Sheraton Orlando Sale Sparks Hope
Mixed amid the recent wave of bankruptcies, defaults and foreclosures, there has been a trickle of hotel transactions sparking hope that distressed assets can and will be sold.
On Dec. 8, the W Hotel Union Square in New York was sold at a foreclosure auction, like the Wyndham Orange County in California the week before. Last month the Sheraton Orlando was sold to a joint venture between a private equity firm and an asset manager after first going through bankruptcy court and then a foreclosure auction.
Buyers in some cases are getting heavily discounted prices: The 238-room Wyndham fetched $21 million—exactly half of what it sold for just three years ago.
The W was foreclosed upon soon after Dubai World announced it would attempt to restructure $26 billion in debt. Some owners, like Sunstone Hotel Investors, have even handed over the keys to flagging properties. Sunstone, which made headlines this summer by giving up the W Hotel San Diego, defaulted on a $246.3 million mortgage covering 11 hotels last month.
To this point lenders have been more willing to restructure loans than take back distressed assets, further delaying the flow of transactions. “They don’t have to,” says Arthur Adler, managing director and CEO of the Americas for Jones Lang LaSalle Hotels in New York.
“In many cases, if the property is covering operating costs and it’s a good borrower doing the right things, there isn’t pressure to sell. They are better off restructuring the loan and extending it.”
Opportunistic investors are prepared to take advantage of coming distress. For instance, Pebblebrook Hotel Trust announced on Dec. 9 the pricing of an initial public offering (IPO) at $20 per share to raise more than $400 million. Pyramid Hotels & Resorts has similar plans to raise $275 million to also purchase distressed hotels.
Despite massive amounts of equity building up on the sidelines, the bid-ask gap is still significant, explains Adler, who adds that recent transactions are “just a trickle” and not the beginning of a tidal wave of activity.
For the year, Jones Lang LaSalle Hotels projects $2 billion in U.S. hotel transaction volume ($1.6 billion through November), down from $8.4 billion a year ago and a high of $45.8 billion in 2007. The hotel investment services firm forecasts that the volume will increase to $3.5 billion in 2010.
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