After a slower 2016, hotel transactions picked up again this year as owners and lenders continued to see strong performance and a more stabilized lending market.
PHOENIX—The U.S. hotel industry saw record hotel transactions following the Great Recession, but then things slowed down a bit in 2016.
There was a lot of negativity where the hotel industry was headed from 2015 into 2016, CBRE SVP Nate Sahn said during the recent Hotel News Now Deals Roundtable. When that negativity was created, true or not, people pulled back, he said, including all buyer types and sellers.
“This year compared to last year is exponentially better,” Sahn said.
Last year actually wasn’t such a bad year from a performance standpoint, he said, and heading into the fourth quarter of 2016, sellers realized they could capitalize on that. Buyers started to feel better in their future forecasting on performance, he said, so they decided to acquire properties.
For all of the deals marketed and sold this year, the number of bids are up 50% to 100% on transactions, Sahn said. The lending environment indicates it’s wide open and drives the transaction market, he said. The right debt market with tons of equity and not enough deals to buy creates the ability to drive pricing.
“We’re finally able to drive pricing competitively, even significantly higher than our guidance pricing, which is even surprising us to a degree at how high it’s getting,” he said.
Everyone is clamoring for value-add deals, Sahn said, so they’re looking for repositioning deals, operating opportunities and recreation. When those exist in good locations, people are coming out of the woods to get them.
What maturity crisis?
In 2015 and 2016, loans that originated in 2005, 2006 and 2007 were supposed to come due, said Rushi Shah, principal and CEO of Aries Conlon Capital.
“Everybody was worried, so all this institutional capital started to get into debt funds so they could refinance all this maturing debt.” he said. “That disaster never happened. The maturities came and went, and they got worked out completely fine.”
They were reabsorbed into conduit markets or some banking relationships took them, Shah said. Those debt funds that were started needed deal flow, and all that money is going into new acquisitions for people buying value-add or properties with a major property improvement plan.
“You have all this pent-up supply of debt capital,” he said. “That’s driving deal activity.”
Those predictions about the complete meltdown didn’t account for the fact that in 2015 and 2016 the industry would see occupancy and average daily rates that exceeded the levels seen at the time the loans were made, said Bill Blackham, president and CEO of Condor Hospitality Trust.
Cap rates aren’t as low today as they were when they were originated because of an aggregate lower loan-to-value ratio, he said. There aren’t as many places people can go to get 85% to 95% of the total cost of acquisition of a project. He said this is unlike 2004 and 2005, when people were putting down a little and getting 20% to 25% returns on day one of a hotel acquisition, and driving capitalization rates down further because their value wasn’t based on the intrinsic value of the hotel but on the financial yields they were getting from structured transactions.
“That is not happening, at least, we are not seeing that happening as much today,” he said.
There are mitigating factors in place that suggest for the near term there will be a stabilizing force in the debt markets, Blackham said. Regulators introduced something called the at-risk provisions, which means underwriters originating securitized loans have to retain a piece of what they sell.
“They only want to keep a piece of what is the good stuff and not the bad stuff,” he said.
The industry is also being governed by the law of averages, Blackham said. Underwriting standards are based on whatever the current projection for revenue per available room is, he said, but RevPAR can vary dramatically depending on the geographic market.
This law of averages approach is both good and bad, he said. It makes it more difficult to develop, but that’s good for the longevity of the cycle from an operations standpoint.
“It’s a very interesting confluence of factors today as opposed to what the predictions were five years ago,” Blackham said.
Over the past several years, GF Management has averaged about two deals per year, SVP of Development Jeffrey Kolessar said, but this year, it hasn’t done any. Based on where the industry is in the cycle right now, it’s cautious with where it’s going. However, he said, his company is doing more development deals than it ever has before.
Because his company is using its own money and it has a lot of equity, Kolessar said, it’s being more careful with how it underwrites its own deals. Looking back at the 30 years he’s spent in the industry and some of the major disrupting events, such as 9/11 and the Great Recession, given where the industry is in the cycle, Kolessar said he’s not sure where it’s hitting the top.
GF Management is typically a long-term holder, he said. There’s going to be opportunity in the future when equity investors who entered the hotel industry about three to four years ago are seeing their hotels six to seven years into their cycle and are facing a large PIP coming due with no money left in the fund, so they’ll have to sell.
“It’s just a matter of hanging around the hoop and watching the deals,” Kolessar said. “That’s when we’ve been able to pick off opportunities over the years.”