Optimism returning about the future of hospitality transaction activity

NATIONAL REPORT—At the start of the year, when brokers were asked their view of the market’s prospects, they tended to say they were cautiously optimistic. Fast forward 10 months and the caution has generally faded, replaced with a more full-bodied, no-qualifiers-needed optimism.
“I’m very optimistic. We lived through last year and anything is better than that. The transaction numbers we’re seeing are real. We may not be back
to 2007, but there’s plenty of business out there today, and plenty of transactions happening,” said Teague Hunter, president of Hunter Realty Associates in Atlanta.
Buyers in the market tend to want the top 10 to 15 markets, noted Robert Koger, president of Molinaro Koger in McLean, VA. “Pricing is very attractive in those markets. However, once you move out of those markets, there are fewer buyers and, therefore, pricing is not as good,” said Koger, adding that while the market is rebounding, “things are coming back slowly.”
Anthony Falor, COO of the focused service hotel group at Hodges Ward Elliott in Atlanta, sees transactions falling into one of two extremes. “Larger transactions are getting done as a result of the tremendous liquidity that REITs have,” Falor explained. “Then we’re seeing a number of smaller deals of $5 million and under that are still SBA or USDA finance-able. But it’s still difficult to do transactions in the middle today.”
REITs have become a mainstay of the present market. “We’re not at all surprised at how active the REITs have become,” confirmed H. Brandt Niehaus, president of Huff, Niehaus & Associates in Louisville, KY. “Whether it’s a REIT or it’s an individual investor, it’s the ones with the cash that are making the deals. In addition to the REITs, we’ve done transactions this year where an individual investor has stepped in and written a check for the entire amount. Cash is king this year.”
One projection that has not proven to be true concerns the number of distressed properties on the market. People expected a flood, but what has materialized has been closer to a trickle.
“Generally, if lenders have a positive cash-flowing asset, they’ve been apt to hold it,” Koger said. “On the other hand, lenders are also dealing with
assets that have negative cash flow, that’s negative NOI before debt service. Generally, these are the assets lenders are trying to sell and borrowers are walking away from.”
If 2010 has seen nowhere near the wave of troubled properties coming on the market, does that mean 2011 will be the year, Niehaus wondered “Or will lenders have figured out a way to work it out with their borrower? Or have they treaded water long enough that the borrowers finally are seeing an upside and lenders are sticking with them? That’s entirely possible in some cases,” he said.
All four brokers agreed that the gap between the bid and the ask prices has narrowed significantly in the past 10 months. “There are some outliers on both sides that don’t quite get it yet, but for the most part, the real players grasp the change,” Hunter said. “Both sides have given in. Buyers have come up in price, while sellers have gotten realistic and have come down in price. Because of that, we’re able to get deals done. In a lot of cases, the prices we’re seeing are below replacement costs.”
Considering the severity of the downturn, these brokers have found they needed to develop a new skill set—or least refine their existing skill set—in order to navigate the new realities.
“The market last year has made us even more detail oriented than we were before,” Falor noted. “Given the difficulty getting financing, the universe of buyers became a lot smaller. Consequently, we’ve become very careful qualifying buyers to make sure they have the equity capacity, but also the ability to be finance-able in today’s environment. We do a lot more diligence on who our buyers are and their capacity today.”
The process has become much more time intense. “We expend more effort making sure all the facets of the deal are covered,” Falor continued. This includes working with the franchise companies to talk about the timing of Property Improvement Plans, talking to lenders in putting marketing packages together, analyzing the future prospects of a market and analyzing the demand generators.
“We just pay a lot more attention to detail, really focusing on all the different facets of the deal process,” he said.
You’re definitely working differently and in many ways harder, Niehaus confirmed, and the difference goes beyond that—you’re calling on a lender, rather than a traditional hotel owner. “It’s still the hotel owner, just one that is in a different position,” he said.
“We’re having to call on people that in years past we haven’t normally been calling on,” he added, comparing it to cold calling in a new market.
“In years past, there was more or less a finite list of who owned the hotels. Today, that list has grown. Now it’s about finding out who really has control of the asset, when the asset gets in trouble. You have to learn to speak the lender’s language, so to speak.”
In fundamental ways, the role of the broker has changed, according to Hunter. “Granted, we’ve been dealing with sellers who are lenders much more than we were in the past. But just in the last year, lenders have gotten smarter about the dynamics of the market. As a result, we’ve become much more involved in helping to educate them about the market.”
Brokers function more as advisors than they do as transactional brokers, Hunter believes, drawing a comparison to the “heyday of the market” in 2007 and even before that. “A broker then was clearly a transactional broker. We’d throw an asset on the market, run a bid process, do a call for offers, receive a number of bids, conduct a ‘best and final,’ and pick a buyer,” he recalled. “The final number would be a 110% to 120% of price and we’d get the asset traded.”
The process is much less certain today. “Buyers and sellers are asking what we recommend they do. Everyone is looking for advice, counsel and guidance,” he said.