2011 starts as the year of “Great Expectations”

2011 starts as the year of “Great Expectations”

After spending the past few days in San Diego at the Americas Lodging Industry Summit or ALIS conference, the hotel lawyers from JMBM’s Global Hospitality Group have a pretty good sense of the “pulse” of the industry. Although attendance at the conference was down significantly from last year, as cost-cutting continues, the mood was decidedly more optimistic, and lots of people were actively working on deals or projects.

We thought the mood reflected a sense of “Great Expectations” — a relatively optimistic sense that the worst is clearly behind us, and that things will only get better from here, however slowly.

Debt capital has reemerged for existing projects with established cash flows, and a decent project may get quite a few competitive bids. Property transactions are also happening across the spectrum. Foreign investment, particularly from China, is fueling some of the acquisition activity. The REITs and equity buyers are also very active.

Snippets from the Lodging Industry Investment Council (LIIC)

At the end of this article are three links to prior musings on the “Great Expectations” theme that may be interesting to review, but here are some of the latest snippets taken from the ALIS conference. Most of these are from members of the Lodging Industry Investment Council (LIIC), a highly regarded industry think tank representing a cross-section of the hotel industry. I’m privileged to be one of the three co-chairman of this prestigious group along with Mike Cahill, CEO and founder of Hospitality Real Estate Counselors, Inc., and Sean Hennessey, president of Lodging Investment Advisors LLC.

  • Debt financing has reemerged, but financing for development and construction is very challenging and will continue to limit new hotel room supply for some time.
  • LIIC members who completed transactions in 2010 said that about half of their deals were accomplished using hotel brokers and about half were not.
  • Although off market, unbrokered deals are widely perceived as a smart way to find deals, several LIIC members noted that with all the extra difficulties in coordinating matters on such deals, they are less attractive than might otherwise seem to be the case.
  • John Arabia, managing director of Green Street Advisors, says “institutional real estate values are up materially from the bottom in late 2009, when they were off 55% from the peak.”
  • Although more transactions are occurring, the relatively limited number of properties available for sale (compared to the continuing strong demand for properties to buy) may still be distorting values to the high side.
  • Many LIIC members expect to see a lot of brand and management changes in the coming months, as buyers reposition distressed assets and provide needed capital.
  • The brands have gotten a lot tougher on enforcing their brand standards again, and will be even stricter in 2011. Get ready for more and bigger PIPs.
  • 2011 will be another year of the REIT. With an all-in capital cost of about 9%, REITs can afford to buy properties at an on leveraged IRR of 11 to 12%. John Arabia thinks that REITs are currently too focused on earnings accretion of their acquisitions.
  • You cannot just underwrite economic growth to create value on your hotel acquisitions. As Doug Dreher, president of The Hotel Group, says, “you need to get ‘brand lift'” or other value from rebranding or repositioning.
  • Steve Kisielica of Lodging Capital Partners says, compared to the component of value increase that a hotel may get from improving market fundamentals (i.e. the property was bought cheaply), a savvy investor can often get more than twice that value increase component from a turnaround of operations, rebranding, repositioning and investing capital wisely.
  • The demographics of China are awe-inspiring. There will be a huge growth in outbound Chinese travel that will have a direct impact on major gateway cities, but this will in turn have a ripple effect on secondary and tertiary markets. Hawaii will benefit disproportionately from the boom in Chinese tourism, as will San Francisco, Los Angeles, Washington DC, and New York City.

Other anticipations of Great Expectation!

Many of the currents above have been reflected in prior interviews and articles on the Hotel Law Blog, such as the following:

Hotel Lawyer: So, You Think You Want to Buy a Hotel?

BLOOMBERG interview with Jim Butler, Hotel Lawyer

New York Times: Hotel Sector May Lead Economic Recovery 

By Jim Butler and the Global Hospitality Group Hotel Lawyers | Authors of