim said if hotel owners want to sell, they should do so this year rather than wait for 2016 because it’s anyone’s guess what 2016 might look like.
“We do not love our assets enough to hold them forever,” Kim said.
He added: “Our mantra is to buy assets, fix whatever’s wrong, and ultimately sell them to a long-term owner.”
After listening to his fellow panelists go on about the excellent selling environment that exists today, Morse joked that he had come to a sudden decision as far as his company’s investment strategy is concerned.
“These guys talked me into it,” he said. “I’m selling our portfolio after this conference. It’s like we’re at a Century 21 conference right now. Everybody should sell everything.”