The Patient Buyer
National Real Estate Investor
Jan 1, 2009 12:00 PM, By H. Lee Murphy
In the dead of January under gray skies and gloomy headlines, savvy hotel investors see a glimmer of light off in the not-too-distant future. The growing consensus among hotel experts is that in the third or fourth quarter, the wrappings will come off the start of a rebound in deal making.
The acquirers will be investors like Thayer Lodging Group in Annapolis, Md., which was smart enough to sell off a couple of dozen hotels near the market's peak in 2006 and is now looking to replenish its portfolio of 14 remaining properties, most of them full-service facilities with flags like Hilton, Marriott and Wyndham. The company has raised a $300 million investment fund and is still adding to that total. Ultimately, the fund could have $1 billion in leveraged purchasing power.
“We think 2009 is going to be a very good year for us,” says Bruce Wiles, Thayer's managing director and chief operating officer. “We expect to be quite active on the acquisition front. In fact, we hope to get most of our equity invested in the coming year.”
Other prospective hotel bidders are emerging from the shadows. Noble Investment Group, based in Atlanta, raised $310 million 18 months ago and sank part of that total into the acquisition of the 244-room Hyatt Regency Valencia near Los Angeles in July of last year. The firm still has more than $200 million in equity to invest, and that total could swell to nearly $800 million with leverage and infusions from well-heeled partners.
Noble owns 42 properties, but Rodney Williams, a managing principal and the chief investment officer, says his firm doesn't expect to be doing any selling this year. “This is a horrible time to be a seller,” Williams declares.
“However, we feel lucky to be in a position to take advantage of a tremendous buying market that should become active by the summer of 2009. We expect to invest all of our $200 million in the next 12 months.”
Finding a catalyst
Before that can happen, the market needs a catalyst, or multiple catalysts, to rouse it from its slumber. Williams believes the first push will come in February, when publicly traded hotel REITs report depressed results for the full year of 2008 to their shareholders.
Asset owners in the private sector who had hoped valuations might remain near 2007 levels will be jolted into reality and finally prepared to mark down their properties and put them up for sale, Williams predicts. “Sellers will be ratcheting down their expectations early in the year,” he forecasts.
The most important transaction trigger of all that looms ahead is the great mass of hotel debt maturities expected in 2009. Industry observers say that 10-year notes negotiated in the late 1990s and five-year mortgages cobbled together in the 2004-2005 period are all coming due.
Trepp LLC estimates that a record $5.9 billion in commercial mortgage-backed securities (CMBS) in the hotel sector alone will mature in 2009. The heavily leveraged borrowers of yesterday will find a new day of reckoning in negotiating with banks today.
“Hotel owners who borrowed 75% of the price of their assets against yesterday's values will find that they must now renegotiate a loan of perhaps 50% at today's value,” says Wiles. “That's going to cause a lot of pain.”
There is more to it than mere maturities. PKF Capital's latest forecast calls for a 7.8% decline in revenue per available room (RevPAR) in 2009. Experts point out that number will be merely an average, with some properties performing far worse.
Where's the bottom?
There's also a suspicion that conditions could worsen even further. “We're in free-fall,” admits Robert Eaton, executive managing director of PKF, which recently formed a distressed hotel solutions program within its firm to consult with troubled lenders and borrowers in coming months. “It's like jumping in a lake and going down, and not knowing where the bottom is.”