COLUMBUS, Ohio—Transaction activity is picking back up, but that doesn’t mean completing a deal has gotten easier. If anything, more players entering the market has bred more competition—and complications, said panelists last week during RockBridge’s Rock the Road event at the Sheraton Columbus Hotel at Capitol Square.
“We’ve been very active. We’re moving through our first discretionary fund (of $310 million),” said Ben Brunt, principal with Atlanta-based private equity company Noble Investment Group, adding the group closed 22 investments in two-and-a-half years.
Noble has since closed its second fund through which it’s acquired three assets with an additional four under contract, Brunt said.
Davidson Hotels & Resorts has seen a similar pace in recent years, said John Belden, president and CEO. The Atlanta-based management company has participated in 25 total transactions, including sales and acquisitions, for a net of 10 properties during the past few years.
The group will probably do five deals during 2013, he added.
“Now you’ve got a lot of assets that need to change hands, so there’s a lot more sorting through the deals and making sure you’re focusing on the right ones,” said Jim Merkel, president and CEO of Columbus, Ohio-based hotel investment firm RockBridge, which also hosted the event.
“We’re seeing a lot more activity and are trying to stay focused on the right deals,” he later added. “(But) now I just think things are getting harder and harder to do.”
As the flow of capital picks back up, more players are drifting into the market, Brunt said.
“It’s gotten a bit more difficult. I’m seeing more competition,” he said, adding that “private equity generalists” who fled during the downturn are now stepping back into the game.
Chip Ohlsson, VP of development at Starwood Hotels & Resorts Worldwide, said repositionings are going quicker, but ownership changes are taking longer.
When Ohlsson admitted he couldn’t put his finger on why some deals were fumbling their way through to completion, Merkel was happy to provide an explanation: Brokers and sellers are not pricing in deferred maintenance, he said. They force buyers to discover it and then re-trade.
The re-trade roadblock
A re-trade occurs when a buyer renegotiates the purchase price of an asset after initially agreeing to purchase at a higher price. This typically occurs after the buyer gets the property under contract and performs due diligence and uncovers deferred maintenance or other issues that materially lower the value of the asset.
“That’s a big dynamic,” Merkel said. “You don’t want to go into the asset that way. But when things are so tightly priced and you’re wanting to spend every dollar you have on guest impact, it’s really hard to ignore in that purchase process some of those issues.”
Savvy buyers can sniff out inflated ask prices, said Robert Cole, president and CEO of Hospitality Ventures Management Group, an Atlanta-based private management and ownership group with 40-plus hotels in its portfolio.
That’s why his company typically estimates much higher than guidance. They realize there’s often more than just a property-improvement plan, including deferred maintenance in the back of house or physical infrastructure challenges, such as plumbing, that aren’t always factored into an advertised price.
Cole often warns brokers that their assets will get re-traded.
At Noble Investment Group, Brunt and his team apply the same approach as they try to convince the seller or broker why the asking price needs to be adjusted down.
“We like broken deals,” he said. “We try to use logic and front end work … to have that kind of discussion with the seller and the broker and lead them to why we’re right about the price.”
Brokers appreciate that kind of honesty, said Harry Pflueger, principal of Newport Beach, California-based Maxim Hotel Brokerage.
“Does it work against you? I can’t say,” Pflueger said when asked whether a buyer’s reputation can be damaged if they tie up a deal in a re-trade. “But I can promise you it works for you when you don’t do it.”
But it’s not as if pricing is an exact science either, he said. No seller or buyer can determine the most appropriate price with 100% accuracy.
“Something’s worth what the next guy is willing to pay for it,” Pflueger said.