Kate Henriksen of RLJ Lodging Trust said during the Meet the Money Conference that buyers are seeking distressed assets. Looking on is Chris Flick (left) of PIMCO and Josh Katzin of ACORE Capital. (Photo: Jeff Higley)
Meet the Money Conference panelists anticipate there still will be deals completed in 2016 as the hotel industry works its way through a slowdown.
LOS ANGELES—How can you tell when the hotel industry’s economic cycle has reached its peak? Simply look for a wide gap between the prices buyers are willing to pay for hotels and the prices sellers are willing to take for them.
That’s the equation dominating the industry as buyers and sellers, for the most part, remain at opposite ends of the spectrum when it comes to asset pricing, according to speakers at the recent 26th annual Meet the Money Conference.
“The bid-ask (spread) is pretty wide,” said Geoff Davis, partner and chief investment officer for León, Mayer & Company, during the “Sellers and buyers: Meeting of minds and wallets” session. “What’s going to change that is confidence in the market, an increase in liquidity in debt. That will turn around after the election.”
“There are numerous more properties on market, less buyers, bigger bid-ask (spread) and debt is more difficult,” said Bill Murney, SVP of HREC and moderator of the “Hospitality investment approaches in a changing market” session.
But hotel investors can rest easy—they’re not the only ones feeling the pain, according to Chris Flick, SVP at PIMCO.
“The bid-ask (spread) is backed up everywhere; it’s not just hotels,” he said during the “Minds and wallets” session. “There’s some uneasiness in the market across all real estate asset classes.”
The pace of transactions
While the general consensus throughout the two-day conference was that there would be deals, there was some disparity about the transactions market’s pace.
“There’s still a lot of deals, but not nearly to the level of last year,” said Jesse Stein, SVP of investments at KHP Capital Partners, during the “Minds and wallets” session. “You have to be patient; you have to cautions. Don’t get overly aggressive in certain markets.”
So far in 2016, KHP has sold three hotels and bought two properties, Stein said.
The deals that do get done during the next 18 months will favor buyers, according to Bob Alter, president of Seaview Investors, during the “Changing market” session.
“2016 and 2017 is going to be a buyer’s market,” Alter said. “Things will get listed. Things will come to market, and they will not find the number of buyers they’ve had the last couple of years. Brokers will come back to sellers and say, ‘We have one or two (letters of intent) and they’re not at your numbers,’ and sellers will have to look in the mirror and make the big decision.”
The biggest players will be easy to spot, Alter said.
“Those who have cash and access to capital … foreign funds, (real estate investment trusts), will step up and get some good buys,’ Alter said.
However, no one is ready to take their ball and go home just yet, and there are plenty of investors looking for “easy” deals, speakers said.
“We’re getting a lot of outreach for potential buyers, but they’re looking for distress,” said Kate Henriksen, SVP at RLJ Lodging Trust, during the “Minds and wallets” session. “There’s no distress at RLJ at all.”
Flick and Stein both agreed.
“There are very few forced sellers in the market anywhere,” Flick said.
“There really isn’t much distress,” Stein said. “People don’t have to sell unless there’s fund-life issues, debt maturities or something like that.”
Buyers still exist
But there are owners looking to cash out while the there’s still some positive aspects of the industry, speakers said.
“A lot of people are looking to get out of the buys from 2011 to 2014 now,” said Phil Cyburt, CEO of Laurus Corporation, during the “Changing market” session.
But their return on investment is going to have to be realistic, Davis said.
“Everyone looking to exit an asset has to have a bit of reality check or invest back into that asset,” he said.
What happens with publicly traded REITs will be interesting to watch because they will get hammered by equity analysts if they make a deal that’s not immediately beneficial to their earnings, said Jonathan Falik, founder and CEO of JF Capital Advisors, during the “Changing market” session.
“For the most part they are on the sidelines right now,” he said. “But they’re in much better shape balance-sheet wise than any other cycle we’ve been in.”
It’s a matter of time before REITs jump back into acquisition mode, Falik said.
“As soon as you get to the point where some of the prices reset a little … and the REITs can do things where they can have Year Two or Year Three accretion,” Falik said.
Some companies, such as FelCor Lodging Trust, will wait until that bid-ask gap dramatically shrinks before getting back into the buying game, said company chairman Tom Corcoran.
“When the market becomes more rational we’ll get back into more transactions,” Corcoran said, who added that “rational” means when assets are trading above their net asset value. He saidFelCor will focus on renovations until that happens.