If ever a property sector illustrated the adage, "It's an ill wind that blows no good," it's the hotel industry. The cold wind of distress has been blowing steadily through the sector, generating an increasing list of defaults, foreclosures and outright closings-a list that promises to grow for some time. But that same distress is creating opportunities on a number of fronts, particularly investment.
"There is growing demand for investment opportunities now that the hotel operating recovery is under way," says Patrick Ford, president and CEO of Lodging Econometrics in Portsmouth, NH. "If investments are soon made in distressed hotels, investors could
be hitting stride just as the industry's operating recovery is accelerating and may by relatively unhindered by new supply coming on line."
A handful of hospitality players, like Sunstone Hotel Investors, are certainly becoming more bullish on the sector. The San Clemente, CA based REIT's president and CEO, Art Buser, commented in an earnings call that Sunstone is confident the hotel industry is "moving into a phase of the cycle where well-capitalized, proactive public companies may have opportunities to create significant value through acquisitions." Though Sunstone has not purchased any properties as of late, Buser noted, "We are highly focused on growing our portfolio, both through selective acquisitions of hotels and disciplined capital investments in our existing portfolio."
Traditional lodging operators, like Sunstone, are not the only ones with designs on the segment. Greg Merage, CEO of Stone ridge Capital Partners in Newport Beach, CA, says the company "is actively evaluating hotel investment opportunities" after closing on the purchase of the Hotel Highland in Phoenix's Camelback Corridor. The investment firm tucked away the 119- room hotel at 2310 E. Highland Ave. in March for what industry sources estimate was $14.8 million.
Meanwhile, others in the hospitality arena are focusing their attention on the service needs brought on by the distressed market. Former Hilton Hotels' chief financial officer Robert La Forgia and a group of other hotel industry veterans, for instance, have formed Apertor Hospitality LLC in Las Vegas. The new entity offers a menu of services for property owners, lenders and special servicers of commercial mortgage-backed securities who are looking for overall strategic guidance.
Apertor, Stoneridge and Sunstone are just a few of the companies that see a bright future on the horizon for the hotel sector. While the industry still has a long way to go before long anemic revenue per available room returns to previous levels, forecasts suggest that it will begin recovering this year. Investment opportunities and improving Rev PAR are bright spots in a distress story that is likely to remain dark for some time, according to industry experts.
Atlas Hospitality Group of Irvine, CA tallies the number of foreclosed hotels at 406 and growing. "We estimate that the number of hotels operating under forbearance agreements in California is between 1,000 and 1,200," says Atlas founder and president Alan Reay. He points out that California is something of a bellwether for the nation because so much of the action was here when the hotel market was hot.
One of the strategies that lenders have been pursuing-delaying foreclosure through forbearance agreements-doesn't seem to be working, Reay says. Lenders are employing this extend-and-pretend strategy in other sectors as well, but it has been especially widespread with respect to hotel properties. Stoneridge's Merage and Reay both point out that where the distress story goes from here will depend on a combination of what lenders
do and how the market recovers vis-a-vis RevPAR. "The number of potential acquisitions within this sector will continue to be dictated by the willingness of lenders to write down loan balances and dispose of bank-owned properties," Merage says. "If the volume of foreclosures expands, attractive pricing should exist on solid, well-located properties. Investors with a strong cash position should have a significant advantage versus the competition."
Merage relates that until the economy shows sustainable improvement, which will lead to an increase in overall business and leisure travel, the hotel sector will continue to suffer distress. With hotel revenues still weak and the wave of defaults rising, one big question is when the distress will trail off. Reay estimates that working through the troubles will take at least three years and possibly up to five, "just because of the sheer volume of deals that have to move through the process."
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