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I hate predictions

I hate predictions



I hate predictions. They?re almost always wrong (who can really see the future with any clarity). Many who get them right are simply lucky, or consistent and persistent. I have a friend who predicted the economic sky was about to fall for three years starting in 2006. Eventually, he was right.

Nevertheless, I?m going out on a limb with a prediction: With the exception of those who have motivations other than making money on real estate (e.g., fees), people who bought hotel assets in 2010 are going to wish they had waited until 2011 or 2012. I love that kind of prediction because it can?t be proven wrong.

All kidding aside, this prediction is based on a few observations and related conclusions:

1. Hotel performance may have bottomed ? but it is going to be a long slog back to true profitability ? especially with operators continuing to give away the store in terms of rate.

2. I emphasize ?may? because the economy is volatile at best and down right scary at worst. You don?t need to look past employment statistics.

3. In most hotels, there are few, if any, cost cuts left to be made. If the industry continues to bounce along the bottom, owners that are hanging on by a thread are likely to sell if they are above water on the debt, or lose the property to the lender if they are not.

4.  A substantial number of loans that are currently benefitting from low interest rate indices are coming to term. Low interest rates are the only thing keeping many of these projects alive. Even if refinancing is available, current underwriting won?t support replacement of the current loan balances for most hotels financed within the last five years.

5. Faced with a glut of properties ? many of which are not cash flow positive ? lenders/servicers who do not want to write checks are going to have few options other than to sell.

6. At the same time, those buyers who bought in 2009 and 2010 with the idea of a near term uptick in cash flow are likely to be disappointed ? as are their investors. Their price of future equity will be impacted by their performance.

7. Negative cash flow only has positive value when there?s an end insight ? and a premium to be earned on the potential upside.


 


My conclusion: Since the aggressive pricing trend we have seen is a function of plentiful, cheap, public capital and a paucity of buying opportunities, the confluence of more product and more expensive risk capital is going to put downward pressure on price.


 


The bottom line is this: The most valuable asset a hotel buyer can have going into 2011 is dry powder. Cash is king… again.


 


Without attribution, here are a few quotes investors should repeat like a mantra when competing for deals in 2010:


?The only thing worse than losing a deal is winning it at the wrong price.?

?The best deal I ever did was the one I didn?t do.?

?You make money when you buy real estate ? not when you sell it.”


 


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