NEW YORK—That real estate investment trusts accounted for approximately 60% of the dollar volume in the U.S. transactions market through May isn’t much of a shocker, said Arthur Adler of Jones Lang LaSalle Hotels. What is interesting—and particularly revealing—is the growing diversity among hotel sellers.
Banks, owners, operators, investment funds, private equity, REITs, high-net-worth individuals, developers—they’re all pushing more and more assets to market. And the transactions landscape is heating up as a result.
Volume reached US$4.9 billion through May, triple the volume recorded during the first five months of 2010, according to Jones Lang LaSalle Hotels.
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“We’re going to see tremendous activity this year,” said Lawrence Brian Wolfe, senior managing director of Eastdil Secured.
Wolfe, along with Adler and three other panelists, shared a transactions update Monday during a breakout session at the NYU International Hospitality Industry Investment Conference.
Relatively new to the selling scene are special servicers.
“My guess is that will be a pretty good source of sellers in 2012,” said Mark Elliott, senior managing director of Hodges Ward Elliott.
Robert Koger concurred: “The velocity of deals from servicers will only continue to grow,” said Molinaro Koger’s president.
Special servicers will sell hotels before they sell other asset types, added Kevin Mallory, senior managing director and practice leader for CB Richard Ellis Hotels.
On the other side of the acquisitions table, REITs have led the buying spree. After acting primarily as an exit outlet for opportunistic buyers in past cycles, the publicly traded hotel trusts wanted to get ahead of the game this time around, Koger said.
“Hotels that are REIT food are trading at the highest rate … because the REITs have the lowest cost of capital,” said Adler, who serves as JLLH’s managing director and CEO.
Underwriting criteria
Throwing a broad blanket over underwriting criteria is difficult, Adler said.
“Underwriting is in the eye of the beholder, so every investor looks at it differently,” he said.
That being said, many REITs are seeing 9-10 off unlevered internal rare of return and 13%-15% earnings-before-interest-taxes-depreciation-and-amortization multiples, he said.
Elliott is seeing targeted IRR on a leverage basis is in the mid to higher teens, he said.
Cap rates are “very, very” volatile, Mallory said. In secondary markets, investors can expect to find rates of 13-14%, while primary markets are closer to 2-3%.
“That does vary significantly by market,” Koger said. “The returns are risk adjusted by product type and by market.”
Distressed debt
There continues to be activity in debt trading, Koger said, “but most of the debt is trading at pretty high prices—85 cents and above in most cases.
“There will continue to be debt that trades, but we’re not seeing the significant discounts that we saw a year ago, two years ago, when there was less visibility in the market.”
Mallory agreed, saying he’s seen debt trade at 90 cents and 95 cents to the dollar.
Pricing often depends on what tranche of the debt is changing hands, Adler said. Deals are complicated, and investors can see different discounts based on what level of the capital stack they’re trying to access.
Construction debt
“We’re not seeing really much new construction, much interest in new construction from debt sources. Our view is that’s going to remain relatively muted at least for the next 12 months,” Koger said.
“Until you see residential start to come back and urban hotel and residential condos come back, I don’t know if you’re going to see a whole hell of lot new hotels,” Adler added.
When new hotel construction does reemerge, Wolfe expects a resurgence of full-service builds. Past cycles have been heavily dominated by select-service hotels—which have represented 90% of all new room starts, he said—and he thinks the tide will shift this time around.
A market pickup
The panelists expected a prolonged and steady recovery for the next several years, as capital begins to flow into the sector with earnest and fundamentals continue to put upward pressure on values.
“Fundamentals are positive. We see a decent run in this,” Mallory said.
Elliott advised attendees to ignore a lot of the periphery noise—oil prices, turmoil in the Middle East—and to keep focus on the long term.
“Barring something that’s absolutely cataclysmic,” he said, “we should have a five to nine year run.”
“Demand will grow. As the economy grows, people are going to travel,” Adler added. “I see a very long and robust recovery.”