SAN DIEGO, Jan 28 (Reuters) - Prices have fallen dramatically, but potential buyers of hotels and hotel companies are staying on the sidelines, waiting for clarity in the financial markets and signs of real distress.
“The current market has required us to take a pause,” Kirk Pederson, executive director at Morgan Stanley Investment, said at a lodging conference this week. “The reason is we don’t know where the bottom is.”
Frozen credit markets mean buyers would have to put up the bulk of any purchase price in cash and that is not an appealing prospect — especially at a time when hotel profits are slipping.
“The reverse of operational leverage is going to scare the hell out of people,” said James Alderman, executive vice president at real estate investment firm Starwood Capital Group.
Real estate services firm Jones Lang LaSalle found that $23 billion worth of hotels changed ownership worldwide in 2008, down from a peak of $113 billion in 2007.
The boom was driven by highly leveraged private capital and its access to increasingly liquid and sophisticated debt markets — a source that has since imploded.
“Now we have the exact opposite — illiquidity and fundamentals which are softening,” said Arthur Adler, managing director and CEO at Jones Lang LaSalle Hotels.
The last major M&A deal in the hotel industry was private equity firm Blackstone Group LP’s (BX.N) July 2007 announcement of plans to acquire Hilton Hotels for $20 billion plus debt.
Since then, stock prices for publicly-traded competitors have plummeted. Marriott International Inc MAR.N shares have dropped about 60 percent since mid-2007, while the shares of Starwood Hotels & Resorts Worldwide HOT.N have lost about 75 percent.
“There is private equity out there that would like to gobble up a deeply-discounted hotel company,” Alderman said. “We would still like to employ some leverage ... it’s about getting a multiple on that dollar.”
With few deals being done, there is little agreement on where asset values stand.
Anthony Juliano, managing director at Dubai Investment Group, estimated hotel real estate prices have dropped by about 20 percent.
“It’s far greater than that,” said Goldman Sachs Managing Director Jonathan Langer. “No one that doesn’t have to sell is selling.”
Starwood’s Alderman said: “We’re looking at discounts to replacement cost right now.”
Instead of potentially shaky equity investments, investors with cash are choosing to buy debt — albeit not securitized pools of commercial mortgages.
“We expect in 2009 there will be far more action on the debt side than equity,” Adler said. “Ownership is not trading because owners have not yet psychologically repriced.
That will change as refinancing deadlines and debt maturities approach.
“If you bought in 2004 to 2006 you can’t sell — you have no equity,” said Robert Koger, president of real estate broker Molinaro Koger. “Lenders are choosing to give the buyer time. The lenders, we are finding, don’t want the assets.”
Such foreclosures have a track record of destroying value for both parties.
“The wave of monetary defaults hasn’t come yet,” Adler said. “The big issue will be when debt matures in 2011 to 2012 — that’s what is really going to force the hands of the lenders.” (Editing by Andre Grenon)