MADRID — Higher rates are expected to continue to offset rising operational costs and forestall any distress that would lead to owners selling their hotels at discounts, according to financing experts in the European hotel space who spoke on the first day of the Atlantic Ocean Hotel Investors Summit.
A slower and constrained hotel transactions market in 2023 frustrated many, but even a lack of distress does not mean hotels won't trade this year, panelists said.
Movement is likely due to the sheer weight of capital building up. It might just not be as much as a competitive, capital-flush market might prefer.
Portfolios continue to perform well, but base rates remaining high will cause issues, as will hedging, said Hal Shaw, partner and head of European capital solutions, KSL Capital Partners.
Strong hotels performances have been hindered by a continued press on costs, which leads to less flow down to investors,” he said.
New equity is entering the market to help reposition hotels’ capital structures, a trend that is likely to persist over the next five years, the panelists said.
David Rico Garrido, corporate banking director at CaixaBank, said today's high-interest-rate environment is different from past peaks.
Currently, increases in average daily rate is mitigating most cost issues.
Industry expectations are positive, with panelists saying they saw no reason to believe ADR will not continue to go up.
Paola Orneli Bock, vice president at Aareal Bank, said as many hoteliers are likely to seek refinancing, opportunities must be considered on a case-by-case basis to see if valuations remain sensible.
“There might be cases where sponsors will need to put their hands in their pocket to close the capital expenditure gap. They might be more creative with capital,” she said.
James Salford, partner at legal firm Bird & Bird, said it is clear that there will not be the wide scale of deals many have hoped for.
Transactions Pace Expectations
At a session on loans and deal volume outlook, panelists said that in the past year with base rates going up the market froze, but that will change even if transaction volumes do not make eyes water.
Shaw said he expected to see more transactions and more stability in the interest-rate environment, resulting in the pricing gap diminishing for several reasons.
That said, more pragmatism would be welcomed to get deals over the line, he added.
Garrido said he is not aware of non-performing loans in Spain, but the sector is in need of fresh capital and repositioning.
“Some funds are coming to an end or have extended their selling date by a couple of years. Some need to be sold or refinanced, but it is not [happening] at the moment,” he said.
Nothing changes in the fact that good assets with good locations and sponsorship will see the most competition, although also the least sales activity, , Orneli Bock said.
“The catalysts certainly exist to close the buy-sell gap. There are conversations, but I do not see distress,” she said.
There is a realism that something has to happen with sellers. On the buy side, evidently there is plenty of competition. Deals will start to come together more and more over the next six to 18 months, panelists said.
Shaw said that at some point in the capital structure there will be exposure, with the question then arising as to whether restructuring is the easy way, or whether is it just easier to sell it.
Orneli Bock said many in the hotel industry might have forgotten that capital expenditures were intelligently deployed during the pandemic.
Definite distress in the office real estate class is affecting hotel transactions and valuations, too.
Investors do not want to be involved [in offices]. Retail is coming back a little, and student housing is doing okay, but the real star currently is the hotel asset class
"European office is better [than U.S.] but still is tagged with the same dynamics,” Shaw said.
Salford said more debt funds are entering the market.
“The debt fund space is broad. [KSL Capital’s] goal is to find a solution that works for all parties, which is harder to do when there are adversarial positions,” Shaw said.
Another old chestnut of worth is that track records and reputation still count highly.
Orneli Bock said 2024 would be a busy year even if fewer deals get finalized.
“There will be different kinds of work and challenges, and no remnants of COVID-19. Focus on your expectations and knowledge,” she said.
Salford summed it up differently.
“This year is the beginning of the workout,” he said.