Wednesday, September 28, 2011

REIT-driven pricing expectations hold strong

PHOENIX—Many of the hotel real-estate investment trusts have left the

buying game, but that doesn’t mean they’ve taken their pricing

expectations with them.

That’s created a two-fold slowdown in the deal landscape. First, REITs

aren’t generating the volume themselves as they rein back along with

eroding capital bases. And second, it’s harder for private equity to fill the

over-sized shoes the big buyers have left behind.

“It’s very difficult to go into a market where a public REIT has just bought,

so everyone’s pricing expectations is, ‘My hotel is worth (US)$400,000 a

key as well,’” said Jin Lee, managing director and chief investment officer

at Thayer Lodging Group. “Settling that expectation is going to be the

challenge.”

Lee and four other panelists discussed challenges facing hotel buyers

Wednesday during a breakout session at the 17th annual Lodging

Conference at the Arizona Biltmore.

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“We’ve become much more vulnerable and tied into what’s happening in

the capital markets,” Lee said. “You have a lot of publicly traded buyers,

you have a lot of banks and lenders that have exposure to the capital

markets. Whatever happens in the larger capital markets and the health of

banks and how they see the world, that has a direct impact in terms of

(capitalization) rates, and that’s going to impact values.”

That impact is pushing values down for most assets, the panelists agreed.

Whereas before there was pressure to jump on opportunities to get ahead

of REITs, today the window is wide open, said Robert Kline, president and

cofounder of The Chartres Lodging Group LLC.

You can wait until tomorrow, because you assume prices will be cheaper,

he said.

David Roedel, partner with the Roedel Companies LLC, agreed.

“With the REITs maybe on the sideline for a period of time, who’s going to

fill that buying void?” he asked. Private equity has stepped up to an

extent, but the vacuum is pulling values down.

Robert Cole, CEO of Hospitality Ventures, was quick to warn against

painting with such a broad stroke, however. Values depend on the asset,

he said. While pricing for some of the upper-end REIT fodder is coming

back to reality, that’s not necessarily the case for middle-of-the-road

fare.

“I don’t think prices are coming down,” Cole said. If expectations of a 5%

increase in revenue per available room hold true, that translates into a

10% increase in net operating income, which should offset any increase in

cap rates.

Buying opportunities

The bid-ask spread notwithstanding, there still exist opportunities for

savvy buyers, the panelists said.

“For us, we like the top 15 markets in the country,” Thayer’s Lee said.

During the past year or so, it’s been hard elbowing into those markets amid

aggressive REIT bidders. But as they’ve faded back, it’s allowed players

like Thayer to come back in and look at opportunities again.

At The Chartres Lodging Group, Kline takes a different approach: “I

generally try to buy where other people are not buying,” he said.

Oftentimes, that’s in gateway markets for properties that require a deep

turnaround.

Cole said Hospitality Ventures is eyeing assets in secondary and tertiary

locations, though only in markets with little to no new supply.

Another concern in secondary markets is what Lee termed the “lowest

common denominator effect.”

“What we’ve learned over the years is when we underwrite markets, it’s to

really do a diagnostic of who’s in the market, who are the operators in the

market, what is the basis in their hotels.” Some owners or franchisees

operate with low-cost models in which there’s absolutely no sales effort;

the majority of bookings are sold via online travel agencies. Thayer avoids

those markets because there’s no room to push rates, Lee said.

Other opportunities are emerging not by location, but by financial

institution. Lee said he’s seeing a lot more opportunities through short

sales, recapitalizations and bankruptcy.

“The real problem for a lot of debt that’s maturing is inability to refinance,”

he said. “… You can only extend for so long.”

Kline agreed. As “involuntary owners” realize that hanging onto a

distressed asset isn’t necessarily a good thing, they’ll begin to push more

of those properties out to market.

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