Hotel Transactions in the New Economy

Transcription

1 Hotel Transactions in the New Economy Hank Wolpert

2 The Hotel Market Cycle Moving Along the Road to Recovery Equilibrium ADR Rapid Development Lodging Decline, Leads Other Sectors Development Picks Up Rapid Development Long Run Occupancy Occupancy Declines, ADR Follows U.S. is Here A Year Ago ADR and Margins Recover Development Slows Occupancy Recovers Development at Minimum Levels Lodging Recovers, Lags Other Sectors Source: PKF Hospitality Research

3 Total Transactions & Property Transfers Individual Transactions Portfolio Trans Actions , vs. 09 VAR M&A Transfers 1,382, Total Transactions & Transfers ,547 1, ,

4 Average Selling Price Per Room

5 Hotel Investment Trends Price Per Key Volume $175 Thousand $25 billions $150 $20 $125 $100 $15 $75 $10 $50 $5 $25 $ $

6 Lodging Industry Investment Transactions with a Reported Selling Price

7 Tale of Two Phones #1 wants high end at a discount solid markets (gateway urban, resorts, coasts, with entry barriers and top brands) #2 wants deep value turnaround plays with a lot of distress recovering markets (steal a deal) All promise $$ source at hand All pursuing distressed notes sales All want: no risk, all the reward, TTM cap rates, relying on uplift

8 Recent History Deepest & fastest hotel recession in modern times (NOI cannot meet debt obligations impact) Unprecedented downturn in asset values (30 40%) bottom levels now Legacy investments will continue to struggle from high leveraged times with attractive terms Industry quicker to adjust upon economy uptick but less protection on the downside (beyond control factors) Negative press for the industry starting at the luxury end downturn

9 Current situation Reactivated transaction velocity 2 4x in vs. current New liquidity of established and newly formed investment entities flush with cash and slowing of risk perception Public entities (REITS) dominate with low cost of capital + private equity with lot of dry powder and pent up demand Brands are in asset sales mode focus on management and new deal flag fees and new brands Sales are below replacement cost, historically low prices

10 Current situation Continued Aggressive bidding for top assets Opportunistic buying in lower grade, higher risk assets Recovering operating fundamentals are lifting values Worst is over hopefully focus on revenue growth vs. expense cuts Key quality driven valuation Epic upside expectations over the next five years Key Question: Buy or sell now before more hits market and cycle grows

11 Getting a Deal Done Each deal is UNIQUE + multi faceted location, market, physical asset parameters, brand, management Not your typical cap rates over time vs. going in (football pass) buying ahead of the rally Blended rate of debt and equity rates Value assigned combination of present and future stabilization All cash and refinance in a few years, if you can Challenge bid/ask spread bridge gap + realistic expectations on both sides

12 Getting Deal Done Continued Dealing with qualified parties real sellers and buyers with ability to close not speculators/time and asset wasters No surprises elevate due diligence get it all out front and early (timing spread exists) Seller or lender financing if available Get to hard earnest money ASAP NEED A SPIRIT OF COOPERATION MORE THAN EVER Do your exit analysis at buy time Best deals may be a level below top of class, unless strategic buyer

13 Unintentional Owners Slow to dispose while government offers cheap money to repair balance sheets and maintain capital ratios and asset value recovery (not RTC repeat no fire sales ) FRUSTRATION Sales tsunami never hit but pace will pick up Receiverships increasing (avoid chain of title) Selling below par only for certain assets, not a fire sale Everyone is overwhelmed hotels are complex + too many defaults at hand 50% restructured/extended, 50% new financing or sale eventual deleveraging over 2 3 years

14 Financing Very much restrained but will limp back Renewed focus on underwriting standards Lower LTV (50 70%) and higher DSC ( ) Best deals only sponsor, location, brand, best in class, real story dubious of lower tier properties Considering current TTM and some stabilized NOI Existing assets, little or no development Public/private weak bond market drop Some CMBS returning, albeit slowly Huge maturing debt refinancing needed

15 Distressed Debt Hard decisions due to complexities Defaults monetary or covenants Hard time taking action control it or workout Chapter 11 risk Usually cannot talk to borrower and difficult to talk with lender/servicer at time

16 Components of Hotel Cap Rates Hotel Risk Premium, LRA Market Risk Premium, LRA 10-Year Treasuries, LRA Forecast Source: PKF Hospitality Research

17 Hotel Capital Stack Sample Capital Stack for a Hotel $100 $90 Equity, (15%) $80 $70 B Note/ Mezz, (20%) Beyond CMBS On Book Lending CMBS Coming Back $60 High Octane Capital Stack Conservative Leverage Senior Leverage up to 70% (12% 14% Debt Yield) $50 $40 $30 A Note, (65%) Equity, (30%) B Note/ Mezz, (20%) Cash Out Financing Equity In Deal Equity In Deal Inefficient Pricing of Capital Risk Based Pricing Risk Based Pricing Loan Brokerage Correspondent & Relationship Lending Loan Brokerage $20 $10 A Note, (50%) Interest Only Interest & Amortization Interest & Amortization 30 Year Amortization/Interest Only Amortization 25 Year Schedule Amortization 25 Year Schedule $ No Funded Escrow Reserves Funded in Cash No Funded Escrow 100+/ Spreads 450+/ Spreads / Spreads Pro Forma DCR s DCR s In Place DCR s In Place Non Recourse Recourse Non Recourse