HOLLYWOOD, Florida—The inevitable comparison between the current economic downturn and a baseball game made its appearance at the Distressed Hotel Symposium last week at the Westin Diplomat Resort and Convention Center, and the verdict from speakers about the macroeconomic panel is that there’s still plenty of innings left to play.
Here’s what the panelists said:
- Bob Craycraft, vice president-industry relations for the Washington, D.C.-based American Resort Development Association: “We don’t know if the vacation ownership industry is going to look the same after this cycle as it was going into it. We’re probably in the sixth (inning). We certainly have bottomed out, in the late fourth quarter of last year. Wyndham and Marriott have had huge securitizations come through.”
- Jed Heller, president of The Providence Group, a hotel management company based in Duxbury, Massachussetts: “If we’re in the sixth inning, it’s a doubleheader. From my perspective, we’re in deep (doo-doo). We’re at the tip of the iceberg. You don’t even hear people talking about the hotel industry. People aren’t traveling. We’re in the second inning.”
- Chris Ward, managing principal of Florida-based developer Magnolia Florida: “There are a lot of lessons to be learned from the residential cycle. We’re still in the third inning there. The last downturn in the real-estate cycle was an eight-year process. We’re at the very beginning of the hotel side. With the operational problems hotels are going to face, particularly in the luxury segment which is always hit hardest, we’ve got a long way to go.”
- Chris Woronka, vice president/lodging analyst for Deutsche Bank in New York: “The fourth inning. It’s not early, but it’s certainly not late. The rate of deceleration is starting to slow. That’s true on a year-over-year basis. But if you look at it on a two-year basis, we are still getting worse. This feels like a typical hotel downturn, but it feels like a longer, more severe downturn than what we’ve seen.”
The stimulus effect
Panel moderator Bob Sonnenblick, chairman of Sonnenblick-Del Rio, a Los Angeles, California-based real-estate development firm, pointed out that slides from Smith Travel Research shown earlier in the program indicated downturns started in 1991 and 2001 lasted three or four years each, but it could be a quicker turnaround this go-round.
“In those previous problem times, we didn’t have a multitrillion-dollar stimulus package,” Sonnenblick said.
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The panelists, however, weren’t as optimistic about the stimulus package playing a large role in the hotel industry’s recovery. “The good news is (consumers will) find more money in their paychecks,” Woronka said. “If they get a good deal, they’re going to go. There will be some impact from the stimulus, but countering that is people out of jobs. Travel remains a bulls eye for corporate travel managers.
“This may take a little longer to resolve itself,” he added. “… How’s your rate integrity going to hold up, let alone recover, in this type of environment?”
The word on the street isn’t good because the limited-service segment and people traveling by car helped the industry through the last cycle, Ward said.
“I called former colleagues, and everyone I talked to said this is much worse,” he said. “The stimulus does help in simple travel—get in your car and drive. The luxury segment is going to be hurting for a long time, and that’s where there’s going to be opportunity for assets.”
The stimulus package hasn’t changed anything yet, Heller said.
“The downside of the stimulus package is that it’s going to be worse for the next 18 to 26 months,” he said.
Owners feel the pinch
That recipe could spell disaster for a number of hotel owners, according to the panelists.
Heller said those owners who sense financial problems coming shouldn’t waste time: “If you see a foreclosure in your future, a bankruptcy in your future, get the expertise to help you out. It’s a wise investment.”
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There’s bound to be a different-looking hotel landscape as the downturn continues, Woronka said. “We have not yet seen a public hotel company file for bankruptcy,” he said. “I don’t know if we will. We may. We’ll probably see a few major restructurings that will take away a lot of equity. The issue isn’t having too much debt now, it’s not having enough (earnings before interest, taxes, depreciation and amortization).”
The looming problem is evident when looking at hotel values and the lack of equity many owners have in their properties because of plummeting real-estate values, Sonnenblick said.
“Sixty-five percent leverage (in 2006) is like 95 percent now,” he said. “Then, most of the private companies were at 85 percent, and if you’re really at mark to market now, they are probably now at 115 percent (loan to value). For us as industry, that is a terrifying thought.”
Mark to market is a measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of a company’s current financial situation.
Stealing hotels
Plummeting real-estate values mean there’s going to be plenty of assets on the market at some point in the not-too-distant future.
“A lot of us in the audience are looking to make a living stealing hotels,” Sonnenblick said. “Is now the time to do it?”
“The private guys are going to get wiped out,” Ward said. “They can’t write things down like the public guys can.
“The (mezzanine loan) guys are going to get wiped out, then it’s going to be the first bank getting these properties back,” he added. “They’re going to have them at a price and won’t want to write them down more because they don’t want to take the hit.”
For that reason, it’s going to take a long time before the assets are released, Ward said.
“It takes a lot longer that you would think,” he said.