A wave of distressed hotel properties hasn’t quite hit the market yet, but conditions are right for it to happen soon, and interested investors are kicking the tires.
REPORT FROM THE U.S.—As CMBS loan forbearance and deferral periods come to an end, hotel industry investors are exploring routes for acquiring distressed hotel assets in the future.
That future isn’t quite here yet but it is coming, speakers said during a panel discussion at the recent Distressed Hotels Virtual Forum produced by IMN.
“The last six months have been characterized by restructurings … but that money is running out. Winter is coming, and we’re all facing some difficult times,” said Rob Kline, CEO of Chartres Lodging Group. “We’ll end up doing a lot of loan restructuring over the next six months and well beyond that.”
Chartres Lodging Group has purchased, repositioned and sold approximately $4 billion in distressed hotels over the past 18 years, Kline said. He said it’s telling to look at how sales volume and price per key recovered after past recessions.
“The dollar-per-key valuation recovered following 9/11 within 27 months, and within 24 months following the (Great Recession)—that was about half the time it took (revenue per available room) to recover,” Kline said. “That speaks to the confidence of investors once they see the turn in the economy and in RevPAR.”
What does that mean in the short term for hoteliers?
“Over the next six months we’ll see more price discovery, as lenders start selling off notes and distressed owners start selling off their properties,” Kline said. “There’s also more capital on the sidelines.”
He warned though that “we won’t see any of that value recovery until corporate travel starts to rebound and meetings and conventions come back.”
Krystal England, managing director at Canyon Partners Real Estate, said that while many lenders want to continue to forbear, “they’re getting pressure from their warehouse lenders or regulators and that’s going to force … transactions and price discovery.”
“Creating the market there will allow for a reset of hotel values in the near term,” she added.
Panel speakers agreed that by and large potential buyers still are in the kicking-tires phase due to several factors.
“The common theme of the conversations we have … is that 10% to 25% is what people are looking for in terms of discounts,” said Adi Bhoopathy, principal with Noble Investment Group. “Obviously there’s more than that for fully broken or highly distressed assets, but there’s still a gap between buy and sell because the activity has not taken off.”
David Parsky, managing principal with Arris Investments, agreed that capital market interest in hotel distress still is in early days.
“The vast majority of the stuff I’m seeing falls into a few buckets, mostly categorized as people going fishing,” Parsky said. “I think some is already broken, and some is people looking for a ‘hope note’ in the form of preferred equity or a buyer willing to contribute to a capital stack that might be 100% debt at this point.”
What’s attractive and where?
Once acquisitions start to happen for distressed assets, speakers said there are no clear trends dictating where the money will go.
Kline said he expects major cities that were heavily affected by the pandemic, like New York City and San Francisco, may attract a lot of money out of the gate because of their long-term viability.
“Look at New York City as a petri dish for what investors will do,” Kline said. “Nearly 60% of all hotels there are closed right now. We have no true visibility as to when recovery will come back, but there’s so much capital on the sidelines and it’s a great city, so why not jump into NYC and start buying now?”
“It’s not happening right now but I think it will happen all of a sudden,” he said. “When a vaccine comes out, or a larger wave of businesses (start) going back to the office, you’ll see money follow that.”
Bhoopathy said distress acquisitions need to reflect the type of investment going in.
“Buyers will have to marry (deals) with the type of money,” he said. “Is it long, patient money? If (a market) doesn’t recover in three to five years, is that buyer now in distress because the timeline didn’t match? Some of this is psychology and some is trying to match the type of money you have with the deal.”