A year after the start of the covid-19 pandemic, the hotels market is showing a significant imbalance between fundraising and transaction volumes for distress.
“There’s not going to be a lot of distress to take advantage of,” says Lukas Hartwich, managing director of lodging and healthcare at California-based research and advisory firm Green Street Advisors. “There’s going to be a lot of funds raised that are going to be disappointed in terms of the pricing that they can achieve on acquisitions.”
A total of 23 hotel funds seeking an aggregate $5.88 billion were in market as of March 12, according to PERE data. This was up 28 percent and 47 percent, respectively, from the 18 funds targeting $4 billion as of March 31, 2020. Fernando Olaso, co-founder and managing partner at Altamar Real Estate, the real estate fund of funds business of Madrid-based private markets firm Altamar Capital Partners, says he has received numerous distressed hotel fund proposals throughout the pandemic, but believes many will not be successful.
One reason for his skepticism is the lack of hotel expertise among some of the managers: “Investing in hotels takes expertise, and we’ve seen some really interesting initiatives by people who have a strong track record investing in hotels. But other initiatives, it’s ‘what’s the flavor of the month? Hotels are the flavor of the month, let’s launch a hotel fund.’”
Limited dealflow so far
The other reason is the low levels of distressed hotel dealflow. “I would have thought by now there would have been many more distressed opportunities,” Olaso says. “In terms of real deals closed, there haven’t been many.”
Distressed hotel sales totaled $771 million globally in 2020, far lower than the $2.2 billion recorded in 2019, according to New York-based data provider Real Capital Analytics. Tom Leahy, RCA’s senior director of EMEA analytics, told PERE that although a large asset sale in Asia pushed up the 2019 figure, the 2020 total was still less than 10 percent of the $8.8 billion of sales closed in 2010, the peak year for hotel distress during the prior cycle.
“There have been a very limited number of distressed hotel opportunities in Europe so far for a few reasons,” says Tristan Capital Partners managing director of hospitality Luc Boschmans, whom the London-based real estate investment firm recently hired to focus on distressed hotel investments. “The support measures currently in place across Europe are assisting hotel owners in reducing payroll and other costs, such as taxes. Most lenders have shown a lot of flexibility to date, which is also keeping deal volumes low.”
One recent distressed hotel transaction was Invesco Real Estate’s new partnership with hotel property owner and operator Westmont Hospitality Group for a portfolio of 13 hotels in Germany and the Netherlands that the Atlanta-based real estate investment manager had originally acquired for €530 million in 2017. In the deal, announced in March, Westmont replaced Event Holdings as both the tenant and Invesco’s co-investment partner after Event became insolvent with the portfolio, according to Miguel Casas, head of investment properties, Continental Europe at CBRE Hotels, which advised Invesco on the deal.
Casas points out that he has yet to see any forced sales, although some hotel operators have done sale-and-leaseback deals or sold non-strategic assets to continue funding operating costs. “Where we have seen distress is situations which were already not good before covid,” he says.
Alastair Carmichael, investment director for Europe at HB Titan, a hybrid real estate investor and lender focused on the US and Europe, agrees. Recent examples of hotel distress, such as the Yotel in London going into administration, “are arguably [the result of] legacy issues or issues that have been created by the specific circumstances associated with a project,” he says.
One of the most high-profile troubled hotel assets, 20 Times Square in New York, which was nearing a foreclosure sale at press time, had been facing sector- and market-related challenges long before covid struck. “It was an oversupply situation,” Jim Costello, RCA senior vice-president, explains. “There were too many hotels coming in at once, which was problematic on its own, but then they had the kicker of all this new competition from emerging competitors like Airbnb, Vrbo and others that just took a huge component of demand away.”
A game changer
For Hartwich, the arrival of a covid vaccine has further weakened the hotel distress thesis: “Not only do we have a vaccine, but we’ve got multiple vaccines and the efficacy is so high. That really was a game changer that put the final nail in the coffin for the case for distress opportunities.”
Hartwich notes that since the announcement of the Pfizer-BioNTech vaccine on November 9, hotel REIT stock prices have risen 30 percent, compared with 10 percent for REITs overall and less than 10 percent for the S&P 500: “That right there is a very powerful statement on the public markets’ view on the potential odds of distress in the lodging space.”
Leahy says the positive impact of the vaccines includes lenders potentially extending forbearance agreements: “It may be that the lenders are going to hold on, because they can see the light at the end of the tunnel.”
Casas agrees that the vaccines could benefit some segments. “The industry is fragile at this moment,” he says. “There’s not enough travelers to get to decent occupancy rates to make profit in many hotels. But the vaccinations could mean that this summer, if there’s good co-ordination between the countries in Europe, there could be a way to restart travel at least if it’s on the leisure side, and that could mean a rebound for many of the owners.”
Carmichael, however, thinks that even within leisure, the impact will vary. “We anticipate those country and coastal hotels and select service hotels will bounce back very quickly,” he says. But “it’s not until international travel, both leisure and business, happens again that those city flagship hotels as well as those hotels that catered to sophisticated international clients will come back to pre-covid levels. I think there’s going to be a difference in terms of recovery timing between different segments of the hotel sector.”
Meanwhile, HB Titan head of US debt investments Alex Chan says the business hotel segment will continue to remain severely challenged, notwithstanding the vaccines: “A lot of business group conferences, those typically get booked a year or two or maybe three in advance. We’re not seeing a lot of activity come back. There should be a longer lead time for business-centric hotels to get ramped up.”
The still believers
Those pursuing a distressed hotel strategy believe most opportunities are still to come. Boschmans points out that distressed opportunities typically lag the peak of a crisis by 12-18 months: “We are biding our time and building out our network in the space so that we can move at pace as dealflow picks up.”
Carmichael sees the majority of distress emerging from three areas:
- Borrowers struggling to secure debt for hotel asset purchases or refinancings because of diminished appetite by banks to lend in the sector
- Existing hotel owners now underwater with their mortgages because many hotels are trading at discounts relative to pre-covid values
- Hotel borrowers in need of working capital to cover the liquidity hole caused by lockdowns.
“There’s hundreds of billions of loans coming due,” Chan notes. “So I think you do have a decent flow of paper that’s coming up for maturity that needs assistance to get repaid, whether it’s taking out the entire debt or providing some subordinate financing to help fill in the gap.”
Ultimately, it is difficult to make general statements about hotel distress. “It’s tough to look at an entire sector and just paint a broad brush,” he says. “You really have to look at each market, each sponsor, each situation.”