"Bottoming Out" of Hotel Values
Occurred in 2003
|ATLANTA, Georgia, December 31, 2003 - ThompsonCalhounFair three principals,
H. Keith Thompson, Al Calhoun and Mark G. Fair, report on the year just
ended and on the hotel transactional market for 2004.
According to Al Calhoun, 2003 was a volatile transaction year. Much of the concern was based, in part, on the “perceived bottoming out” of hotels’ values. “Clearly it has bottomed and the prospect for the 2004 year, in our opinion, will bring levels of hotel transactions not seen since 1998,” said H. Keith Thompson. There will, of course, continue to be many hotel foreclosures throughout the next 18 months, but it’s our opinion that most of the bloodletting has occurred.
With 2003 clearly being a buyer’s market, the transactional deal sizes, types and segments were mixed. For example, Mark Fair completed a transaction earlier in the year involving four full-service Marriott Hotels for Host Marriott Corporation, while Al Calhoun was very instrumental in closing a number of distressed hotels in Orlando. Keith Thompson finished the year by closing the 15-property Cross Country Inn Hotel Portfolio. The sellers were all different ownership types, from publicly traded hotel companies to lenders owning distressed hotels. “The broad hotel real estate appetite is leading us to believe the hotel transaction market is firming up nicely,” stated Mark Fair.
“The economic bloodletting is not over, but is beginning to turn around,” states Keith Thompson. ThompsonCalhounFair is still being asked to value 15 to 25 hotels a month through many of the CMBS service lenders such as Criimi Mae, GMAC, Lennar and GE, among others. Many of these assets are still in “special servicing” (the lender’s workout department), and for any number of reasons have defaulted on the mortgage. They will either get “worked out” or foreclosed. We routinely provide “broker’s opinion of value” reports by request to the hotel real estate industry. These reports are really a street/market level appraisal. Many lenders find the reports critical in determining true value because as brokers we are not governed by the same valuation guidelines as the appraisal industry. The reports are based on many variables that determine and validate the hotel value, which generally include value creation methods from leveraged IRR returns to room revenue multipliers.
The reports arm the lender with the true market value of the collateral and hopefully enables them to best manage their loan portfolio. As was the case with the Cross Country Portfolio, there were 15 hotels with 13 being non-branded. All 15 were foreclosed as a portfolio, thereby giving the buyer a very inexpensive price per room purchase along with the potential upside of renovation and franchise branding. The goals of the seller were met, which represented having all 15 transactions completed start to finish within four months. The properties were primarily located in Ohio with eight of the 15 located in Columbus. For years the portfolio was a very well respected regional chain with high guest satisfaction returns. As with many 3rd and 4th tier markets, the branded supply growth of the late 90’s, along with the availability of money, virtually saturated the supply market. In many of these markets supply has outpaced demand year over year since 2000 and has therefore been the catalyst for many of the current and forth-coming mid-market tier hotel foreclosures.
Regarding Orlando hotel transactions closed by Al Calhoun in 2003, “these transactions probably represented the greatest erosion of value we’ve seen within the current real estate cycle,” noted Calhoun. The Orlando market did not begin experiencing demand decline because of September 11th. The market demand really began to fall in April 2001. The events of September 11th only exacerbated the decline. As with every market cycle there are differing opinions as to the turnaround time frame. With Orlando, we believe there has been a major negative shift of the market fundamentals that in our opinion will not turn around in the foreseeable future. We believe the Internet along with world events have resulted in less leisure demand to the Orlando theme parks. Market analysts are not definitive as to when and how the change occurred, but clearly Orlando’s ability to attract the interest levels of the critical age groups has been in decline. It is important for Orlando to increase its corporate demand market segment without which, according to Mark Fair, Orlando is in for a tough economic cycle for the next several years.
“What should bode well for all hotel brokers is the inherent value created by a properly orchestrated brokerage engagement,” said Al Calhoun. With most of the transactions we completed in 2003, there were multiple offers from interested parties however; the Cross Country Inn portfolio brought the competitive environment to a new level. There were 84 offers, clearly moving the environment from buyer controlled to seller controlled. It is said that returns on a hotel investment are split into three parts. The first part is gained upon strategic acquisition or development. The second part is gained from ongoing cash flow during ownership. The final, and perhaps most important part, is gained from optimizing the sale of the hotel(s). For all sellers, the overall financial return generated will greatly depend on their success in negotiating pitfalls of the sales process. Multiple offers create intensity and often mitigate pitfalls such as transactions that linger but never close and buyers re-trading when they sense seller weakness. “The broker that can create multiple offers will create greater demand and therefore result in higher prices,” stated Keith Thompson.
The 2003 transaction year brought many buyers and sellers together and transcended many economic hurdles, according to Mark Fair. Provided the current market fundamentals remain consistent, we at ThompsonCalhounFair are expecting a very brisk tranaction market for the 2004 year.
ThompsonCalhounFair, LLC (TCF) was formed to focus on servicing the transaction needs of clients in the mid-tier segment of the hotel industry, those ranging from $5 to $30 million in asset value.
H. Keith Thompson
Thompson Calhoun Fair, LLC
|Also See:||Unreliable Market Trends Yield an Uncertain Direction / Rick Swig / RSBA Associates / Oct 2002|
|Value Volatility; Some thoughts to Share / Lori E. Raleigh / June 2002|