bechtleslade.com

Hotel & Motel Management, Nov 23, 2009 by Paul J. Heney

Washington, D.C.–Ask longtime hoteliers about the on-again, off-again nature of the industry, and they’ll likely start by telling you how many cycles they’ve been through in their career. But each cycle is different, and panelists at the recent Distressed Hotel Summit mostly agreed this cycle is unique–as are the challenges in getting out of it. Lee Pillsbury, chairman and CEO of Thayer Lodging Group, told the audience that trying to figure out when the turnaround will happen was a futile exercise. He pointed out that no economist foresaw 9/11, the recovery after 9/11, the rapid increase in revenue per available room in 2005-2007 nor the current downturn. “It is inevitable that the forecasters are going to see a continuation of the current [trends], that their views are going to tighten around the current slope of that line. And it’s also inevitable that that won’t happen,” Pillsbury said. “There will be a turn in the market. From my perspective, the recovery is going to be extraordinarily steep. … I can recall economists at the bottom of [other] recessions saying that ‘things are going to continue downward; [we] are going to bounce along the bottom; there’s not going to be a recovery.’”

Pillsbury said he sees a recovery that is going to be as steep or steeper than the decline was.

“Certainly by the end of 2010, we’re going to see a very significant upturn in demand in this business. I am very optimistic,” he said.

Michael Medzigian, chairman and managing partner of Watermark Capital Partners LLC, said there has been an unbelievable lack of clarity as to the depths of this downturn, but he thinks we’re in some sort of bottom now.

“We might be bumping along a bit, but it doesn’t feel like we’re going down another 5 or 10 percent,” he said.

Medzigian explained that a key question to ask is when do sellers give up?

“Most sellers today have hope certificates, they don’t have equity left in their assets,” he said. “The lender or somebody else is going to have to force it. I’ve been hearing … within the last two weeks that the regulators are waking up to this issue. I’m not sure they were asleep as much as they weren’t willing to make institutions take writedowns now. I don’t think the regulators can just turn their backs and say ‘let’s let these guys hold this stuff until it gets better.’ … I think that’s where the pressure has to come from to get things moving. My sense is it’ll happen. Is it three months or six months? think it’s starting.”

Bob Webster, senior managing partner, Hodges Ward Elliott, said this year has been a fascinating one for transactions.

“We had 112 hotels traded year-to-date,” Webster said. “A total of $2.5 billion of capital has traded hands. That includes lodging, where one deal represented $775 million. If you take that down to just hotels, and hotels of $10 million or more, we’ve actually had about $1.5 billion in trades and 49 hotels. That’s your pool, $1.5 billion.”

Webster explained that several types of buyers have become involved in transactions: foreign buyers, the direct participation program market, hotel companies, insurance companies and cross-over investors–those who haven’t owned hotels but have owned other types of real estate.

“It will be interesting to see … who really takes the ball and runs with it,” Webster said.

Who is distressed?

An interesting subtext to the discussion was some panelists felt the very definition of a distressed hotel asset was making things diffi cult for buyers and sellers.

“I think we still have a situation where we have a lot of hope that our assets aren’t distressed,” said Jonathan Benowitz, managing director of RockBridge Capital.

“Realizing your losses is difficult,” Webster said. “We’re still trying to figure this out; this has been a catastrophic event to our industry, and it’s difficult to figure out where we are in the mess.”

Medzigian told the audience to be practical.

“If I’ve got an asset where my debt is coming due in three years … to me, that’s distressed,” he said. “I’d like to think today about what to do about it as opposed to three years from now.”

Forcing the issue

Medzigian said private equity funds have been bruised pretty badly in this cycle, and as a result, there isn’t a lot of capital available.

“But they’re not gone, there’s certainly going to be private equity funds going forward,” he said. “A couple of months ago, some of the real estate investment trusts were taken for dead, and suddenly, they’re looking pretty good. I think the REITs could be active buyers in this next cycle.”

Pillsbury was concerned about a lack of external factors.

“I recall in some of the earlier cycles … things forced sales … this time around, there don’t seem to be any external factors forcing sales,” Pillsbury said. Medzigian said there might be a need for a resolution trust corporation, like the one that liquidated the old savings and loan assets in the early 1990s.

“Last time, it took time to get there, but it was very organized,” Medzigian said
cedar rapids chiropractor