The Lodging Conference 2009, Phoenix, Arizona
This conference has been one of my favorites for many years. The Arizona Biltmore is a beautiful facility. The weather is usually fantastic, and the informal atmosphere promotes a relaxed environment for doing business.
The program did not disappoint in any of these areas in 2009. There were about 1,000 participants in attendance -- a few less than last year and perhaps fewer lenders. But the major players were there and it was easier to talk with people with a slightly smaller crowd.
The hotel industry mood
At one level, the mood of the conference was more optimistic than one might anticipate from the current state of the industry and its prospects. There were reports of transactions for smaller hotel properties and notes -- particularly at the $10 million-and-under level.
While hotel brokers say that transaction volume is down a stunning 97% from last year, in just the last 30 days, many lenders have issued a flood of requests for Broker Opinions of Value or BOVs. The brokers are hoping that lenders' rush to understand collateral value means that lenders are preparing to take action, whether that is selling notes or REO.
Liquidity
Liquidity is still a dominant problem. But it seems that the public stock markets may be opening for IPOs, like Hyatt's, and David Loeb or RW Baird thinks that by this time next year there may be 3 or 4 lodging IPOs providing fresh equity capital to the industry. Some even claim to see trickles of new debt, but any debt available is underwritten on "reset values" based on current NOI and cap rates, with 50-60% loan to value and roughly 1.5 times debt service coverage from available cash (generally discounted to reflect further market adjustments).
In other words, this debt (where you can find it) won't help anyone invested at 2005-2007 prices.
The elephant in the living room is still there
The real problem that the optimists want to ignore (like the big white elephant sitting in the living room) is that hotel industry NOI continues to fall. Falling NOI will not recover for a while, and when it does, it will take considerable time to get back to former levels. In the meantime, more and more hotels are unable to meet debt service, and many increasingly cannot pay operating expenses like payroll and utilities.
So what?
While we are waiting for things to get better, somebody is going to have to do something. Who is going to meet the shortfall in payroll and utility bills? And while the brands have eased their strict enforcement of brand standards for many situations this past year, this cannot continue indefinitely. Sooner or later, additional investment will have to be made in the properties to maintain their competitive position with other properties being bought at deep discounts and upgraded to take advantage of the situation.
When does hotel industry NOI recover?
I thought one of the most thought-provoking (and disturbing) slides I saw at the conference came from Mark Woodworth, President of PKF Hospitality Research. Here is the slide and why it looks so important to me.
