With demand virtually disappearing as a result of the pandemic the number of distressed hotel assets is most definitely on the rise, however, opportunities for deals remain very much in flux as the capital markets struggle with valuations.
A virtual panel entitled “Sourcing Debt & Equity, Acquisitions & Value Add Strategies,” which was part of IMN’s distressed hotel asset webinar, revealed some of the current strategies of investors. For the most part, the panelists agreed that leisure and drive-to destinations are the most desirable at the moment.
According to Rani Gharble, head of acquisition and development, The POD Hotels, part of BD Hotels, “drive-to destinations seem to be a good mitigant in the short term given the lack of desire to take a plane anytime soon and the uptick in purchase of cars and rentals of RVs and so forth.”
In addition, he cited a trend toward “heavy leisure hotel brands with younger crowds.” Gharble went on to tout the company’s Pod brand noting the majority of its core audience is under 35 years of age.
“We think a brand like Pod or a micro hotel in general would be at the forefront of the recovery because it targets a trench of the population that is less vulnerable to the virus. It has a younger crowd and it’s leisure oriented. We think corporate [business] might take a bit long longer because of the ease of zoom and virtual meetings,” he said.
Andrew Gindy, principal, Walton Street Capital, weighed in. “I would say leisure, extended stay, and premium select-service [are the best opportunities] but ultimately it depends on the price. If we can buy something that’s attractive, that’s urban and it’s in a great market you take a longer perspective, but right now clearly leisure is the winner,” he said.
Krsytal England, senior director, Canyon Partners Real Estate, however, also skewed toward leisure but pointed out her company favors a longer-term approach. “From our perspective while the demand might be a bit slower to return we’re continuing to focus on properties that have a healthy balance of demand drivers, although staying away from those that are group heavy,” she said.
David Parsky, managing principal, Arris Investments, acknowledged the trend toward leisure properties but provided a bit of a different perspective. “The opportunity may be in those that are most out of favor. So if you can get your arms around a large group-driven hotel in a market that for whatever collection of reasons you think is going to outperform and it’s priced appropriately, that may be an interesting place to focus,” he said.
Meanwhile, when it comes to making deals for distressed assets, Brian Waldman, EVP, Investments, Peachtree Hotel Group—who moderated the discussion—noted there are still plenty of obstacles.
“There are not a lot of equity investment opportunities right now, we’re definitely focused more on the debt side and note purchases. There are some opportunities out there and some deals getting done but it’s few and far between. In all our conversations about servicers and how long it’s going to take lenders to figure this stuff out, I think you’re probably looking at least 2021 before a lot of this gets worked out,” he said.
England reinforced the point. “I would say that the opportunities are certainly few and far between. Quite honestly the predominant opportunities for a quote right now are hotels that were in some level of trouble, if not distress, prior to COVID and this has kind of accelerated the challenges with those,” she noted.
Parsky preached patience based on a lot of the uncertainty. “I think we’re definitely in early days having seen this story a few times in the past. I think the vast majority of borrowers are still getting their head right in terms of coming up with a forecast to present some plan to their lender, which is just the beginning of the dance,” he stated.
Parsky later added some specifics in terms of financing. “I think preferred equity is a great formula right now because if you can get to the finish line it gives an owner an insurance policy and a lifeline. But that doesn’t make it easy to get done,” he added.
Gindy, meanwhile, noted many are still taking a cautious approach when it comes to financing. “Owners are really playing defense, they’re saying ‘I don’t know what the next 12-18 months look like but I’d just really rather be safe than sorry. A lot of times those are long-term owners with low leverage, maybe with tax implications if they were to give up an asset, but these opportunities are few and far between and they’re small,” he said.