REPORT FROM THE U.S.—While recent reports indicate an uptick in hotel real estate transactions, hotel values are still difficult to peg, according to valuation experts.
Even in good times there is debate about value, said Eric B. Lewis, executive managing director, national practice leader in the hospitality and gaming group for Cushman & Wakefield. With relatively few sales and elusive net operating income projections, investors are turning toward unconventional valuation methods.
|
Eric B. Lewis |
Lewis made comments related to a report released by Cushman & Wakefield, “On the Minds of Hotel Investors.” View the full Cushman & Wakefield briefing.
Investors are pricing hotel assets on projected NOI figures, with a return to peak levels forecast anywhere in three to five years, according to the report.
When NOI-driven value makes the pricing of an asset difficult, if not impossible, investors are considering a hotel’s intrinsic value, Lewis said.
“Hotel (NOI) has been beaten down so far that it’s almost meaningless,” he said. “While investors always make projections on where NOI levels are going to head, it’s much more of a leap of faith, much more than it had been in the hotel world.”
Stephen Hennis, director of STR Analytics, said intrinsic value is somewhat analogous to underwriting a new development.
“The future income and recovery pace is all speculative, but there is certainly value there along with the assumed market and financial risks,” he said. “Many investors are using pre-peak values, discounted peak values and discounted replacement cost as a litmus test for pricing.”
Lenders have to be part of the conversation when dealing with this new environment, Lewis said.
“The vast majority of lenders require an appraisal or other form of verification of value and projected cash flow,” Lewis said. “But in my 23 years, this has been the hardest time to estimate market value of property, and lenders realize that as well. Really the best way to handle that is to engage the lender in a meaningful conversation right up front.”
Unconventional valuation makes a difficult marketplace for inexperienced investors, he said.
“Experienced investors have always had the advantage, but in this market it’s magnified,” Lewis said. “Inexperienced investors might not have the capability to accurately project where NOI levels may go from here as well as an experienced investor might. That experience would involve both looking back and looking forward.”
Return to “normal”
Traditional valuation methods will come back when operating fundamentals return, Lewis said.
“The other issue is the availability of financing and liquidity in the market. That is beginning to turn in favor of transactions. Lenders are expanding, (commercial mortgage-backed securities) lenders are coming back in fairly aggressively. … We’ve even seen and heard of money being lent on development projects, but for the right deal—the right property at the right location with the right sponsor. You can get it done if the stars align.”
Hennis shared similar sentiment that fundamentals must return, but cautioned against anyone being able to time the market.
“My best guess is that the market will look more like its traditional self in terms of pricing and financing in 18 months or so,” Hennis said.