DENVER, CO—The Lodging Industry Investment Council (LIIC) has completed a follow-up to its March 15 flash survey, and asked how 40 more days of the global pandemic has affected U.S. hotel investment.
The survey was produced by Mike Cahill, LIIC co-chairman and CEO/founder of hotel and casino brokerage and advisory firm HREC.
The results of the survey include the following:
• More Than a Year for Property-Level Hotel Cash Flow to Rebound: In a major switch from the original survey, 91% of LIIC members now believe that hotel asset level net operating income (NOI) impact from COVID-19 will not normalize (a return to 2019 cash flow performance) for at least another year. Previously, 75% anticipated full normalization within a year.
• Recession is Here: 94% of survey respondents believe 2020 should be considered a recession year.
• Buyers Cautiously Increasing Activity: Currently, 57% believe the time is right to submit LOIs (Letter of Intent to Purchase) for new hotel investments, a 21-percentage point increase from 36% just 40 days prior. For hotels under contract, results are consistent that 75% of buyers believe the contract should be extended revealing that investors still want to close transactions. Some 86% of respondents believe a buyer is entitled to a retrade, if warranted, due to anticipated short-term cash flow impact, a 14% increase from the March survey results. While 64% of investors state they are still cautiously underwriting new lodging investments, 74% are taking a wait and see approach at the same time.
• Hurdles to Cross for Closing Transactions?: A review of both the March and April surveys reveals two dominant concerns that may hinder return of a healthy lodging property transaction market: frozen traditional debt financing and closing of a bid/ask spread between buyers and sellers. The amount of necessary downward pricing adjustment from February 2020 values to facilitate a closed transaction is still in flux. Even once the amount of justified pricing discount is quantified, buyers are still left with the issue of whether sellers will allow their assets to trade at the new pricing or will opt to just hold. On positive notes, hotel investors are getting creative with 20% noting an increase in seller debt financing and 15% of sellers offering preferred equity investment to buyers. Moreover, hard money lenders featuring 8% to 9% interest rate bridge financing are stepping up to the plate quickly.
• Hope for Debt to Become More Active: 87% of new hotel purchase and sale contracts (PSAs) are anticipated to have debt financing contingencies (essentially nonexistent in the last five years) added in conjunction with longer due diligence periods. The April survey indicates investor concern about the speed of the hotel lending comeback, with 72% expecting no increase in refinancing activity in 2020, a 49% increase in negativity from March. The CMBS (Collateralized Mortgage Backed Securities) market continues to stall, with 86% of buyers and refinancers reporting an inability to get debt quotes.
• Top Three Threats to Hotel Investment Remain Constant:
- Anticipated Economic Recession
- Decrease in Domestic Corporate and Leisure Travel
• Further Lowering of Hotel Transaction Levels Anticipated for Calendar 2020: Over the past 40 days, investors have become increasingly negative on the overall hotel transaction market. In the March survey, only 9% believed the total dollar volume of U.S. hotel transactions in calendar 2020 relative to year-end 2019 would decrease more than 50%. In the April survey, the percentage is 32%.The total number of assets forecasted to be sold by year-end 2020 is anticipated to decline more than 50% by 36% of respondents. More favorably, 25% anticipate a lesser decline in number of assets exchanged (10% to 20% decline) and 30% envision a 25% to 50% drop.
• CARES Act and PPP (Payroll Protection Program): The performance of the CARES Act and PPP component under the Trump administration is viewed favorably by 61% of survey respondents. Some 27% believe execution was above average, with 33% viewing it as expected, good and bad.
• Hotel Asset Values Drop: Of particular note is the theoretical perceived drop in individual hotel asset value, on average, from Feb. 28 to April 25. Forty percent of investors believe a decrease of more than 30% has occurred. Some 25% of respondents estimate a decline of 10% to 20%, and an equal percentage see a drop of 20% to 30%.
• REO Asset Sales in 2021 and 2022?: REO (real estate owned) by lenders as a target purchase category by hotel buyers is increasingly being discussed. Fifty-six percent believe the wave is coming and lenders will take control of hotel assets. However, 44% believe that this REO wave will not materialize, as “extend and pretend” kicks in and loans are worked out without foreclosure.