Depleted Reserves, Delayed Renovations Could Finally Force Hotel Owners To Sell
The wave of distressed hotel assets that some expected to hit the market in 2020 never materialized, as lenders granted flexibility and the government provided relief. But a new set of circumstances could now force more hotel owners to put their properties — most of which haven’t yet reached pre-Covid levels of demand — up for sale.
Nineteen months into the coronavirus pandemic, many hotel owners have deferred renovations to the point where their brand partners are pushing them to reinvest or their properties are becoming less competitive in the market, hotel executives said Tuesday at Bisnow’s Lodging Investment Summit in Washington, D.C.
The problem for many of these hotel owners with deferred maintenance, the executives said, is that they don’t have the money needed to renovate their properties. These pressures could force them to put their hotels on the market for sale, a trend that would be welcome news for investors that raised billions of dollars to buy discounted hotels during the pandemic.
“Now it seems like a lot of hotels are starting to come to market,” Choice Hotels International Chief Development Officer David Pepper said. “I think a lot of banks are starting to say, ‘We’re done.’ So I think you’re going to see a lot more assets out for sale … I think all this money that’s been sitting on the sidelines is going to start transacting on deals.”
Peachtree Hotel Group CEO Greg Friedman said that many hotel owners spent most of their cash reserves on debt service and operating expenditures as they fought to stay afloat during the pandemic. And he said while cash flows have improved over the past six months as demand has increased, much of that money will need to go to paying back debt, as lenders are no longer being as flexible on deferring obligations as they were earlier in the crisis.
“A lot of loans are going to be maturing here shortly that have been pushed out, so there is a lot of lender fatigue,” Friedman said. “With that lender fatigue, coupled with the need to do a lot of renovations that have been pushed out, that’s going to push a lot of groups to sell.”
An Atlanta-based hotel investor with 160 hotels in its portfolio, Peachtree Hotel Group announced in August that it had acquired more than $1B in distressed and stressed assets since June 2020. Friedman said he hasn’t seen as many distressed hotel assets as some expected, but he expects to see more properties hit the market in the coming months.
“Over the last 18 months, everyone thought there was going to be this huge distress trade on the real estate equity side. It hasn’t really arisen,” he said. “I don’t think it’s all of a sudden going to take place, but it’s going to create an opportunity to buy at more opportunistic levels.”
Sage Hospitality Chief Investment Officer Jason Altberger said he sees pressure on hotel owners to renovate properties coming from brand giants like Hilton and Marriott that have requirements for the standards of their properties, and he sees pressure from the market — hotel guests don’t like to stay in properties that need upgrades. But he said many of these owners don’t have the money needed to invest in renovating their properties.
“This isn’t a 120-day or a 180-day problem. We’re going to see the residual impacts of this for several years to come,” Altberger said. “I do think it’s going to drive owners to make decisions on whether they want to reinvest in an asset or just sell it. I think a lot may choose to sell … I don’t think it’s going to be a huge wave, I just think it’s going to be a trickle over the next coming years.”
Hilton Senior Vice President and Treasurer Mike Hollman said brand operators have sought to provide flexibility when hotel owners are in cash-strapped situations, but they also have the reputation of their brands to maintain.
“It is important that owners and brands do reinvest in those properties and try to figure out the balance from an owner-lender-brand perspective,” Hollman said. “It has to be a negotiation, it’s really a case-by-case basis. From Hilton’s perspective, we’re trying to be as flexible as possible, but also protecting the integrity of our brands and the overall experience of our customers.”
Friedman Capital founder Brian Friedman, who also serves as managing partner of D.C.-based real estate firm Foxhall Partners, said leisure demand has risen over the course of this year, and guests are willing to pay more for hotels that have invested in renovations.
“The consumer is on jailbreak right now, people want to get out and they want to experience,” he said. “Those who invested in their hotels … they’re going to get a benefit in their rate, but the problem is they’ve got to have the cash to do that.”
While owners that have spent nearly two years fighting to survive a pandemic may not have the money to make the investments needed to increase rates, investors that have raised funds for hotel acquisitions have plenty of cash to fund renovations.
“That’s part of the value play,” Peachtree’s Friedman said. “You’ve seen a lot of assets that need dollars on the [capital expenditure] side, especially in markets that have been hit harder. So as things go on, I think those capex projects can create value … a lot of renovations projects are able to drive value and help that property benefit from this recovery that’s going to take place.”
Other hotel properties that haven’t received the necessary renovations needed to compete in today’s market may wind up selling to investors looking to change to a different use: multifamily.
Foxhall's Friedman said the increased cost of construction has led multifamily developers to seek conversion opportunities, and in some cases apartment units have become small enough that they can be converted from hotel rooms.
“If you’ve got an unrenovated product, and there is a housing shortage, there is a good chance you can sell your hotel and turn it into multifamily and make more money from it,” he said. “That’s been interesting to see, these hotels going away and getting converted to multifamily.”
MCR Chairman and CEO Tyler Morse, whose firm owns 125 hotels across 34 states, said he sees four times as much money on the sidelines looking for deals as he did before the pandemic.
His firm is one of those investors looking for deals. In July, MCR paid $185M for a New York City hotel, and that same month it acquired a five-property portfolio in Texas and Washington for $94M.
“When there’s blood in the streets, that’s when you should be buying,” Morse said. “So we bought 41 hotels over the past 18 months, and we have another dozen or so under contract. It’s been a brutal period for the industry ... There were a lot of opportunities. You had to work hard for them.”