Hotel owners and developers were required to play defense in 2020, but 2021 might require some offense.
During a Distressed Hotels Virtual Forum panel discussion between owners and developers, Heather Turner, co-founder and CEO of Tamarack Capital Partners, said “the vast majority of the focus has been on the existing portfolio and how do we shore that up."
“But when hotels went to zero revenue, which before 2020 was always a theoretical risk in the sector, we thought a lot of folks would try to leave the space, and it’s been just the opposite,” she said.
Her company, a privately held real estate investment firm in Oregon that specializes in hospitality assets, is now looking at how to switch from defense to offense and find ways to play on the acquisition side.
The current environment might not represent the dream buying opportunity — in which the upside equals the pain that hoteliers have been through — but Tamarack Capital Partners has had some acquisitions come to fruition, she said.
One deal was for a direct asset purchased from a public real estate investment trust. Another under contract involves working with a mezzanine debt holder.
Evens Charles, founder and managing principal of Washington, D.C.-based Frontier Development & Hospitality Group, which is a development, acquisition and asset management firm, said it’s been tougher than anticipated to find opportunities in terms of discounts.
“One of the issues I see that’s going to make it even more challenging going forward is there’s a lot of capital on the sideline,” he said. “The very few opportunities that are coming out that are broker deals, we’re always scratching our heads at what things are trading for today.”
There’s plenty of “anxious capital” on the sidelines with a lot of competition, he said. The real opportunities will be off-market, relationship-based deals.
“We don’t see the broker deals as being true opportunities in the near future because of so much capital and how competitive it’s going to be,” he said.
How the Capital Stack Has Changed
Turner said traditional banks have remained largely on the sidelines and debt funds have been quite active.
In one of her company’s acquisitions, she said it was interesting to see how the capital stack shaped up. The asset was purchased for an approximate 30% discount compared to where it was priced in January. It was in the low 50% in terms of loan-to-cost ratio.
“The debt, compared to pre-COVID, was nowhere near where it would have been. Part of the discount clearly was attributable to the lack of liquidity in the debt markets, and part of the discount attributable to the fundamentals,” she said.
Vamsi Bonthala, CEO of Chicago-based Arbor Lodging Partners, the investment arm of Arbor Lodging, said the lending community is more apt to consider loans valued at $20 million to $25 million. Anything less than that appears to be difficult for a non-recourse loan, he said, unless it’s relationship-driven.
Charles said his company remains cautious on how it capitalizes loans.
“Is pricing going to be different six months from now, particularly if we’re in stages of refinancing? And if our lender requires a yield maintenance … we’re stuck with this interest rate for some period of time,” he said.
He anticipates debt pricing will come down in the next six to 12 months.
Choosing Assets To Save
David Duncan, president and CEO of First Hospitality, a Chicago-based hotel management and development company, said he fell in love with the hotel business and its long cycle investment strategy.
“We are an investor first and ... one of the things we like to do is recycle capital and find more opportunities,” he said.
First Hospitality today has about 50 hotels in its portfolio. He anticipates the portfolio could grow in the next two to four years to 100 hotels, partly as a result of recycling old assets and redeploying that capital.
“What we look at really depends on location and specific asset type. Superior urban locations are hard to come by and harder to part with. Less superior locations are a little easier to part with,” he said. “We’ve implemented a traditional buy, sell, hold analysis.”
That entails looking at what a property is worth today and deciding if it’s better to hold it for the next five years or sell.
Bonthala’s advice is not to fall in love with an asset, especially in the midst of a big renovation project.
“It’s a full team effort and really hard not to fall in love with your project after that,” he said.
He said his company also holds responsibility for its investors’ capital, which needs to lead the decision-making.
Arbor Lodging Partners is also looking at potential new uses for some of its assets, whether it’s for the next buyer or something the company would do itself.
“You have to look through your portfolio regularly right now and figure out where you want to belong and where it’s time for the next person to make their bet,” he said.
2021 Outlook
Duncan said a unique opportunity sits in front of the hotel industry today despite uncertainty around the level of discounts available.
Now is the time to build a portfolio to sustain future changes in a unique way, he said. On the operating side, there’s opportunity to reemploy a staff with diversity and inclusion at levels not seen before, he said.
“One of the gifts [from the pandemic] is a fresh start. It’s here. We can buy the things we want in the locations we want — obviously it will be competitive — and we can employ and build teams in the fashion we want,” he said.
Charles said opportunities will be presented and discounts will be appropriate at some point. Hotels, compared to other asset classes, “have more runway to go up,” he said.
Frontier Development & Hospitality Group remains optimistic and is playing “defense while playing offense,” he added.
Turner said her company learned many lessons over the past year and will be more selective.
“We have sharpened our pencils and I think we’re going to take a very detailed, hard look at every asset that comes across our desk; it’s with an optimistic lens but realistic underwriting,” she said.