Deals expected to pick up with bid-ask spread closing
Deals expected to pick up with bid-ask spread closing
12 OCTOBER 2020 7:55 AM

Members of the Lodging Industry Investment Council say they are already seeing signs of hotel transactions picking up as potential buyers wait for the right moment to act.

REPORT FROM THE U.S.—The pace of hotel transactions slowed to almost nothing during the pandemic, with buyers holding back, even to the point of letting deals fall apart. That likely won’t last much longer, sources said.

During a recent online meeting of the Lodging Industry Investment Council, members spoke about how buyers and sellers are making deals now and the pace, as well as the competition, should start heating up soon.

Driftwood Capital was lucky to close on its $3-billion fund before the pandemic started, President and CEO Carlos Rodriguez Sr. said, adding “sometimes it’s better to be lucky than to be good.”

When the pandemic hit, the company took time to better understand what would happen in the markets, even backing away in March from offers it had previously made. The company now has a war chest of cash ready to go, Rodriguez said.

“On one side, it delayed our deployment of capital for about six months,” he said. “On the other side, the deals that we’ll be seeing are much more attractive than what we had initially put in our business plan.”

Driftwood Capital is actively acquiring hotels, with 200 contracts it intends to purchase in the near future, Rodriguez said. The company is looking to return to 2019 numbers over the next three years.

There is going to be a mountain of deals coming up within the next three to six months, he said.

The deals will depend on the market, said Julienne Smith, SVP of development, transactions and asset management at InterContinental Hotels Group. Half of the luxury hotels in New York are closed, and half of those aren’t expected to reopen as hotels. They’ll flip to residential, senior living or, in some cases, office space.

Extended-stay properties and mid-tier hotels will probably still trade and stay, she said. Some markets might reach a saturation point, however, after 10 to 11 years of an upswing and have to figure out how to compete in a better and different way.

The industry will soon be beset by discounts, varying by product type, location and barriers to entry, Rodriguez said. Discounts will be smaller for resorts and extended-stay hotels that have fared better, and larger for the big-box properties aimed at group business and business travelers. On average, the discounts will probably range between 20% and 30%, he said.

“In a transaction that I’m doing right now, I’m getting a more than a 50% discount from what (the owner) was transacting a few years back,” he said, adding that he’s gotten 20% in others. “You’re seeing it all over the place.”

The bid-ask gap spread is getting smaller, said Mike Cahill, founder and CEO of Hospitality Real Estate Counselors. Part of that is the realistic view sellers have about the value of their properties. The other subjective factor is the amount of equity that wants to invest in hotels, particularly premier hotels in gateway destinations.

Greenwood Hospitality Group has bid on a few projects with its capital partners, but those prices were actually increasing, Greenwood Principal Aik Hong Tan said. The company lost out on a few deals because of a lot of money on the sidelines pushing prices up, he said.

Looking back at those, everything had to go right for that deal to go smoothly for the buyer, he said. Taking a conservative approach, the company factors in carry costs for a period of time, not knowing what the recovery is going to be like or how long it will take.

The buyers
There’s a lot of capital chasing deals, Rodriguez said, noting his company has bid on several deals lately but was only able to get two.

In hotel real estate, requests for broker opinions on value are a bit of a canary in the coal mine for what’s coming, Cahill said. The company recently hired a new analyst and a new intern to handle the volume of requests coming in, mainly from CMBS lenders.

Buyers from outside of the hotel industry are interested in hotels, he said. His company has had regular dealings with multifamily investors who see an opportunity to buy extended-stay hotels or suite hotels and look at commercial alternatives. These investors are chasing deals valued at $40,000 or $50,000 per key with a $200,000 key replacement cost. Before this when the hotel industry was doing well, the economics geared those properties to staying hotels.

“There’s a lot of equity looking for those commercial alternatives, especially on a package level where you can take 10 to 15 (generation) one Residence Inns that really make no sense anymore,” he said. “There’s going to be competitive bidding for those assets.”

HREC has a runway capital program, also called rescue capital, Cahill said. Over the last two months, he said, he’s had more than 40 calls with private equity groups that want to put money in hotels.

“That’s never happened in past cycles,” he said. “You used to have to worry about the debt and go out and find some equity that likes hotels. There’s a huge amount of equity money dying to get back into hotels, and that can be the difference of the hotel valuation.”

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