No Vacancy: Duff on Hospitality Law : Northwest Attorneys & Lawyers for Hospitality, Travel & Tourism based in Seattle

Some additional observations from the two days’ meetings:

• The much publicized industry recovery is definitely a regional or local recovery being led by both coasts of the United States and the top 25 markets.  Despite record level demand in 2011 (over 1 billion room nights sold), many markets in the Midwest, South and other regions continue to suffer.  
   
• A number of the owners and operators I spoke with felt that the 2012 forecasts presented by PKF and STR at the conference the day before were rather conservative.  Several owners and operators (with properties in multiple markets) indicated that they anticipated exceeding forecasted REVPAR increases. 
   
• Debt continues to be a mystery for many.  Those I met with represented both ends of the availability spectrum with debt being either impossible to obtain or readily available.  Construction financing seems to be returning on a limited basis for quality developers in quality markets.  One national developer I spoke with indicated that construction financing was becoming easier to obtain through national and regional lenders at approximately 65% LTC with limited recourse.
   
• The much publicized refocus on enforcement of brand standards by the leading franchise companies appears to be limited to top tier franchisors only.  Second tier franchise companies may be increasingly willing to waive or postpone standards requirements to maintain or grow needed distribution.
   
• Nearly everyone believes that lenders and special servicers will grow increasingly impatient with nonperforming loans and take needed steps to bring those properties to market over the next year.
   
• The Northwest continues to be an area of interest for lenders, investors and operators.  All but one of the investors featured as part of the ALIS Talks Money segment (including Aimbridge Hospitality, Apple REIT Companies, Carey Watermark Investors, Felcor Lodging Trust, HEI Hotels & Resorts, Kimpton, Noble Investment Group and Thayer Lodging Group) identified the Northwest as a prime target for 2012.
   
• Unions were surprisingly active this year.  At least two developers I spoke with mentioned that they had been approached by union representatives at the conference to discuss the developers' design review and staffing plans for their new hotels.
   
• As you might imagine, a great deal of discussion surrounded the recent launch of Room Key (see my colleague Ruth Walter’s recent post on the Room Key launch) and its effects on the current distribution landscape. One of the more interesting panel discussions occurred when Michael Shannon, managing director of KSL Capital Partners, questioned whether Room Key would succeed. Michael’s co-panelists, Richard Solomons, CEO of Intercontinental Hotels Group (one of the website’s founding partners) and Steve Joyce, President and CEO of Choice Hotels (also a founding partner of Room Key) strongly disagreed. Only time will tell whether this new travel search platform receives the acceptance necessary to make it a long-standing player in the on-line travel distribution landscape.

Finally, for those of you that were not at ALIS and are interested in seeing PKF’s 2012 national forecast, I’ve attached a complete copy of Mark Woodworth’s presentation here.

I look forward to seeing everyone at next year’s conference in January 2013.

John's presentation was followed by very brief presentations by each of the industry's usual cast of economic forecasters - Smith Travel (Jan Freitag), HVS (Susan Mellen) and PKF (Mark Woodworth).  Here are the highlights:

1.  Smith Travel

• World is recovering in majority of hotel markets
• 2011 REVPAR was up 8.2%, driven largely by occupancy
• 2012 forecast: 4.3% REVPAR growth driven by 3.8% ADR growth and .5% occupancy growth

2.  HVS

• Hotel transactions in 2011 by dollar volume increased over 70%
• 2011 average price per key exceeded $200,000
• REITs accounted for 43% of transactions in 2011

• Cap rates will continue to fall in 2012

3.  PKF

•  2012 forecast: Occupancy 60.5% and 4.7% ADR growth
• "Headwinds diminish and tailwinds develop"

Stay tuned for more details from ALIS later this week.

Our good friend Chris Kraus, Senior Vice President of Colliers PKF Consulting USA presented his recap of national and regional performance for 2010, and the forecast for 2011 and beyond.  His hotel market overview revealed that demand in 2010 was stronger than previously projected as the economy improved over all metrics (employment, payroll, income GDP, CPI, etc.) contributing to lodging demand and increases in revenue per available room (“RevPAR”) at 5.5% for 2010 nationally, and 4.5% in 2010 for the Seattle area:

New hotel projects will not come online until 2013, and therefore, lodging demand should continue as the economy improves.

The national forecast for the hotel industry shows an improving trend to RevPAR at 9.0% in 2011, and 9.9% in 2012, as employment returns to pre-recessions levels:

In the Seattle area in particular, the total number of booked rooms for conventions is up 8% for 2011, and SeaTac Airport passenger count increased by a modest 1.0% in 2010.  The Seattle Four-Year Forecast is as follows with RevPAR increasing to 8.9% in 2011, 10.5% in 2012, and 10.8% in 2013, but dropping down to 5.1% in 2014 when new supply comes online: 

Following is the RevPAR forecast broken down for upper tier hotels in the Seattle area:

The RevPAR forecast for Seattle lower tier hotels is more impressive, but supply coming online in 2014 will decrease RevPAR growth more significantly than for upper tier hotels:

In Portland, the four year RevPAR forecast shows that upper tier hotels will fare slightly better than lower-tier hotels:

The Spokane four-year RevPAR forecast demonstrates similar opportunities except with less RevPAR growth in 2013 and 2014 than in Seattle and Portland:

Following the economic presentation, Greg Duff moderated the following panel of industry experts on distressed hotel assets: 

• Richard Hooper, Pivotal Solutions
• Jeff McKee, Premier Capital Associates
• Yousef Arefi-Afshar, Cairncross & Hempelmann
• Matt Hanna, Cairncross & Hempelmann
• Neil Hodge, US Bank
• Mike Dolan, GE Capital
• Andy Olsen, Chambers Group

Greg initiated discussion on the distinction between distressed assets and unsalvageable assets.  Matt Hanna defined a distressed asset as a property where the owner is not able to meet loan covenants such as debt service.  Panelists viewed an unsalvageable asset on a continuum from not able to “break even” on a balance sheet to uninhabitable in physical condition. 

Discussion then shifted to new FDIC regulations that make it difficult for lenders to change the interest rate for borrowers who fail to make payments, among other regulations that have led to the lack of restructuring loans, resulting in foreclosures and receiverships.

Yousef Arefi-Afshar informed attendees of the flurry of activity by lenders to take control of properties through receiverships in the first three quarters of 2010, with the drop off in the fourth quarter of 2010, and potential of such activity to come back in 2011.  We have seen lenders use general receiverships to take over the entire business entity, but also have seencustodial receiverships to manage a specific asset for the benefit of the bank.  Essentially, a receiver and its attorney step into the shoes of the owner of the asset and takes over the business with the added responsibilities of negotiating debts, including utilities, and clearing legal issues.  Once a general receivership is established by the Court, the investors should talk to the receiver who has the power to sell.

Panelists relayed that many distressed assets did not come to market even though opportunistic investors created funds to acquire such assets.  Panelists advised that if the facility cannot cover its operating expenses, occupancy is declining and the property is physically degrading, the lender is left with fewer options.  Banks have to ask sponsors to put money in the deal, and take action if the sponsors do not.  The borrower needs to take a pro forma to the bank with a viable workout/exit strategy. 

Greg presented two case studies of typical distressed asset scenarios for the panel to workout. 

One asset was cash flow positive leading the panel to conclude that the asset could attract financing, but the fact that the borrower had failed to make loan payments would make it difficult for the bank’s credit committee to approve new financing.  If the lender is willing to provide forbearance, one option is that the borrower could return the property to the bank through a deed in lieu of foreclosure -- a negotiated agreement to give the property to the lender and the guarantors would not be liable for the deficiency.  This would avoid a judicial or non-judicial foreclosure that could have a “stigma” on the value of the property.  Further, panelists uniformly agreed that cooperation by the borrower goes a long way to avoid the lender’s enforcement of guarantees in such a situation.

A second case study involved an asset that was cash flow negative, with the potential of switching hotel flags to revive the asset.  Lenders on the panel considered lending additional funds for the new flag, with some level of recourse, but stated that the borrower needs to show level of equity commitment to support the property.

Greg concluded the panel presentation inquiring about lessons learned.  Consensus among panelists emphasized communication between lender and borrower, as the underwriting concerning loan-to-value and debt service will be more conservative in the next cycle.

If you would like more details from this presentation, including information about receiverships and bankruptcy, please let us know.  Similarly, if you did not attend Wednesday’s presentation but would like to attend future similar presentations, let me know.   Also, if you find these topics of interest, we invite you to subscribe to the blog either via RSS or email, by completing the field to the right.