Hotel Deals Start Flowing

Capital Loosens But Widespread Dealmaking Is Still Elusive

RockBridge’s Bruce Lowrey and Peter Willis of Chatham Lodging Trust

The hotel transactions market is in a state of transition, which is better than the paralysis it’s endured for the past couple of years. Apparently, the number of deals getting done is on the rise, but there’s still more capital chasing deals than there are suitable assets for sale.

In a panel discussion yesterday at The Lodging Conference in Phoenix, Bruce Lowrey, managing director of RockBridge, explained it best. “Every deal is like hand-to-hand combat,” he said on a panel titled Hotel Investing Today. “While it was never easy, there was a short period of time in our recent memory when it was almost like drive-through hotel investing. Not anymore.”

What’s helping free up the sales process now is a loosening of capital, for both debt and equity. Pete Dannemiller of Hodges Ward Elliott believes the “availability and cost of debt for hotels is as robust as I can ever remember.”

Despite that optimistic talk, it’s still hard for some investors to pull the trigger on deals, often because many hotels for sale don’t fit their investment criteria. Peter Willis, chief investment officer for Chatham Lodging Trust, said the REIT targets properties in the top 20 MSAs but admits it’s tough to find the right deals in the top five markets.

“It’s a crowded space, and we try to do our best to stay away from overbidding for these assets,” he said. Geography aside, Chatham gravitates toward properties where the company can add value to the asset. “We love PIPs. A meaningful PIP and a debt maturity are often the impetus for a transaction. This [scenario] forces deals into the marketplace that otherwise wouldn’t get there.”

The panel generally believes the velocity of transaction volume will continue to accelerate into 2013 and beyond. As Dannemiller noted, capital aimed at this market continues to aggregate and will need to be put to use.

“There’s a lot of capital out there looking to deploy, and it’s getting frustrated,” he said. “And there is a lot more being raised through all kinds of channels: private REITs, private equity funds, public REITs and more. This capital is looking for yield, and the financing spigot is wide open for performing assets, so people should be able to finance their acquisitions.”

Dannemiller and others on the panel agreed the overhang of distressed CMBS debt and maturities will eventually hit the market. As Lowrey pointed out, the owners of many distressed hotels have not been able to adequately fulfill their CapEx needs.

“As some point, the performance of those hotels relative to their well-capitalized competitors can only go one way, and that’s down,” he said. “When that does, it puts more pressure on those loans to kick out the assets [into the marketplace].”

While no one in the session thinks oversupply will become an issue for the industry or hotel owners in the near future, they agreed new development could begin to sprout in certain markets and under certain circumstances. For example, Willis of the Chatham REIT said the level and pricing of transactions in the top five markets, New York City in particular, are probably encouraging new hotel development.

“In many cases, the transaction costs are greatly exceeding the replacement costs of those assets,” he said. “Of course, the problem is finding buildable sites and the right flags and positioning. They’re tough to finance but you’re seeing a lot of focus on that by some developers in certain key markets.

“It will be awhile before it becomes a statistic that creates problems for us in the business, but you’ll see a lot more of it, particularly in the premium branded select service and upscale extended stay segments.”

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