News for the Hospitality Executive |
By Jim Burr, CHA Last year I posted a blog to remind hotel owners that they needed to have an exit strategy that embraces the circumstances and timetable under which they plan to exit their hotel investment. Since then, major and dramatic – some say seismic - changes have occurred in the domestic and international economy and in the hotel capital markets. It is advisable to revisit the exit strategy and revise it to reflect the current environment and foreseeable circumstances. First the good news:
Either the hotel isn’t doing
well or financing to replace outstanding debt that is maturing isn’t
available. The hotel needs an infusion
of equity and you don’t have it, cannot get a return sufficient to
warrant
investing it or cannot raise it. This is
what the bankers call a troubled asset and brokers refer to as “a
distress
sale.” The selling price is going to be
favorable only for the new owner.
A new competitor is coming
in – the brand is out of favor – the location is no longer prime –
demand is
declining -- the property is older and needs much upgrading and
refurbishment –
a union agreement (or the threat of one) or a legislative mandate such
as a
“living wage” or retroactively applied building code change has changed
the
economics – and so on. For whatever reason
or reasons, a large outflow and/or a small inflow of cash are
foreseeable. Clearly, this hotel will not produce the
desired return on investment in the near or medium-term future.
There are at least two versions
of this: One is the “Greater Fool
Theory” where a prospective buyer wants the hotel so badly, for
whatever
reason, that he is willing to overpay for it, giving you a handsome
profit.
The second is where the land the hotel occupies has become so valuable that it makes economic sense to buy the property, tear the building down, and replace it with a different, more profitable use –shopping center, mixed-use development, offices, condos and the like. Believe it or not, these “ships” will be sailing again in the future. But presently they are far out at sea, or perhaps even in dry-dock. The challenge is to forecast how long it will take, and how much additional cash outlay will be required before they arrive at the pier.
The bulk of the tax benefit
has been realized – Opportunities considered more attractive (or safer)
are
available – cash is needed for other purposes — estate planning (or
estate
settlement) needs dictate a sale – the partners are arguing about
objectives or
future strategies. These are just a few
examples.
If a potential or planned exit strategy is thought out, it can be modeled in a pro forma and the effects of various strategies considered and refined. The forecast and an asset management approach can then be utilized by the owner to increase his total return on the investment by:
If you model the likely income and realistically project the amount of debt that can be supported for at least the next five years, you will quickly pinpoint opportunities and roadblocks. If the hotel was highly-leveraged and its debt is maturing in the next few years, this would be a very good time to reset your exit strategy. Will it be on your terms or someone else’s? If you plan to stay in the hotel, you will need to restructure your capital stack. If you can come up with strategies to add value, perhaps you can convince the lender to write down the loan by less than he would be facing if he put the property into foreclosure and sold it to a new owner at market rates. Even though the loan decision is likely to be made on the basis of trailing twelve-month’s earnings, and not the proforma, if the future scenario is presented carefully and thoughtfully, it can enhance the prospects for a favorable outcome. If the conclusion is to exit the investment, you need to become knowledgeable about today’s cap rates and the amount of financing potentially available to a buyer. Couple that knowledge with a current cash flow forecast and you can easily determine how long you can hold out, and what a realistic value is for your equity. A sound exit strategy, put in place and then reset to current conditions, will greatly increase the likelihood that when you exit your hotel investment it will be on the most favorable terms available, and that your return during the holding period will be optimum for the circumstances. Jim Burr, a member of Cayuga Hospitality Advisors,
is a
graduate of Cornell University’s School of Hotel Administration and has
more
than 40 years hospitality industry experience, including asset management, single and
multi-unit hotel management, franchise operations and strategies,
consulting at
the Principal level, organization development and planning, and control
systems
development and installation. He is now the principal
of Burr
Company specializing in Asset Management, Strategy Development, Due
Diligence,
and Workouts of Troubled Properties for a variety of hospitality
industry
firms. Jim is the Group Leader for
Cayuga’s Asset
Management and Distressed
Properties Assistance Groups.
|
Contact:
Cayuga Hospitality Advisors |
Also See: | The
Electronic Guestroom / Jules A. Sieburgh / September 2009 |
LEADERSHIP:
The Basis for Management / William P. Fisher Ph.D. / September 2009 |