Valuations difficult as pandemic lingers
 
Valuations difficult as pandemic lingers
17 NOVEMBER 2020 9:40 AM

Experts speaking at the 42nd Annual NYU International Hospitality Industry Investment Conference said it’s impossible to have confidence in hotel valuations right now.

REPORT FROM THE U.S.—Finding the right valuation for a property now is a remarkably difficult task, according to a panel of experts speaking during the 42nd Annual NYU International Hospitality Industry Investment Conference webinar series.

Talking during the “NYU Tisch Center alumni” panel of the event, Evan Weiss, COO and principal of LW Hospitality Advisors, said anyone confident in knowing the current value of their assets is “either one of two things: A) exorbitantly lucky, or B) exorbitantly full of it.”

Weiss’ company has done somewhere between 150 and 200 valuations since the pandemic took hold in the U.S. in March for owners, operators and even CMBS special servicers, and he said values vary wildly depending on different factors.

“Value today is extremely challenging to pinpoint because it’s really asset by asset, market by market and segment by segment,” he said. “A limited-service hotel in suburban Alabama is very different than a full-service hotel in downtown Los Angeles.”

He said now more than ever a hotel’s burn rate, and its ability to cut costs, is vital in keeping its valuation, but the ultimate determiner of an asset’s long -term value is “when will (revenue per available room) return to pre-COVID levels (and) will it return?”

Steen Petri, SVP of investments for HEI Hotels & Resorts, said he’s not seeing a lot of deals getting done because of that ambiguity on valuations, although some are happening with roughly 20% discounts compared to 2019 valuations.

Weiss said discounts currently range anywhere from 15% to 40% off 2019 values, but that depends on what kind of asset is on the market and why it’s up for sale.

“If you were to go to sell your asset today, you have to understand why you are selling,” Weiss said. “Are you distressed? Do you need the capital to save other assets potentially? Do you see the market going down even further and sort of want to stop the losses?”

Petri noted his company and its investment partners “are looking at acquisition opportunities,” but there’s lots of competition with more sought-after assets.

“There’s lot of equity on the sidelines looking for a deal,” he said. “And where the deals do look interesting and do look attractive, there’s a lot of capital chasing them. What worries me a little bit is some of the capital coming in, it would appear, may not fully understand what they’re getting into.”

He said that specifically means that some investors don’t fully comprehend how they’re buying into operating businesses that aren’t currently making enough revenue to cover the costs of operating.

“It’s going to take a while before you see positive cash flow,” Petri said. “And I don’t just mean return to the owner’s equity. I mean, can you pay debt service? Can you even contribute toward the fixed expenses that you need to overcome first?”

John Paulsen, VP at HotelAVE, said his company is advising its clients more than ever on cutting operating costs.

“What we’ve been trying to do with our owners is try to help them to understand those carry costs and the burn rate and to work with them and our operators to reduce costs as much as we can,” he said. “It’s been a lot of effort. We’re taking the models from a full-service hotel to more select service, if we can.”

Paulsen said the role of a third-party asset manager like his company is always to be fighting to reduce costs, but those efforts are increasingly vital as the pandemic and economic recession linger on. He said it increasingly becomes an issue of looking for relief from partners, including brands, operators and vendors.

“The brands have been really helpful in the sense that they have provided some relief on some issues,” he said.

He said the current environment behooves owners to ask operators to reduce payments for shared services that aren’t being used or seek relief from vendors.

Some vendors, for example, may give 90 days forgiveness and allow you to waive their fee for three months, he said. Others will do six months forgiveness or give you a 50% reduction.

“You don’t get anything unless you ask,” he said.

In addition to looking to cut costs wherever possible, hoteliers need to be willing to find demand in every avenue, Paulsen said.

He said that includes finding unique groups, like nurses who came to New York in May and June. But it also means opening to various booking channels that hoteliers might not want to focus on otherwise.

“I know no one likes to use the (online travel agencies), but if that’s what’s booking, we’ve got to be aggressive, and you’ve got to go in there,” he said. “So that’s what we’re talking about with most of our owners—how do we capture more business? How do we bring more to the bottom line?”

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