REPORT FROM THE U.S.—The U.S. hotel transactions environment has been dampened in 2012, thanks in part to such factors as a decline in deal activity by REITs and a difficult financing environment.
Tony Muscio, senior VP at Jones Lang LaSalle Hotels, discussed via email with the Hotel Investment Barometer some of the challenges involved in putting a deal together. His responses are below.
Q: Does it take longer to close a hotel acquisition today?
“The time period involved in closing a hotel transaction is property specific. Properties that include complicating factors, such as ground lease assignment/approvals, loan assumptions, complicated entity (stock) structures compared to a straight asset sale require a longer due diligence and closing period. Investors are being very diligent in the current cycle to manage risk and ensure the best outcome for their investment. To the extent that a loan is required, additional time could be required.”
Q: What goes into closing a $10-million deal as opposed to a $100-million deal?
“Depending on the property, there are situations where a $10-million deal might require the same amount of due diligence, time and effort as a $100-million (deal), depending on any complicating factors as previously mentioned.”
Q: Are you seeing buyers walking away from deals more frequently?
“Certain buyers require specific criteria that need to be met in a hotel investment. If previously unknown factors are uncovered during a due diligence process, there is a chance the buyer could walk away.”
Q: What does the debt landscape look like? How easy/difficult is it to get acquisition financing?
“The debt landscape is improving since the economic downturn. Lenders are underwriting a variety of hotel assets and lending on hotels that fit their lending criteria. It is easier to get acquisition financing on a top-tier market, cash-flowing asset with top sponsorship compared to an asset in a secondary market with no trailing cash flow.”
Q: Where do hotel values stand today?
“Price per key is trending up since the downturn in late 2008, however, this is asset- and market-specific. If cash flow is at or near peak levels, this helps in a higher price/key. Other factors to consider are if the hotel is in a major market and would be accretive for a REIT purchase.”
Q: What are the major influences on hotel values today?
“Influences on hotel values are based on the asset type, quality level, location and ability to renovate, reposition or put in a new management company or brand.”
Q: What impact do hotel values have on cap rates?
“Cap rates essentially drive hotel values as they are a combination of greater market factors including required return rates, perceived risk, market sentiment and growth potential.”