LIIC: Location, product value influence deals

New York—The pieces that will assemble the hotel industry’s post-recession recovery are beginning to fall into place. Today hoteliers, financiers and brokers are finding new sources of equity, doing smaller deals and trying to bridge the ever-present bid-ask gap. Throughout the recovery period, however, the lack of ideal assets on the market continues to trouble buyers flush with cash.

Members of the Lodging Industry Investment Council met in New York in June to address these topics and more.

Bid-ask gap
Yes it still exists, and yes it has created a major seller’s market, LIIC members said.

Mike Cahill, CEO and founder of HREC Hospitality Real Estate Counselors, agreed and said the bidding process for any product has had a lot more participants. “There’s a lot of shoppers,” he said. “The bid ask-spread—it’s there. And who is moving more? The buyers are moving. The buyers are narrowing the gap by dropping their return requirements.”

With some exceptions, these buyers are competing for mostly small deals involving often less-than-ideal properties, LIIC members said.

“What’s selling are either the trophies or the train wrecks,” said Doug Dreher, president and CEO of The Hotel Group. “Now you’ve got the trophies trading, in terms of the quality of the asset, but that middle market is where the void is.”

Steve Kisielica, principal at Lodging Capital Partners, said quality product has a lot to do with market, particularly for his company. “We want markets that have high barriers to entry,” he said. “Cities that everyone in the world has heard of. Quality product to us is more market-related.”

While some LIIC members said they are doing deals in non-gateway markets, they said it’s tough to get good capitalization rates in smaller cities.

“You just can’t rationalize the secondary and tertiary markets,” said Kevin Mahoney, COO of Stonebridge Companies.

However, phones are starting to ring more, LIIC members said.

“I had a dozen meetings in Manhattan this week and it was a different world than 12 months ago,” said Jim Butler, of Jeffer Mangels Butler & Marmaro. “In some bankers’ offices, they had three closings this week. People are talking about the shortage of product, but they are doing deals.”

“There are still a lot of all-cash buyers,” said Larry Shupnick, SVP of acquisitions and development at Interstate Hotels & Resorts. “People think they can maximize on the market.”

Buyers today include private equity investors and entrepreneurs, Asian and other offshore investors, and real estate investment trusts, LIIC members said.

Capital is lining up as it has in past cycles, said Sean Hennessey, CEO of Lodging Advisors. Investors “recognize that when the hotel industry recovers, it tends to recover very quickly,” he said. “They want to be ready when assets do become available.”

Foreclosure opportunities
While many hoteliers still consider the investment opportunity of hotels in distress or foreclosure, the expected volume has not hit the market and some LIIC members said they don’t think it will.

“A lot of banks aren’t going to take back assets,” Kisielica said. “They’re going to sell their notes at 70 cents, and that’s where you’re going to see the transactions.”

Special servicers can take years to see how well an asset is faring, some said. In that time, value can continue to go up.

“A phrase we heard at Meet the Money is that extend and pretend worked,” Butler said. “Values today are a lot higher.”

With so many players in the capital stack, logistics can be a nightmare.

“It can take months, and now we’re on hold,” Cahill said. “Somewhere in the servicer never-neverland, we’re selling.”