ATLANTA — When asked at the Hunter Conference on Tuesday what scares
him the most about the next 12 months, Greg Friedman admits that market
volatility is creating severe challenges.
“The volatility is going to get
really tough to operate in this type of environment,” said Friedman, managing
principal and CEO of Atlanta-based Peachtree Group. “We’re probably going to
see some business pull back at the hotel level, which is going to be
challenging. We’ll probably continue to be in this higher interest-rate
environment, which will make it very tough.”
However, Friedman is also
optimistic about how the market will eventually turn out for hotel M&A.
“At some point, I think you’re
going to see the transaction market open up for us to be able to go and buy
assets, and that’s what gets us excited,” he said. “Given that everyone’s
dealing with higher interest rates and the need to renovate assets, that will
create a buying opportunity for us. At some point, people will be forced to
sell assets, and as they’re being forced, you’ll see owners get a little bit
more realistic on valuations, which will create buying opportunities.”
When asked to advise owners who
have had challenges in this current debt environment, Friedman stressed being
proactive because this environment is taking longer to transact.
“I recommend being very
proactive and being very constructive and trying to work with your current
lender because, in a lot of cases, your current lender may be your cheaper
source of capital,” he said. “Otherwise, you’ll probably be paying a
substantially higher rate.”
Friedman was part of the “Market
overview: Financial analysis and forecast” at the Hunter Conference in Atlanta. The panel included Daniel Peek, president of JLL Hotels &
Hospitality Group; Teague Hunter, president and CEO of Atlanta-based Hunter
Hotel Advisors; and Robert Webster, vice chairman of CBRE. Mitch Patel,
founder and CEO of Chattanooga, Tennessee-based Vision Hospitality Group,
moderated the panel.
Buyers and sellers
Hunter was asked about who the
buyers and sellers are in this current deal environment.
Our sellers today are the institutions… the big boys who are at the end of a fund, who are at the end of a life, who either have a PIP or have debt maturity or have some reason that they need to sell and they’re all but at capitulation.
Teague Hunter
“Our sellers today are the
institutions… The big boys who are at the end of a fund, who are at the end of
a life, who either have a PIP or have debt maturity or have some reason that
they need to sell and they’re all but at capitulation,” he said. “They’ve been
fighting this for three years… I’ve been telling them today is better than
tomorrow. We’ve been right for the last two and a half years, and now they’re
like, ‘Fine. Just sell it. Do what you’ve got to do.’”
Hunter said his book of business
is as thick as it’s ever been.
“I believe that the bid-ask
spread is achievable. There’s always been a bid-ask spread. In the best of
times, there’s the best spread. In the worst of times, a bid-ask spread doesn’t
matter,” he said. “Who are the buyers out there? It’s our local community
buyers who want the asset… They can still get a loan from their local bank.
They can sign personally. They can get a decent interest rate because
they’ve got a relationship and they’re running through that.”
Because these buyers are getting
the assets from institutions, Hunter said there’s a belief that the new owners
can operate it better.
“They know they can get in there
and turn things around,” he said. “There’s an opportunity for them, and
fundamentally, they like the basis. If you believe in the long term, you’re
going to buy that asset, you’re going to lock in and you’re going to call it a
day.”
Biggest deal hurdles
When asked about the biggest
hurdle to getting deals done in this current environment, Peek said the lack of
big mixed-allocation private equity buyers in the U.S. hotel market.
“What you didn’t see (over the
past few years) and still haven’t seen is big mixed-allocation private equity
being active. The Blackstones, the Brookfields, etc. Why? Because they like
something else better. They’re very active in data centers, industrial or
multifamily. On a risk-adjusted basis, they like that product better,” he said.
Peek said PE has been active in
other markets outside of the U.S.
The $50-$250 million full-service hotels are not trading. Those are the hotels that have big PIPs and they’re kind of heavy.
Daniel Peek
“There’s just a different
dynamic in the market. The hardest thing is getting that capital to have
conviction on where to invest,” he said.
Peek said there is a “hole in
the doughnut” regarding a type of asset that currently isn’t selling in the
U.S.
“The $50-$250 million
full-service hotels are not trading. Those are the hotels that have big PIPs
and they’re kind of heavy. They’re very much relying upon financing because a
lot of it is private equity… A lot of those assets where the PIP used to be $30,000
a key and now it’s $75,000 a key, and they’re late-cycle recoveries, and they
don’t have the higher cash flow that the select-service assets have.
Those assets have largely been
illiquid, Peek said, which has created a challenge. “That is where that big private
equity plays most frequently, in both portfolio and single asset,” he said.
“That’s the hardest thing to get done in the market today, and there’s a lack
of conviction amongst mixed-allocation private equity.”
‘Sugar high’ gone
Webster said investors have had
a 15-year “sugar high" making them both “excited and fat.” To continue the
analogy, he likens the current interest-rate environment to a low-carb diet but
says it’s better for investors to return to the norm. “We’re going back to
where we were before it all started because these interest rates are much more
in line with where we were prior to 2007,” he said.
While the inefficiency of this
market creates challenges, it also creates opportunities, Webster said.
You don’t want to invest in efficient markets, because efficient markets drag everybody in and the bid goes way up and the ask makes a lot of money.
Robert Webster
“You don’t want to invest in efficient markets,
because efficient markets drag everybody in and the bid goes way up and the ask
makes a lot of money,” he said. “If you look at the period of time when we were
trading in 2021-22 that was when the bid-ask spread was completely aligned.
Many trades were made, and 2022 was one of the biggest trading years ever.”
Webster said while the market
was efficient back then, it doesn’t mean that the deals were better.
“If you go back in time and look
at those trades that were made, a lot of those trades have turned out, in
hindsight, not to be great,” he said.
Currently, the inefficient
market creates a lot of questions but also presents opportunities, Webster
said.
“If you go through the periods
in our careers where the best deals were made, it’s when the markets are highly
inefficient and you get a much higher multiple,” he said. “But you’re also
taking considerable risk because of the noise.”