U.S. hotel investments hit, but hopes exist for rebound

The members of hotel industry think tank The Lodging Industry Investment Council (LIIC) released a flash survey on April 25 looking at how the global pandemic is affecting U.S. hotel investment.

Highlights include:

•   In a major switch from the original survey conducted March 15, 91% of LIIC members believe that hotel asset-level net operating income impact from COVID-19 will not normalize (a return to 2019 cash flow performance) for at least another year. Previously, 75% anticipated full normalization within a year?.

•   94% of responders believe 2020 should be considered a recession year.

•   Currently, 57% believe the time is right to submit letters of intent to purchase for new hotel investments, a 21-percentage point increase from 36% just 40 days ago. For hotels under contract, results are consistent that 75% of buyers believe the contract should be extended, revealing that investors still want to close transactions; and 86% believe a buyer is entitled to a re-trade, if warranted, due to anticipated short-term cash flow impact, a 14% increase from the March survey results. While 64% of investors state they are still cautiously underwriting new lodging investments, 74% are taking a wait and see approach at the same time.

•   A review of both the March and April surveys reveal frozen traditional debt financing and closing of a bid/ask spread between buyers and sellers. The amount of necessary downward pricing adjustment from February 2020 values to facilitate a closed transaction is still in flux. Even once the amount of justified pricing discount is quantified, buyers are still left with the issue of whether sellers will allow their assets to trade at the new pricing or will opt to just hold. On positive notes, hotel investors are getting creative with 20% noting an increase in seller debt financing and 15% of sellers offering preferred equity investment to buyers. Moreover, hard money lenders featuring 8% to 9% interest rate bridge financing are stepping up to the plate quickly.

•   87% of new hotel purchase and sale contracts (PSAs) are anticipated to have debt financing contingencies (essentially nonexistent last five years) added in conjunction with longer due diligence periods. The April survey indicates investor concern about the speed of the hotel lending comeback, with 72% expecting no increase in refinancing activity in 2020, a 49% increase in negativity from March. The CMBS (collateralized mortgage backed securities) market continues to stall, with 86% of buyers and refinancers reporting an inability to get debt quotes?.

•   Over the past 40 days, investors have become increasingly negative on the overall hotel transaction market. In the March survey, only 9% believed the total dollar volume of U.S. hotel transactions in calendar 2020 relative to year-end 2019 would decrease over 50%. Today, the percentage is 32%. The total number of assets forecasted to be sold by year-end 2020 is anticipated to decline over 50% by 36% of responders. More favorably, 25% anticipate a lesser decline in number of assets exchanged (10% to 20% decline) and 30% envision a 25% to 50% drop?.

•   The performance of the CARES ACT and PPP component under U.S. President Donald Trump’s administration is viewed favorably by 61% of survey responders. 27% believe execution was above average, with 33% viewing it as expected, good and bad.

•   Of particular note is the theoretical perceived drop in individual hotel asset value, on average, from February 28 to April 25. 40% of investors believe a decrease of over 30% has occurred. 25% of responders estimate a decline of 10% to 20% and an equal percentage see a drop of 20% to 30%?.

•   REO (real estate owned) by lenders as a target purchase category by hotel buyers is increasingly being discussed. 56% believe the wave is coming and lenders will take control of hotel assets. However, 44% believe that this REO wave will not materialize, as “extend and pretend” kicks in and loans are worked out without foreclosure.