 This single
question seems to be consuming our industry. No doubt, the last 18
months has
been very difficult for owners, lenders and brokers. I have seen the
most
significant slide in hotel values since I began in this industry more
than 20
years ago and I don’t expect to see any meaningful recovery for some
time. In addressing this question, we first have to determine when we will hit the bottom of the current economic cycle. I believe the bottom will occur in the 4th quarter of 2009 and will be followed by a stabilization period of two to three quarters where we will see the curve began to tread upward. I expect the capital markets to loosen during this time and the secondary loan market to become active again. Investors can be given all the TARPS and bailouts that Congress can offer but until the secondary capital markets recover, new debt will continue to be stalled. Without a secondary purchase market, every loan that is consummated will be an “on balance sheet” loan for a lender and very difficult to complete. The government has given the green light to lenders to loan again but regulatory agencies are imposing restrictions within the non-CMBS lenders, which if a loan proposal is given, makes it difficult to obtain the desirable spreads, LTVs and other requirements. Most hotels are valued today approximately 20 to 25 percent less than what they were in late 2007. We expect that percentage to decline in most markets throughout the remainder of 2009. Many hotels today have RevPAR declines in the double digit range with many over 20 percent. On average, when the top line revenues decrease 20 percent, the net operating income (NOI) decreases 40 percent, or twice that of the top line decline. In today’s market, we could be experiencing the worst inverted value slide in our industry’s history as a result of almost every value matrix being off substantially. If a hotel was valued by applying a cap rate to a trailing 12 month NOI, cap rates have increased while the NOI has decreased, thereby causing a dramatic decline in value. Similarly if the transaction was valued as a multiple of rooms revenues, at say, 4 times rooms revenue, it is now trading at under 3 times rooms revenue. This philosophy applies to all valuation methods used in our industry including leveraged IRR or unleveraged IRR, price per room and cash-on-cash return. All of these are valuation methods that have defined our industry and every metric has changed. At Hotel AG, we currently have 75 hotels on the market with 23 in various contract stages. Typically, in a more robust environment, we would see a greater percentage of properties under contract. A call from a potential hotel investor that use to begin with questions about the financial performance of a hotel, now begins with the question, “Is the seller in trouble and can we contact his lender?” This transformation of the investment climate has escalated over the past six to eight months after we witnessed many of the global real estate funds and investment houses collapse. The new FDIC loan auction web site will more than likely be the most visited investment web site in the world by the end of 2009. This action by the FDIC is doing more to de-value real estate than any other factor today. It’s very simple really. The balance of 2009 is going to mimic hand-to-hand combat. As a 20-year professional in this industry, I am concerned for the financial stability of hotel investors, lenders and franchisors like never before. About the Author H. Keith Thompson is the founding principal of Hotel AG and has worked within the hotel industry for 20 years. Keith has been involved with hundreds of hotel transactions with a combined market value into the billions. He possesses a keen understanding of complex operational and sales issues that often impact value, while maintaining a personal, yet strategic approach. About Hotel AG |