Hotel
real estate chatter these days seems to constantly focus on distressed
hotels. There are plenty of them out there and many companies are
starting to shift acquisition and/or management strategies to dealing
with hotels that aren’t providing expected cash flow.

Problem is, too many hotels were built with too much easily available
debt and a cash crunch is making them miss debt service payments. And,
unlike any other industry recession, hotels that are in the distressed
category aren’t necessarily bottom-of-the-barrel properties a heartbeat
away from demolition. Many are brand-spanking-new and, if run by the
right people, may still have a chance to survive and thrive.

At the Real Share Hotel Investment Summit held yesterday in New York
City, a lot of the conversation was highly tuned to how operators could
best take advantage of hotels that have been sputtering along and are
near insolvent.

When a hotel is slipping into financial malaise, many times a new
operator is brought in in an attempt to reverse the slow slide into the
abyss.

One of the biggest culprits causing this problem was too many
developers drunk on access to easy loans and building hotels in markets
that should never have been built in the first place. Either the market
was already crowded or a hotelier built a high-profile property that
had no business being built in the first place. Now the owner is
sitting on an improperly positioned hotel in dire straits.

“Often you have owners that want a real upscale brand when a market
doesn’t support it,” said Biff Hawkey, Senior Vice President of
Development with Hostmark Hospitality Group, who explained that in many
cases these hotels need to be rebranded to a flag that doesn’t command
as high of a rate. “[Owners] have had to discount so seriously against
their premier [brand] name. It’s made more sense to come in with a less
pricey brand.

Hawkey blamed an overheated economy for creating the illusion that more
upscale brands could survive in certain markets, when the reality the
premium rates of 2006 and 2007 were an aberration.

Steve Van, President & CEO of Prism Hotels, agreed. He explained
this reality is especially troublesome for the five-star segment. “They
[five-star hotels] barely worked before. And now when the billionaire
owner is worth a million, the problem is magnified. What do you do with
a Four Seasons in a market where you can only get $200 a night? We will
buy that Four Seasons, figure out a way to get out of the contract and
down-brand to something that works. It’s a great brand at $600 a night,
but not at $300.”

There are some five-star hotels operating in a negative cash flow
situation. They are not even making operating expenses and there may be
nothing else they can do,” said Robert Winchester, President, Waterford
Hotel Group.

Winchester said it’s important to fully evaluate the market where the
hotel is located, its specific niche and area demand generators to
determine the best brand for the property.  “For investment, we really
evaluate best brand for that particular property,” said Winchester,
noting that changing the brand is not always the case when his company
is appointed by a special servicer. Special Services are sometimes
appointed when a hotel falls into default. In those cases, there may be
limitations on money that can be reinvested in the property.

Navin Dimond, President and CEO of Stonebridge Companies, said his
companies have bought full service hotels and moved them to a select
service brand, which turned the property from a money loser to a very
successful investment. You have to put the right lens on and look at
every option that may actually increase the value of the asset,” said
Dimond. “Thinking of every option is critical. You have to find where
the intrinsic value is in a real asset, that is, where there is some
real value.”

But whatever option a new owner chooses, these experts say it’s
critical to stay with a hotel brand familiar to the general public.

“Our group sees brands as bringing value. You pay for that insurance.
Look, everyone does fine in good times, but it’s [affiliation with]
great brands in hard times that can help build market share,”

Sometimes, though, closing the hotel may the smartest option of all.

At Prism Hotels, Van said they’ve recommended it three times already.
When his company looks at the hotel budget on a five-year basis going
forward, he said sometimes the best option is to just close the
building and try to wait for property valuations to climb…then sell it
in two or three years.  “This is a fundamental shift in the hotel
industry where this would make more sense,” said Van.

One major instance of this happening was with the Four Seasons Exuma,
which closed during the summer. It was purchased by Sandals and will
reopen later this year as the Sandals Emerald Bay.

Need help: ask the specialists at wm@hotelier.com

Source: Glenn Haussman