HOTELS ’ InvESTmEnT OuTLOOk
Fight
for property survival
Deferments , waivers , write-Downs , reDuctions in interest rates — everything ’ s on the table as banks anD governments struggle to shore up the worlD ’ s hotel inDustry . it ’ s what happens next that will Define the new normal .
Contributed by Mary Scoviak
For now , hotel finance trends can be summed up in one word : triage . Lenders are working out forbearance and debt structuring as tourniquet measures to stanch the fiscal bleeding , while governments craft stimulus packages , generate funds for small- and mid-sized business loans and try to pick up part of the tab of unemployed or furloughed workers . What ’ s the longer-term prognosis ?
Expect more order . “ The Federal Reserve will have to step in to regulate the CMBS market ,” says Sloan Dean , president and CEO , Remington Hotels , Dallas . “ Most of the US $ 86 billion outstanding is nonrecourse debt , and hotels are the collateral . That could translate to a default rate of 20 % starting in late May / early June and into Q3 .”
Anticipate challenges as deferred payments come due . “ It ’ s not as if most lenders are forgiving debt ; they ’ re just extending it ,” says C . Patrick Scholes , managing director , lodging , leisure and gaming equity research , SunTrust Robinson Humphrey . Clients with strong relationships can expect more leniency ; for smaller players , many of the deferrals will run out at or near the same time .
Watch for subtler plays as hoteliers get their footing . “ In some cases , capital is coming in as a wedge between the senior loan and the borrower ’ s equity ,” said Malcolm Davies , principal and managing director , George
Smith Partners , at an early April webinar on the state of the hotel market . “ Today , all parties are stakeholders , not rivals .”
Prepare for a cool reception . “ Even as we overcome [ COVID-19 ] and travel resumes , most countries are going into recession . It ’ s inevitable that most lenders and investors will dial back on hospitality projects ,” says Sonu Shivdasani , CEO and joint creative director , Soneva , Bangkok .
Look for more conservative terms — and bring cash . “ There ’ s currently capital available for low-leverage , ‘ no-brainer ’ deals in which the terms are so attractive that the lack of clarity on current valuations can be overcome ,” says Michael Sonnabend , managing member , PMZ Realty Capital . “ Generally , debt will
In the near term , an Income approach to value doesn ’ t work . so we may have to rely more on a cost basIs — or prIce per pound .
chad crandell become increasingly conservative and higher priced relative to the benchmarks . Deals will require more equity .”
Brace for new underwriting and appraisal criteria . Deals are difficult to underwrite amid uncertainty about performance recovery , says Chad Crandell , CEO and managing director , CHMWarnick . “ In the near term , an income approach to value doesn ’ t work . So , we may have to rely more on a cost basis — or price per pound .” In his view , a discount to replacement cost “ will likely be the interim metric , similar to the approach used during the financial crisis .”
Appraisals are changing . “ Our appraisal group has macro projections , but we have to view each asset as unique ,” says Daniel MacDonnell , senior managing director , Cushman & Wakefield . “ We ’ re doing models month by month , breaking down the process into multiple components .”
Strategize around low interest rates . The U . S . Congressional Budget Office predicts interest rates on 10-year Treasury notes at under 1 % this year and probably next . Europe may be looking at zero or even negative interest rates . Some contrarians say cashed-up investors could consider ground-up development , the majority of the industry doesn ’ t see that happening . “ New construction is dead for at least five years ,” says Jon Bortz , founder , chairman and CEO , Pebblebrook Hotel Trust , Bethesda , Maryland .
18 hotelsmag . com June 2020