The Flurry to Position for Aquisitions

By Ted Mandigo

August 13, 2009 11:46 AM

We’ve had two new financial instruments enter the Wall Street market to raise funds, including a $1.5 billion IPO from Hyatt and an $810 million fund for Starwood Properties (a unit of Starwood), both earmarked as intended for acquisition of troubled and non-performing assets. In addition, we've recently seen news that Blackstone is looking to offload its Hilton portfolio, possibly by breaking up the company into smaller collections. While it's indicative of the fact that Q2 earnings were way down and that these companies are looking for ways to raise capital, It's also a sign that we've hit bottom. Generally, the big trend near the top of the cycle is to go private, now the major players are going public. That these companies feel like they can pick up hotels on the cheap means that they're seeing a big upside potential coming down the road.

Non-performing/troubled assets by definition will require patient money and additional investment to carry the properties through a turn-around as well as most likely significant PIP and deferred maintenance attention to bring the properties back to a competitive position.

If you've spotted the inconsistency there, it's because while a good asset CAN be distressed (especially given how many hotels are highly leveraged), it's unlikely to result in a catastrophic doom-and-gloom scenario where every hotel out there is going to default. Of course, SOME will.

There's a sort of general sense that everyone's on the sidelines waiting for their favorite hotel to fall into foreclosure so they can snap it up, in some sort of hotel-buying feeding frenzy, but logically, the situation is much the same as it's ever been.

During these troubled times, those assets which are up for sale will most likely trade well below replacement values, but the carry costs and risk of acquiring those properties will be significant. Just as much work as buying a distressed hotel on the upside. The difference is that now it's a bit cheaper, so more people are gunning for the good ones. It's complicated by the fact that there's less money out there to get them. As always, the distressed hotels are going to need a lot of work and money to get them up to profitability.

...Unless you've got a huge acquisitions arm, because I’m not sure that position is consistent with the investment strategy for those funds, which are ideally looking for well-performing assets, which they can essentially slap their name on.

Which means that, as long as you don't mind the fact that you're never going to have nearly enough shares to ever challenge a Pritzker, or Wal-Mart, or any of the other major holders, investing in a group that CAN move mountians at the bottom of a market is a pertty sweet deal, provided you have an idea of what you're getting into.

A realistic probable scenario would see REITs solicited for possible deals to sell their performing assets at current market values, to raise the necessary funds to carry the remainder of their portfolio through the current recession and into a recovering market. This would accomplish two tasks, supporting the weakened REIT market and providing the selling organizations with necessary resources to survive and providing those firms with ready investment cash with performing properties to enhance their portfolios at a significant discount. Cherry picking portfolios would also allow investors to be deliberate in acquiring properties that fit their portfolio and allow them to target markets that are not currently served by their brands, or improve representation in markets where they under-serve the market.

These huge organizations are also likely to look at possible chain or multi-property acquisitions, such as a possible fit with say, Hyatt acquiring Embassy Suites. These "new" brands would fill a niche and remain compatible with the organization.

This type of selective acquisition makes much more sense than targeting properties in such deep financial holes that they are teetering on the edge of bankruptcy or foreclosure.

There are certainly the funds out there waiting for the right opportunities, and those with the cash resources have multiple opportunities to jump into the market.

Ted Mandigo, CPA, ISHC.
Director TR Mandigo & Co.

About TRM

TR Mandigo & Company is a Hospitality Consulting firm with over 35 years of professional experience. We specialize in hotel & resort market feasibility, litigation support, and portfolio valuation.

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