July 31, 2010 7:21 am
Napoleon Hill, an American author, once said, “Don’t wait, the time will never be quite right”. And so it is with Leisure Real Estate Advisors and network media. I must admit, I have resisted for quite awhile, but we have finally taken the plunge into the blogosphere. As a result, welcome to my 1st post. At Leisure Real Estate Advisors, we have always tried to stay on the cutting edge of technology, especially as it pertains our web based marketing campaigns. However, it has become evident we can also distribute industry information, changes in our listing portfolio and our opinions of the market through the posting of blogs. More importantly, we will learn from your comments and will provide us, and our readers, valuable insight to a variety of hospitality topics (and a few other things, too, I suppose!!).
A COMMENT ON THE STATE OF THE INVESTMENT MARKET
Like nearly every business in the country, (except the federal government and its startling growth), the hospitality business has been a bit of a struggle. Over the last 18 months, occupancy, ADR’s and RevPar have all dropped and in some instances by 25% or more. In the central US, we haven’t been hit as hard as the coasts, but the effects have still been felt. With regards to the buying and selling of hotels, and as it relates to the recession, the drop in revenue has caused profitable hotels to become break-even or worse. Most of us would agree that such a property would be distressed. (I know investors think so!!) In order to sell a hotel in financial distress, a seller needs to be very motivated to sell. That is to say, without cash flow sufficient to meet debt service, the market considers your hotel to be in distress, no matter how new and pretty you are. Secondly, without cash flow, the seller will need a buyer with the financial capability to purchase the property on his/ her own financial strength, without the strength of cash flow. Everyone knows these folks (buyers) are around, but they will not pay a premium for upside they will create nor from operations they will improve. Those deals are getting done through motivated sellers and very qualified buyers. If, on the other hand, your hotel shows appropriate cash flow for the price point, it will appeal to the marketplace. It isn’t rocket science… the cash flow will provide the best opportunity to gain financing for the transaction, through conventional methods or through government programs such as SBA or USDA.
In spite of the recession and investor caution, our activity has remained strong. Buyers and sellers still differ on opinions of value, (which is certainly not a new phenomenon), but the gap is narrowing. Sellers are realizing investors will not purchase based on pre-recession revenues and prices. And, it could be years before the basic fundamentals improve to those levels again. I have been through three major investment cycles since the mid 1980′s, so this cycle was not unexpected. However, the severity and depth of the cycle was unexpected. We are seeing signs of improvement in the basic fundamentals of the hotel business, but it could take some time to get back to 2007 levels. As for me, I have always held there is a deal to be made on every property, sooner or later… one just has to find it.