With a lack of revenues making valuations impossible and distress yet to hit, hoteliers have little incentive to buy and sell now, experts said during the LodgingStream online conference.
REPORT FROM THE U.S.—Hoteliers looking for new debt to buy a hotel or trying to figure out an accurate and up-to-date valuation on a property are likely out of luck.
Speaking in a session titled “Deals on the horizon” during the LodgingStream online conference, organized by Long Live Lodging,* panelists said those things are simply off the table in a low-to-no revenue environment.
“I think it’s an absolute waste of time to do a valuation on an asset,” said Lou Plasencia, CEO of The Plasencia Group. “Whatever number you give a seller or a lender, chances of being wrong are virtually 100%. You just have to wait and see for a little bit of time.”
He gave a similar assessment of reaching out to lenders to fund construction or deals, and said it will likely be a few years before things truly stabilize.
“This is not a fun time to be in this business, right now,” he said. “My expectations are valuations will remain very challenged probably through the end of 2021 or into 2022.”
“Right now, it’s tough sledding,” said Todd Roffman, partner at Highline Hospitality Partners. “The debt capital markets have hit the pause button. And it will be awhile until we get back to the levels we’ve been seeing in recent years. I’m thinking it’s 12 to 18 months until the debt markets come back. There’s financing out there if you’re in a tough spot, but it’s going to be lower leverage and not cheap.”
Panelists generally agreed that the industry won’t reach 2019’s performance metrics until 2023 or 2024.
Plasencia predicted a scenario where deal volume judged in dollars for the U.S. will be 10% of that seen in 2019, but the actual number of transactions could grow. Panelists agreed that there are eager investors waiting on the sidelines ready to pick up distressed assets at discounted prices, but that distress has not yet cropped up.
Roffman said he expects more distress to hit in the latter half of 2020. “The flood gates will open in four to six months,” he said. “That’s when the forbearance period allowing borrowers and owners to get through ends. (Owners) just haven’t really felt much pain yet, truthfully.”
Plasencia said there hasn’t been much in the way of bank foreclosures, and those that have happened have essentially been owners walking away from their own properties.
“It’s borrowers waving their hands and saying, ‘Here are the keys to the hotel; I’ve got a (property improvement plan) coming up, and I’d be spending $6 million out of my pocket this year to keep the hotel open for (the lender), so I’m done,’” he said.
Omari Head, senior associate with Paramount Lodging Advisors, said the pool of potential buyers hasn’t changed much recently but the types of assets they’re looking at has. He said this downturn has spiked interest outside top 25 markets.
“If hotels are still open and are above the 20% to 30% occupancy range, people are asking ‘What are those demand drivers?’” he said. “I think the appetite is being whet for secondary and tertiary markets.”
The pain might be felt most acutely by CMBS borrowers, noted Joe Reardon, chief development officer for Hotel Equities, who added deals will come much more quickly in four to six months. He said the screeching halt the industry faces will also drastically alter the pipeline of new supply.
“There are a lot of broken construction projects that had been started and are stalled in the middle of this,” he said.
That pause could lead to many changes, panelists noted, from full cancellations to brand conversions to buildings ultimately opening as something other than hotels.
Roffman said he expects many shuttered properties in challenged markets like New York ultimately won’t reopen, or at least not as hotels, and he doesn’t expect much supply growth in the next three to five years.
“So there could negative supply along with no new construction,” he said. “In the long run, that along with other factors can help a comeback.”
The ideal property type coming out of the downturn could be driven more by geography than chain scale, Plasencia said. He said travelers will want to “get out of Dodge,” but aren’t likely to favor densely populated city centers.
“If you own a two- or three-story property on the beach in Florida, Georgia or the Carolinas or in the mountains of Wyoming, I think you’ll be doing pretty dang well,” he said.
For the time being, the property types doing relatively well are mostly select-service and extended stay properties.
“That could typically be a roadside Hilton Garden Inn, Courtyard or other select service, but it’s mostly been extended-stay,” Plasencia said. “That’s in the short term. When you look long term … what we found was that those markets with a heavy leisure component were the ones that came back the fastest.”
Head noted ultimately this crisis might play out in the favor of brands, noting consumers might put more faith in them as they announce “huge cleaning initiatives.”
It could be a risk “if they’re not affiliated when cleaning and sanitation are at top of mind,” he said. “The brands have released all this and have the platform to get people trained up.”
Head said early data indicates the percentage of direct bookings are rising amid this COVID-19 crisis, and Reardon agreed the strength of brands will be vital going forward.
“It’s always important,” he said. “When you can have more business coming through the lowest cost channel, that’s a win every day.”
Brands have been flexible with owners and operators in doing things like allowing them to use FF&E funds to cover operations, panelists said. They expect similar flexibility going forward with property-improvement plans.
“I can’t imagine brands asking you to put a candlestick in the lobby, let alone a full PIP,” Plasencia said. “That dog won’t hunt.”
Roffman said groups like his aren’t simply sitting on the sidelines, though. Some deals, although not many, are getting done, panelists said, and companies have remained in contact.
“We’ve been active on the phones the last two months, trying to stay in front of all sorts of groups as interesting opportunities pop up,” he said.
He said doing pro formas is exceedingly difficult and requires hoteliers to “underwrite a band of scenarios” instead of one base-case proforma.
“You have to see if you’re comfortable falling within that band, and if you’re not, then you can’t do that deal,” he said.
Plasencia has been “pleasantly surprised” that some owners still are looking to sell, but those are largely unique circumstances or deals that came together prior to COVID-19. He said he’s also seen a rise in seller financing.
*Clarification, 7 May 2020: This story has been updated to include the conference's organizer.