The Big Money Waits
As the economic storm ravages the hotel industry, investors patiently wait for an inevitable flood of distressed assets.
By Adam Kirby, Associate Editor -- Hotels, 5/31/2009 11:00:00 PM
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Through the first half of 2009, the big hotel transaction story has been the serious dearth of deals. Sure, a few properties have changed hands, notably The Greenbrier in West Virginia, Hyatt Regency Adelaide, Sheraton Brussels and Treasure Island Hotel and Casino on the Las Vegas Strip. But on the whole, transaction volume has ground to a relative halt.
Fear not—the eerie silence will be broken soon enough.
Most would-be buyers are sitting on the sidelines for now, waiting patiently until the third and fourth quarters when perhaps hundreds, if not thousands, of distressed hotel assets are expected to flood the market at deep discounts. Global hotel transaction volume was the lowest it has been since 2002 in the first quarter, falling to just US$1.9 billion, according to Jones Lang LaSalle Hotels (JLLH). Still, the quarter-on-quarter decline was a modest 2.6%, suggesting that the transactions market may be at or close to bottom, says JLLH CEO Arthur de Haast.
When the market finally does bottom out, though, expect a flurry of deals to begin. “Once we hit bottom and there is a bounce, capital will start to flow into the industry,” says JLLH President Arthur Adler. “Equity would buy at the right price, so the question is when will you have a motivated seller that is willing to meet the market? That could be fourth quarter of this year.”
Expect to see a fair number of overleveraged mixed-use projects come to market as distressed assets. With the primary home ownership market melting down in several urban and resort markets across North America, unsold residential components at condo-hotels and vacation ownership projects have left many developers in a financial lurch. “The hotels that had some kind of extra component to it—mostly residential—that didn’t get absorbed, where it just didn’t happen… they’re going to be on the market in the next few months in one way or another,” says Stephen Hennis, managing director of hospitality consulting firm Hospitium, Denver.
The bid-ask gap has been cavernous through the first half of 2009, with neither buyers nor sellers having much incentive to deal. The flood of distressed assets will almost certainly come, however, and the flurry of activity that will follow will establish a baseline for property values and likely will create an even greater snowball of transactions. “There is just a huge discrepancy between the expectations of owners of hotels and buyers, particularly post the 'Lehman Effect’ last September,” says Julian Kemp, a London-based associate director for CB Richard Ellis Hotels. “Owners’ expectations pricewise are at one level, whereas buyers’ expectations of what they should be buying at have been lowered quite considerably.”
The good news, says Michael Shindler, president of Chicago-based Four Corners Advisors Inc., is that the inevitable rush of transactions will help rid the industry of weak and ineffective asset managers and operators. “The flood, in a very perverse sense, is going to be a very good thing, because all that stuff is going to clear the marketplace,” Shindler says. “When the smart guys—the guys with all the money that are holding off on the marketplace—the Blackstones and the Relateds and the overseas funds that are watching from the sidelines—when they start coming in, it will clear out the market.”
Debt capital continues to tamp down major deals across the globe, but the transactions market remains viable—relatively speaking—for select-service properties around the US$15 million mark and below, according to a March investor survey by JLLH. Like many investors preparing to jump in once the market heats up, Shindler sees the most upside in select-service hotels valued at under US$20 million—overleveraged but otherwise strong assets that had the misfortune of opening into a down-trending economy.
Ron Danko, a New York City-based executive vice president for CB Richard Ellis Hotels, believes transactions involving assets under US$20 million will be plentiful in the second half. “In that particular category, those [buyers] don’t want to sit on their hands,” Danko says. “If they were historically growing their portfolios through development, they are shifting now toward acquisition, and they have the bank relationships to get 55% leverage, and in most cases they have no problem bringing equity through their network of investors.”
Indeed, while banks once preferred large-scale, multi-property transactions, the opposite is true today. “Now, smaller is better,” Adler says, “because the debt markets and lenders today are kind of capped at US$50 million or so financing for any individual property.”
Few Deals Done
The transactions market has been so slow through the first half that mid-scale deals that might have gone somewhat under the radar a year ago now warrant headlines, like the March US$121 million sale of Hilton Garden Inn Manhattan from Brack Capital Real Estate BV to RLJ Development LLC. The transaction, at US$407,000 per key, was a standing development deal that RLJ completed at a favorable discount, says RLJ President Tom Baltimore. RLJ financed the deal via internal credit facility. “The economy clearly impacted our capitalization—it would have been our preference to put a moderate amount of debt on it,” Baltimore says.
RLJ plans to be among the active buyers come third quarter, targeting similar urban select-service hotels. “We’ve got significant dry powder, and we expect to be a lot more active later in the year when opportunities arise,” Baltimore says.
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| RLJ Development LLC acquired Hilton Garden Inn Manhattan in March for US$121 million. |
In Australia, JLLH advised on a pair of transactions in the first quarter, in which a Thailand-based asset manager acquired Hyatt Regency Adelaide and Hyatt Hotel Canberra from Grand Hotel Group. The purchases were for US$113 million and US$59 million, respectively, or US$308,000 and US$238,000 per key.
The buyer, which has requested anonymity, was drawn to the properties for reasons of prestige and trading history. “So far, most transactions have been limited to trophy assets or those that offer strategic value, and have been purchased by parties that are not reliant on large proportions of debt finance and are able to take longer-term views on investments,” says Mark Durran, executive vice president for JLLH Australia.
Several other quality assets remain on the market in Australia, including Novotel Langley Perth; Four Points by Sheraton, Darling Harbour, Sydney; Holiday Inn hotels in Melbourne and Perth; and the Voyages Hotels and Resorts portfolio. “There are investors in due diligence on each asset—encouraging signs that hotel sales volume in 2009 could be substantial,” Durran says.
The hotel investment market in Australia benefits from limited supply additions across the region, meaning downward pressure on hotel trading in the short term will come from the demand side. The impact, therefore, should be relatively short-lived, Durran says. He expects the bulk of second-half transactions in Australasia to come from intraregional buyers. “Over the last 10 years, Asian investors in particular have proved to be very countercyclical purchasers, and market conditions are primed for this trend to continue, at least in the short term,” Durran says. “We, therefore, expect Asian investors and domestic high-net-worth individuals and private companies, who over recent years had been priced out of the market, to lead the charge in hotel investment in Australia.”
Prestige Driving Sales
Prestige, location and market position were the driving factors in the April sale of Le Méridien Beach Plaza Hotel, Monaco. CBRE advised the unnamed buyer, a high-net-worth resident of Monaco. “Le Méridien plays well because of its location on the south coast of France,” says Kemp, who worked on the sale. “Also, residents of Monaco do like buying into the principality, so therefore it’s like keeping it within the four walls of the principality.” The transaction, valued at €25 million, or €62,000 per key, involved a mix of cash and equity plus debt.
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| International Real Estate Plc in March bought Sheraton Brussels for an undisclosed amount. |
CBRE also advised Starwood Hotels & Resorts on the sale of Sheraton Brussels, which closed in March for an undisclosed amount, to London-based International Real Estate Plc. The 511-key hotel will continue as a Sheraton under a long-term leaseback agreement and a commitment by the buyer to refurbish. International Real Estate is an investment firm controlled by Rolf Nordström, who has ties to Brussels.
Capital France Hôtel, a hospitality fund managed by Algonquin Asset Management France, in April closed on the purchase of the 170-key Radisson Paris Boulogne Hotel from Compagnie La Lucette. JLLH advised the seller. The purchase price has not been disclosed.
Mark Wynne-Smith, CEO of Jones Lang LaSalle Hotels EMEA, says the Radisson transaction is a sign of medium-term confidence in major Europe markets like Paris and London. “They are best positioned to weather the financial downturn, could recover more quickly and have had low growth in supply in recent years,” Wynne-Smith says in a statement. “Paris is showing remarkable resilience in attracting international and domestic visitors and is likely to maintain healthy occupancy levels. As such, Parisian hotels look capable of holding their values in comparison to other cities.”
Chartres Lodging Group, San Francisco, unloaded the last two remaining Adam’s Mark Hotels properties, in Buffalo and Indianapolis, in the first quarter. CBRE advised on both transactions, and prices have not been disclosed.
Adam’s Mark Buffalo-Niagara went to Vision Hotels, a Houston-based company that has a portfolio consisting mainly of hotels in upstate New York. The property, which will be reflagged as a Crowne Plaza, was bought at a “huge” discount to replacement cost, Danko says. “It was attractive to [Vision] because they thought, through renovations and a different operating model, they could make the property profitable,” he says.
Financing materialized thanks to a strong standing relationship between the buyer and regional lender M&T Bank. “It got done purely as a result of this borrower’s track record with this lender. If they had to start from scratch, it never would have gotten done,” Danko says.
Akshar Capital Group of Scranton, Pennsylvania, acquired Adam’s Mark Indianapolis, attracted by a price “substantially below” replacement cost, Danko says. The hotel, purchased via bridge financing, will be affiliated with Wyndham Hotels & Resorts going forward.
West Virginia’s Justice Family Group LLC, led by businessman Jim Justice, purchased The Greenbrier resort and 80% of The Greenbrier Sporting Club in May through the acquisition of the stock of The Greenbrier’s holding company.
At press time in mid-May, Marriott International—which, previous to Justice’s purchase, had planned to acquire the hotel in conjunction with the resort’s holding company seeking bankruptcy protection—was still interested in the property, but more in managing it than owning it, according to Marriott President and COO Arne Sorenson.
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