I’m in Atlanta for the Hunter Hotel Investment Conference. My room isn’t ready yet, and I thought I’d crank out some interesting insights based on an interview with Rod Petrik, managing director at Stifel Nicolaus, while I wait in the lobby.
Petrik is rooting for the luxury hotel companies (specifically, Strategic Hotels and Resorts), and that’s why I interviewed him for an upcoming story about the precarious state of luxury hotels. But as is often the case when conducting an interview, you end up with more information that you can include in your story.
Such is the case of my conversation with Petrik. I called him to talk about luxury hotels, the AIG effect, et cetera and ended up with more insight into the current hotel real estate market than I know what to do with. Rather than let it go to waste, I offer some of his observations.
Petrik said the real estate market has a long way to go. And seeing as how the activity hasn’t started in office and retail yet, hotels have a longer wait. Talking to some of the brokers here at the conference, they expect things to be quiet for a while.
He made the argument that at least half of the U.S. hotel real estate investment trusts have no equity value. “Stocks are trading as on option of potential future value,” he said. “Right now it’s unfair because there’s no real market. Capital markets are still frozen so you can’t sell a company.”
Will anyone survive through 2010?
“Yes,” Petrik said. “But what’s happening is a lot of companies are going to break covenants with their debt. But banks seem willing to amend the covenants. Lenders are granting extensions—a series of one-year extensions. You’re seeing that a lot even with (commercial mortgage backed securities) debt. A lot of the (mezzanine) investors will be gone.”
Four things could happen to a public hotel company at risk for bankruptcy, Petrik outlined: First, companies will attract private investors and management-led buyouts. The second option is companies that “will throw in the towel—sell the assets and distribute what’s left.” Third will be public-to-public mergers, “maybe a year from now. They’ll take a stock deal and ride a different horse.” And the fourth option is bankruptcies.
A side effect will be lower property values and higher cap rates.
“2011 is going to be a much more interesting year than 2009 for workouts, sales and foreclosures and transaction activity,” he said.
And it seems like a lot of people are just trying to ride out 2009 unscathed. Maybe now is a good time to be “uninteresting.”
