25 September 2011
Hotel lawyers: Are we at a turning point in the industry?
Our hotel lawyers were at The Lodging Conference in Phoenix last week, taking the measure of the hotel industry. It was pretty interesting. Some said August was a “turning point” and they were not referring to a good thing.
At the Hotel Law Blog, what happens in Phoenix does not stay in Phoenix. Here’s what we heard.
“It’s not just me. The market has changed in just the last 60 days!”
While many people at the Lodging Conference said recent market volatility had no impact on them, their transactions or their deals, this was clearly not the case for all.
A widely-held view was that it seems like someone hit the “PAUSE” button on hotel finance and purchase-sale transactions. Some fear a “reset” button may also have been tripped. The global market turmoil of the past 30-60 days triggered by the inability of our politicians to resolve deep U.S. budget issues, along with questions about political resolve by European governments to deal with their own problems continue to raise major issues.
And there are all the usual specters of big increases in taxes, continued high unemployment, sagging consumer confidence, rising labor costs, rampant inflation to deal with $14 trillion of debt, operating costs rising faster than RevPAR as well as war, plague and pestilence.
So here are some insights from industry leaders and vignettes JMBM’s hotel lawyers gathered at the Phoenix Lodging Conference. In many cases we have omitted the speaker’s names because I was not certain that the comments were intended for attribution.
President, PKF Hospitality Research
I am having a hard time being negative.
Our worst case scenario based on a 25% chance of a recession will still show RevPAR growth at a 2.4% increase, which is long-term RevPAR growth average. Positive RevPAR growth is still positive.
Senior VP, PKF Consulting USA
The fundamentals of the industry are holding up well.
On the transaction side, the first part of the year was very active. We were even doing feasibility studies on new hotels.
All markets will be capped out next year. But we saw a definite slowdown in late July and August. Things have slowed way down in the last 45 days.
A lot of people are saying, “The fundamentals are good, let’s keep moving.”
Thomas M. Geshay
SVP , Davidson Hotels & Resorts
Declining numbers creates uncertainty on how to underwrite a deal.
We were bidding to buy a property but our bid was 8% lower than the highest bidder. The seller went with the highest bid which needed financing. 60 days later, the high bid could not get debt. The seller came back to us, but by then our REIT partner was gone and we could not do the deal we could have done 60 days earlier.
Everything is taking longer. Everything we have done is all cash. No debt.
2010 was a great year. This will be a good year — a little bit off last year. We think next year will be great. Maybe this has made sellers more realistic with the REITs on the sidelines.
We think this is an opportunity for guys like us to be competitive without losing to the REITs every time.
James T. Merkel
President & CEO, RockBridge Capital, LLC
We don’t think over the next 5 years the economy will shrink.
Buy the right asset. Position and capitalize it correctly and you will be OK.
A lot of hotels need capital. There has been a standoff on the needed PIPs.
The cost of debt is attractive.
Bernard N. Siegel
Principal, KSL Capital Partners, LLC
We are trying to push rates, but in the last 30 days, that has not been achievable. There is a market reset going on like in 2008.
We thought to be in the middle of a very strong recovery off a low bottom, but this [development of the last 60 days] changes everything.
And here are some “vignettes” or stories recounted . . .
An established hotel owner had a deal to buy a major urban hotel property and financing was in place, but was pulled at the last minute because the lender’s economist decided that the market was too volatile. The buyer only needed 50% LTV on the purchase (with a nice repositioning value-add play), but could not find any financing at better than 30% LTV. Volatile, unsettled markets killed the deal.
An established owner-operator has started seeing group business cancellations. In one case the cancellation fee is greater than what it would have cost if they went forward with the group meeting, but the customer felt holding the event would send the wrong message.
Tom Naughton, Managing Director and Principal of Clearview Hotel Capital, LLC had a different experience.
We are not seeing same cancellations we did in fall of 2008.
Destination group markets with incentive business, product launches, and the like — these are still intimidating markets. It is too early to tell on the group side.
A bank lender in the hospitality industry started pulling back on lending, pulling term sheets and backing away from deals. They say that August was the “turning point.”
One of the major brands’ reported that they have seen some deals falling out of bed in the last few weeks. They say that groups with capital with be the winners in this environment.
Gregory T. Mount
President, Richfield Hospitality, Inc.
We have been active on the acquisition front and will continue to do so.
I just returned from China where we are working on another 10-20 hotels.
The last 30 days has not had much of an impact on us.
We are working on bringing our parent company REIT over to the U.S. to acquire assets over the next 12-18 months.
Stephen L. Van
President & CEO, Prism Hotels & Resorts
Half of our business is distressed hotels. We are hiring a lot of people. We have 41 new hotels coming in between now and the end of the year.
SVP Finance, Pyramid Hotel Group
How you are doing is market-by-market. For example, Hawaii was great in 1st quarter of 2011 but not good after the tsunami hit in Japan.
We have not seen cancellations yet and are optimistic about next year.
Kevin D. Mahoney
COO, Stonebridge Companies
We have not seen any impact from the recent market turmoil . But maybe this has leveled out the playing field for opportunities . And it is causing us to focus on what has to be delivered to our shareholders and owners by end of the year.
President, Bedrock Partners
The challenge in the last 30-90 days is finding financing, even 50% financing.
The biggest challenge we all face is if and when financing market comes back.
This creates an opportunity for private funds with a lots of cash available.
Samuel C. Winterbottom CHA
SVP and Director Hospitality Practice Group
Recently, it seems like our main business has been selling assets for lenders. The properties sold range from a 325-room full-service hotel to closed Days Inns.
Buyer confidence has sagged in the past few weeks. They are all taking second look at their underwriting.
Banks are even more loath to carry back debt.
There has been a pause in the market for 60-90 days.
If you are planning corporate events, you may think more about laying people off than sending 1,000 people to a seminar, or you may decide to push off the meeting from February to October.
ANONYMOUS QUOTES AND NOTES
- “One of the real bright spots in the Conference was the prospect of EB-5 capital for new hotel development that JMBM Hotel Lawyer Catherine Holmes presented with her superstar panel.”
- “These unsettled markets are reminiscent of the 1998 Russian ruble crisis.”
- “Is it time to buy? Yes — particularly if you are ready for a 5-7 year hold, but not 1 year hold.”
- “There is the prospect of massive inflation to solve the 14 trillion debt problem.”
- “Operating expenses — like labor, health insurance, property taxes, and utilities — may be growing faster than RevPAR.”
- “We are back to a case of the “haves” and “have nots” again.”
- “Some people have good assets with good cash flow and no need to sell. They are not going to do anything right now.”
- “There is pressure for deployment and redeployment of assets.”
- “It’s not just me. The market has changed in the last 60 days”
- “Everyone is taking a closer look, taking more time.”
What’s it all mean?
The lack of confidence in the economy, and roiling of the markets is having a significant impact on some, perhaps many. Where we go from here depends on how you see the next few months unfolding.
The fundamentals for the hotel industry are good! They are improving. The stage is set for continued improvement in ADR and profit margins. But some are having trouble in pushing rate while others are not.
Will our Congress resolve the postponed budget crisis or will the U.S. take another hit to its credit rating? And how about Europe? What will happen with Greece, Italy, Spain and Portugal? Will the euro survive? Can slowing economies in the US and Europe avoid slipping back into a global recession?
Will the political mess, volatile markets and business uncertainties keep leisure travelers home and lead businesses to curtail travel? Or will the bifurcated economy continue to see the employed continue to travel, and businesses proceed to book hotel rooms on pent up demand.
The next few weeks should tell us a lot. There is either a more level playing field and great opportunities for those with cash, or some very uncertain times ahead. Maybe a 3-5 year investment horizon solves those uncertainties. Or maybe it doesn’t.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?
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