If ever a property sector illustrated the adage, "It's an illwind that blows no good," it's the hotel industry. The cold wind ofdistress has been blowing steadily through the sector, generatingan increasing list of defaults, foreclosures and outrightclosings-a list that promises to grow for some time. But that samedistress is creating opportunities on a number of fronts,particularly investment.

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"There is growing demand for investment opportunities now thatthe hotel operating recovery is under way," says Patrick Ford,president and CEO of Lodging Econometrics in Portsmouth, NH. "Ifinvestments are soon made in distressed hotels, investors could

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be hitting stride just as the industry's operating recovery isaccelerating and may by relatively unhindered by new supply comingon line."

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A handful of hospitality players, like Sunstone Hotel Investors,are certainly becoming more bullish on the sector. The SanClemente, CA based REIT's president and CEO, Art Buser, commentedin an earnings call that Sunstone is confident the hotel industryis "moving into a phase of the cycle where well-capitalized,proactive public companies may have opportunities to createsignificant value through acquisitions." Though Sunstone has notpurchased any properties as of late, Buser noted, "We are highlyfocused on growing our portfolio, both through selectiveacquisitions of hotels and disciplined capital investments in ourexisting portfolio."

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Traditional lodging operators, like Sunstone, are not the onlyones with designs on the segment. Greg Merage, CEO of Stone ridgeCapital Partners in Newport Beach, CA, says the company "isactively evaluating hotel investment opportunities" after closingon the purchase of the Hotel Highland in Phoenix's CamelbackCorridor. The investment firm tucked away the 119- room hotel at2310 E. Highland Ave. in March for what industry sources estimatewas $14.8 million.

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Meanwhile, others in the hospitality arena are focusing theirattention on the service needs brought on by the distressed market.Former Hilton Hotels' chief financial officer Robert La Forgia anda group of other hotel industry veterans, for instance, have formedApertor Hospitality LLC in Las Vegas. The new entity offers a menuof services for property owners, lenders and special servicers ofcommercial mortgage-backed securities who are looking for overallstrategic guidance.

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Apertor, Stoneridge and Sunstone are just a few of the companiesthat see a bright future on the horizon for the hotel sector. Whilethe industry still has a long way to go before long anemic revenueper available room returns to previous levels, forecasts suggestthat it will begin recovering this year. Investment opportunitiesand improving Rev PAR are bright spots in a distress story that islikely to remain dark for some time, according to industryexperts.

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Atlas Hospitality Group of Irvine, CA tallies the number offoreclosed hotels at 406 and growing. "We estimate that the numberof hotels operating under forbearance agreements in California isbetween 1,000 and 1,200," says Atlas founder and president AlanReay. He points out that California is something of a bellwetherfor the nation because so much of the action was here when thehotel market was hot.

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One of the strategies that lenders have been pursuing-delayingforeclosure through forbearance agreements-doesn't seem to beworking, Reay says. Lenders are employing this extend-and-pretendstrategy in other sectors as well, but it has been especiallywidespread with respect to hotel properties. Stoneridge's Merageand Reay both point out that where the distress story goes fromhere will depend on a combination of what lenders

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do and how the market recovers vis-a-vis RevPAR. "The number ofpotential acquisitions within this sector will continue to bedictated by the willingness of lenders to write down loan balancesand dispose of bank-owned properties," Merage says. "If the volumeof foreclosures expands, attractive pricing should exist on solid,well-located properties. Investors with a strong cash positionshould have a significant advantage versus the competition."

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Merage relates that until the economy shows sustainableimprovement, which will lead to an increase in overall business andleisure travel, the hotel sector will continue to suffer distress.With hotel revenues still weak and the wave of defaults rising, onebig question is when the distress will trail off. Reay estimatesthat working through the troubles will take at least three yearsand possibly up to five, "just because of the sheer volume of dealsthat have to move through the process."


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