INVESTMENT
( possibly including a REIT ?): Traditional PE , sovereign wealth , high-net worth . These entities have a longer-term timeframe ( five to seven years at minimum , HNW even longer ), and probably can withstand the potential incoming macroeconomic volatility that may challenge some public market stock prices .
H : Will buyers avoid paying at peak multiples ? TARPEY : Unless it ’ s a brand with a strategic acquisition opportunity , we ’ ve
all started to pull back from the recent multiples that have traded . MARITZ : Some will ; many won ’ t . The best way to justify high multiples is that old canard about replacement costs , which are currently exceptionally high . RODRIGUEZ : It depends on the product type and market . Hotels get to price the rate they charge daily , so that ’ s a hedge against inflation . Hence , quality hotels in great destinations with barriers to entry will continue to command a premium , while low-barrier-to-entry hotels with lower quality brands will be more challenged .
H : How would you describe the state of bid-ask spreads with strong performance yet higher rates and hurdles ? DAVIS : We are beginning to see a growing bid-ask as sellers look for yesterday ’ s pricing and buyer ’ s look for tomorrow ’ s pricing . Following the next Fed meeting later this month [ July ], it ’ s likely that the lending index , SOFR , will have increased almost 300bps since March , and could increase another 50bps before year end . Moreover , credit spreads have increased at least 100bps since March , resulting in
I SEE SPONSORS FOCUSING ON EXISTING LENDER RELATIONSHIPS , WHO HAVE SUCCESSFULLY EXECUTED ON BUSINESS PLANS TOGETHER . THIS IS NOT THE MARKET TO GET CUTE AND OVER SHOP FINANCING .
– BRANDON TARPEY , M DEVELOPMENT
loan coupons that are higher by 400bps compared to earlier this year and may end the year 500bps higher . The cost of debt is shaping buyer expectations far more than any improved operating performance . Of course , there ’ s the fear that the Fed rate increases could lead to a hard landing , in which case the improvements in operating performance could reverse . TARPEY : The bid-ask spread was already influx due to COVID economics . Today ’ s interest rate environment will expose real sellers and not groups testing the market – which is much of what we have seen recently .
H : How are higher rates going to impact asset values ? DAVIS : The impact on asset values is incredibly dynamic and is also a function of deal specifics . If we assume March as a baseline , which is when the Fed started raising rates , I ’ d say that values are off approximately 5 % to 8 % today [ mid-July ]. I think the market absorbed the first 100- 125bps of Fed rate increases without much value deterioration , but now that the Fed is on a much more aggressive rate increase path , we ’ re settling into value declines of 5 % to 8 %. Certainly , strong operating performance in some demand segments and some markets are offsetting the impact of rates , but the more recent rate movements are generally overwhelming improved fundamentals . RODRIGUEZ : The replacement cost is going higher , which helps the value of existing hotels over time and allows hotels to sell for higher values than anticipated . TARPEY : Well-located , generational hotel and resort assets will have limited impact on value . The most impacted hotels will be cash-flow plays such as the limitedservice sector . MARITZ : They can only go down , right ? Except when they do not ( unique , beach front or mountain assets ). Trophy is about the most overused word in the hotel business !
H : How will higher rates impact development ? SCHOLES : Rising construction and financing costs as well as supply chain issues are dampening pipeline growth for projects in early planning stages , although most hotels under construction are highly likely to open even if on a moderate multimonth delay .
In addition to concerns around a possible recession , decelerating new unit pipelines for most hotel C-Corps is a reason we cite for the pull-back in hotel stocks . DAVIS : Development deals are getting
38 hotelsmag . com September 2022