Want to buy a hotel? 2010 may be just the time.
Hopes for an economic turnaround are prompting some hotel investors to get back in the long-dormant acquisition game, laying the groundwork for what could prove to be an active acquisition market next year.
“Like most companies, we did not acquire anything in 2009,” said Leslie Ng, chief investment officer for Arlington-based Interstate Hotels & Resorts Inc.“But we are planning to get active once the market heats up, and I think there will start to be some pickup in activity in 2010.”
Interstate isn’t the only one. Hospitality companies — particularly resurgent real estate investment trusts — have raised funds and cleaned up their balance sheets so they can pounce on a long-anticipated wave of distress sales across the country.
In its third-quarter earnings report, Bethesda-based Host Hotels and Resorts Inc. said it expects a number of debt-saddled hotel properties to go up for sale because notes will come due and owners might not be able to refinance in the still-harsh capital markets for commercial real estate.
“We believe these opportunities will not reach the market until 2010 or subsequent years as distressed owners and their lenders will first explore other options,” Host said. “However, we have been actively exploring potential acquisitions and expect to be able to take advantage of these opportunities over time.”
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Host’s statement comes after a full year of playing the role of seller, not buyer. Following a 59 percent drop in net income in one quarter, Host shored up its balance sheet in March by selling its Hyatt Regency Boston property for $113 million. It then unloaded four other non-core properties in the third quarter for $90 million: the Sheraton Stamford, Conn.; Hanover Marriott in New Jersey; Washington Dulles Marriott; and Boston Marriott Newton.
Bethesda-based DiamondRock Hospitality Co., a real estate investment trust, is also in a nice position to take advantage of acquisition opportunities next year. It completed a
$75 million secondary offering earlier this year. In a statement, DiamondRock CEO Mark Brugger said the successful offering put the company in a position where it has no corporate debt and has more unrestricted corporate cash, meaning it can take advantage of opportunities that come on the market.
Through the third quarter, national hotel sales volume was $2.1 billion, with 123 hotels sold, according to Peter Slatin, editorial director of New York-based Real Capital Analytics Inc., which tracks commercial real estate trends. That’s 75 to 80 percent of last year’s volume, Slatin said.
Just two hotels have been sold in D.C. so far this year — the Embassy Inn and the Windsor Inn — for a total of $11.25 million. Six were sold in the Maryland and Virginia suburbs for an additional $77.9 million.
In 2008, four hotels were sold in D.C. for $301.5 million and four others in the suburbs for $122.6 million.
“Things have come to a screeching halt,” said Scott Berman, a principal with New York-based PricewaterhouseCoopers LLP specializing in the hospitality industry.
Nationally, Real Capital Analytics is currently tracking about $30.2 billion in distressed hotel assets. Of those, the only D.C. hotel is the Watergate — it was bought out of foreclosure by its lender in July. Also being tracked are 30 others in the region.
“Investors are smart enough to know if they just wait until the desperation point, they will be able to get good assets,” Slatin said.
One local company, Bethesda-based Urgo Hotels, already has made a deal for a distressed product. It just purchased the Resort at Singer Island from Bonita Springs, Fla.-based WCI Communities through bankruptcy proceedings for $7.1 million. Company executives say they will step up acquisitions next year.
Ng said a big focus of Interstate’s acquisition work will be distressed properties where banks have become involved.
“We’ve begun working with a lot of lenders and special servicers who have asked us to take over management of these properties,” Ng said.
Interstate has money to invest in acquisitions but will most likely team up with existing partners, including private equity funds and high-net worth individuals. Since the capital market teetered in 2007 — and crashed in September 2008 — lenders have been requiring more equity.
“We have partners who have been sitting on the sidelines, waiting for these opportunities,” Ng said..
Some companies will still watch and wait. In an investor call, Arne Sorensen, president ofMarriott International Inc., said the company is monitoring investment transactions to see when they start to increase. But the goal is for its partners to purchase the properties, while Marriott concentrates on obtaining management or franchise contracts.
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