How investors will spend their money in 2011

The hotel industry can debate all day over branding, labor cost, revenue management, distribution, etc., but here at the Americas Lodging Investment Summit, the focus is on money. There would be no hotels to operate if there weren’t investors to build and buy them. So, what does 2011 have in store for the money guys?

Because of where 2011 falls in the cycle, owners are looking for any opportunity they can find to buy underperforming assets and carry them through the upturn.

“It’s a great time to be buying hotels,” said Monty Bennett, CEO of Ashford Hospitality Trust. “What makes certain investments turn out to be fantastic and other investments not so good … It all comes down to when you bought in the cycle. That is the driving factor. Now is the time to jump out there and buy.”

Bennett said Ashford will focus on properties and portfolios where it already owns a piece of debt and examine opportunities to become full owners. Any equity now should be spent on acquisitions, he said. Renovations—if they weren’t completed during the recent downturn—can wait.

“Don’t overinvest in capital expenditures right now,” he said. “And I hope no one builds.”

Don’t start building now
Jay Shah, CEO of Hersha Hospitality Trust, agreed. Hotels that aren’t in the ground yet might miss the boat by the time the doors open.

“By the time you’re up and running, we’re going to be over the hump,” he said. “Buying an asset and having it through the upturn is going to be most beneficial from an IRR standpoint.”

Adam Weissenberg, Deloitte (left), and Monty Bennett, Ashford, on the Hotel Leaders Outlook panel.

That’s true for full-service players, said Mit Shah, CEO of Noble Investment Group. But select-service players might have the option of buying or building because construction costs are down, land availability is higher and brands have a willingness to do things to help out.

“Whether it’s credit-enhanced debt or key money or some combination thereof, you can actually look at a model without robust (revenue-per-available-room) growth, in a stable demand market, where you can find an opportunity to develop some select-service hotels.”

Ed Walter, president and CEO of Host Hotels & Resorts, said his company is in buy mode, too, as evidenced by Host’s US$310-million purchase of the New York Helmsley from Leona Helmsley Estate.

“There are great opportunities to buy assets at discounts to replacement cost. Until those values get back to replacement cost, the new-build scenario doesn’t make a lot of sense,” he said. “Those numbers are going to make sense sooner in select-service than full-service.”

Debt markets loosen
The one hurdle that has kept many investors on the sidelines during the past few years—availability of debt—seems to be easing. The lending markets are loosening, although underwriting standards remain strict.

Hersha Hospitality Trust’s Shah heard talk in the ALIS hallways of 70% to 75% leverage availability. “It looks like 2004 again,” he said.

But as credit becomes more available, sellers get more stringent with their prices. The time to capitalize on deeply discounted hotels might have passed.

“The deals are not as juicy as they were in ’09 and ’10,” said Ash Israni, chairman of Pacifica Companies.

Israni said owners are sitting on properties in need of major improvements and deciding whether to spend the money or take the property to market.

“You’ve got to make the decision—do you want to fix the asset yourself or let someone else put up the capital?” Host’s Walter said. “Sometimes the best thing to do is to sell it.”