Meet the Money: Owners weigh deals amid cycle angst
 
Meet the Money: Owners weigh deals amid cycle angst
11 MAY 2017 8:43 AM

Speaking at the 27th annual Meet the Money conference in Los Angeles, owners weighed whether now is the time to buy or sell hotels.

LOS ANGELES—As many openly wonder where the hotel industry sits in relation to the current cycle, investors are still looking to get deals done, both as buyers and sellers.

Speaking during the “Acquisition and divestment strategy” panel at the 27th annual Meet the Money conference, Chuck Pomerantz, managing director of Garrison Investment Group, said there are both good and bad signs so far this year.

“I feel better about 2017 than 2016 on the acquisition front, but there still are not a lot of deals out there that fit our return thresholds,” he said. “On the dispositions side, we were very active in 2016 and sold a lot of our assets. … There’s still a disconnect in pricing, and we’ve had a little bit tougher of a time (selling) in 2017.”

Richard Russo, SVP of acquisitions and development at Highgate Hotels, said it’s hard to generalize across the country and industry, especially when it comes to pricing.

“The spread is very market-specific,” he said. “It’s coming together (in markets that have been down for an extended period). In other markets where (new) supply … hasn’t hit yet, buyers are still sensitive to the fact there could be negative growth coming to those markets.”

Russo agreed that the quantity of hotels on the market doesn’t necessarily translate to quality hotels available to purchase.

Brett Stewart, SVP of development acquisitions for capital markets at Interstate Hotels & Resorts, said one of the top challenges at the moment is trying to figure out how to underwrite cycle dynamics.

“It’s a struggle to find out when does a downturn hit and how hard,” Stewart said.

He said that gives an advantage to investors willing to hold on to assets for a longer period.

“They could weather the storm,” he said.

Impact on values, transactions
Stuart Turner, VP of hotel acquisitions for Barings, said changes in interest rates are expected to move cap rates, which means investors will be much more careful in underwriting an exit strategy.

“You have to be very, very careful that your spread differential is taking that into consideration,” he said.

Stewart said rates will have to continue to increase before they make a material impact on valuations.

Ed Ansbro, EVP of Fairwood Capital, said property improvement plans also have an impact on valuations and are a “critical element” in the due diligence process.

“We take a hard look at PIPs and make sure we understand the costs,” he said.

But Pomerantz said they’re not always the easiest thing to quantify.

“PIPs have been such a moving target,” he said. “Sometimes one thing doesn’t show up on a PIP, then you find out it’s hidden somewhere in the brand standard. In the whole underwriting process, we’re taking a conservative approach. (When selling) you really have to understand what the next guy’s (PIP) numbers are going to be to get the returns you want.”

Impact of oil and politics
There have been some recent signs of life for oil and gas markets, which largely have been viewed as struggling lately. Still, sources said, there are reasons for concern.

“The energy piece is getting a little stabilized, but Houston and Pittsburgh have so much new supply still coming in,” Pomerantz said. “Unless you’re going to be a long-term holder—and I believe it will all come back—you need to be very careful.”

Stewart said any considerations start with what you think a rebound for oil markets will actually look like.

“It’s about, ‘What do we think about how far it comes back and what’s your hold period?’” he said. “How far back do we have to get for a deal to make sense?”

Stewart said his company is hearing from partners who have a high interest in Houston in particular because it’s hard to find large markets with so much potential upside at the moment.

“It could represent a good (opportunity), but it always comes back to if it’s the right price,” he said.

Turner said his ability to sell hotel investment within his company also has been affected by perceptions of the geopolitical climate.

“That becomes very challenging because of geopolitical (issues), because we’re late in the cycle for hotels and frankly because of the competitive returns we’re seeing in other markets,” he said. “When we’re trying to invest institutional dollars for our clients, there’s a lot of considerations.”

Ansbro said he tries not to think about politics when looking at deals.

“We don’t think we’re smart enough to figure it all out,” he said. “We try to look at micromarkets, not figure out the national or international situation.”

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