A Hockey Game Broke Out

During our pre-panel discussion at the recent Midwest Lodging Investors Summit, the group of panelists for our panel was discussing “distressed assets” and the market for them.

I posited the notions that (a) the term “distressed assets” should be on the “I don’t want to hear it again” list, (b) “distressed assets” were assets that, as operating hotels, were problematic, and (c) most buyers did not want “distressed assets,” they want assets that are operating decently and whose capital structure is distressed. There ensued an interesting conversation debating whether I was drawing too fine a line in this distinction (who, me?).

It is my humble perspective that most buyers circling the so-called “distressed assets” are looking for assets priced at a significant discount to the existing capital structure (which may have passed for “market value” at some point in the not-so-distant past). The “distress” the assets are under relates solely to a no-longer sustainable capital stack. So, I ask, “Is that really a distressed asset?"

I consider a “distressed asset” (did I say that I want to stop using this term?) one that is almost irretrievably broken. It’s the full-service, first-class hotel that, if owned without a mortgage, would still be a nightmare (usually in a location where the hotel market is best served by the limited-service assets that likely have sprung up around the full-service one); it’s the second generation limited-service asset in a place where, one exit away on the Interstate, fourth and fifth generation versions of the competition are abundant; and, it’s the asset that has been so capital-constrained that it cannot compete physically or from a service perspective with the well-regarded property across the street.

I do not believe that financial buyers who are assembling their war chests want these assets. They want the assets which perform well considering the economic circumstances but which have capital stack stress, to which they can bring their financial prowess (and funds) to bear and hope for a recovery.  And, the financial buyers want to buy these decent assets at a substantial discount to their current capitalization. Yet, we hear that the money is standing by to acquire “distressed assets.” Simply put, they want “discounted assets” (and my partners and I are among them).

So, our panel had a substantive conversation about the differences: whether they existed, whether my notion made any sense (which might be the first time one of my notions makes sense) and whether they agreed.

Hmm, I went to a conference and a truly interesting, substantive conversation broke out. Rodney Dangerfield, you would have been proud.