Hotel Investors in Holding Pattern

MBA (6/2/2008 ) Murray, Michael
Hotel investors playing the waiting game could find positive values after the cycle of illiquidity and bid-ask pricing gaps begins to narrow, said a new report published by Jones Lang LaSalle Hotels, Chicago.

The report, Focus on the Progressive Asset Manager: Top Five Tips for Success, said hotel investors are starting to deploy asset management strategies to improve their position for future trading.

Jim Butler, chairman of the global hospitality group at the Los Angeles law office of Jeffer Mangels Butler and Marmaro LLP and author of www.hotellaw.jmbm.com, said investors are not the only industry players in a holding pattern. Lenders, owners, developers and other hospitality real estate players are on hold as well. He said many owners find that their properties are producing the same or even better cash flows than they were last year.

"Investors have been clamoring for downward price adjustments for some time [the bid-ask gap], but are likely as affected by scarcer and more expensive capital as much as their expectations of price adjustments," Butler said. "We have heard investors anticipating major price adjustments in the price of lodging-secured notes and lodging assets, but neither the anticipated big price adjustments nor the forecasted waves of foreclosures and bankruptcies seem to be upon us. In meeting with many financial players in New York over the past few days, no one seems to have spotted either a duck-billed platypus or a pool of deeply troubled hotel loans offered at an attractive price. We may see the platypus first."

“The ability to quickly capitalize on change is an essential factor in achieving competitive advantage to positioning a property for success in the future,” said Bruce Stemerman, managing director of strategic advisory and asset management for Jones Lang LaSalle Hotels. “Hotel properties that are able to aggressively identify opportunities, adopt effective revenue generation and cost containment initiatives and allocate resources to exploit emerging trends will create the greatest value for their stakeholders.”

Irvine, Calif.-based Atlas Hospitality Group said the California hotel market is beginning to level off after 2005-2007 when it reached “unprecedented heights.”

Sales volume fell 32 percent in 2007 to $3.5 billion and individual transactions fell 12 percent in California. Nationally, Jones Lang LaSalle reported $45 billion, a 38 percent increase above 2006. Globally, it reported 2007 as 56 percent higher in hotel transaction volume to nearly $113 billion, compared with $72.5 billion in 2006.

Atlas Hospitality reported an 18 percent increase in the median price per room sold in California last year and the average price per room jumped 9 percent. This year, Atlas Hospitality forecasts transactions down by more than 30 percent from 2007—nearly 250 individual sales—one of the lowest figures in more than 10 years of reporting, the company said. It also predicted total dollar volume of transactions would decline this year by more than 30 percent to $2.5 billion, nearly 50 percent below the peak in 2006.

“A number of factors will continue to negatively impact sales activity, including financing difficulty, RevPAR [Revenue Per Available Room] growth slow down or decline and disconnect between buyers and sellers on price expectations,” said Tim Edgar, senior vice president at Atlas Hospitality Group. “Sales will continue to be slow through 2008 and at least through mid-2009.”

In the Jones Lang LaSalle Hotel Investor Sentiment Survey, nearly one-third of investors said they intend to hold their assets in the short term.

“This represents the highest ‘hold’ sentiment in three years, marking an important time for investors and asset managers to deploy renovation strategies to boost cash flow and improve performance,” said Kristina Paider, senior vice president of research and marketing for Jones Lang LaSalle Hotels.

Last year in Southern California, individual transactions fell 19 percent, but the median price per room increased by 17 percent. Northern California had a 4 percent drop in transactions with a 26 percent increase in the median price per room, Atlas Hospitality reported.

Paider said current market conditions underscore an “effective and progressive asset manager” to improve the future trading of assets.

“Unlike last year, when lenders were willing to underwrite some upside, lenders today are looking primarily at a trailing 12-month history—and cash flow is king,” Paider said.