On Finance: Opportunities bring more buyers to hotel industry

Hotel transactions proved to be the comeback tale of 2010. Buoyed by The Blackstone Group’s fourth-quarter acquisition of Extended Stay Hotel’s 680-property portfolio, sales of significant hotel properties leaped by 358 percent to $13.8 billion in 2010.

These levels, unlike any other property sector, easily surpassed 2008 volume of $11.9 billion (but significantly off the peak of more than $80 billion in 2007, according to Real Capital Analytics).

The jump in volume from 2009 to 2010 can be traced to many factors, including signs of a fundamental market recovery and a high level of distress in the sector. Midway through 2010, investors realized the opportunity and began to flood back into the hospitality sector.

According to Real Capital Analytics, even excluding the ESH transaction, combined distress sales in Q3 and Q4 were 33 percent higher than in the first half of 2010 and growing at a faster rate than nondistressed sales.

While there was a flurry of transactional activity to end 2010, 2011 seems to be shaping up in a similar fashion. Now that there is some sense of stability in the lodging sector, lenders are coming back into the space.

While most lenders will still seek in-place cash flow and debt yields north of 10 percent, loan-to-values will generally run between 60 percent and 70 percent, which will help attract more buyers. Also, there are still hundreds of cases of unresolved “problem” loans on lenders’ books and hundreds of millions of dollars in commercial mortgage-backed securities maturities coming due.

It seems as though broker packages are flying through the market as fast as ever and pipelines are filling up with a seemingly endless array of opportunities that all take on eerily similar characteristics—strong acquisition basis for an underperforming asset in an improving market with minimal cash flow that is in need of renovation capital.

It is important to tread carefully and sift through the multitude of transactions to find the right opportunities that fit your return requirements and strategy. Examine where the inefficiencies are in each transaction and weigh that with the risk parameters of the deal. If the risk/reward scenario doesn’t make sense for your capital, don’t feel the need to chase. There likely will be many more opportunities coming down the pipeline.

Jonathan Benowitz is managing director of RockBridge Capital. Contact him at (614) 246-2548 or jabenowitz@rockbridgecapital.com.