To Follow the Money, Specialize

NEW YORK CITY-Two afternoon panels at ALM’s RealShare HOTELS 2011 got down to key questions everyone wants to know the answers to. Specifically, they addressed where the capital is in the current cycle and how to access it. The event, produced by ALM's Real Estate Media Group, held forth Thursday at the Hilton New York Hotel and drew over 200 attendees.

The after lunch sessions kicked off with “How to Compete for Deals and Make Money in This Cycle,” a panel moderated by Nelson Migdal, a shareholder at law firm Greenberg Traurig. Migdal asked panelists where we are in this current cycle.

“To me this is very much reminiscent of January ’08,” responded Joel Ross, principal at Citadel Realty Advisors. “Greece is bankrupt, the Euro is at risk--it’s going to get restructured.” He added that, though he doesn’t anticipate another recession, “the housing problem is not going to get solved real quick.” The banking crisis in Europe, in Ross’ estimation, is a major event that will have ripple effects and negatively impact the ability to get deals done here at home.

One particular area that seems shut down, many panelists agreed, is access to the CMBS market. Ross said that he is wrapping up a $250-million deal, but that key factors made it possible: among them institutional sponsorship and $70 million in cash equity.

Nolan Hecht, principal at Square Mile Capital Management, said that much of its focus has been on acquiring hotel debt. “We’ve really been focused on buying hotel debt--performing and non-performing loans,” he said. “On the lending side, what we’re certainly doing is enforcing FF&E coverage, so that we don’t get into a situation where there is no money to operate the asset.”

The best way to compete, panelists asserted, is to develop a specific game plan and area of specialization. “We need to pick our battles and have an extremely narrow focus on what we need to do really well,” Michael Everett, SVP, Hospitality Investments at Destination Hotels & Resorts, said of its strategy. “Got into some branded assets and those were a mistake. We’ve gotten more active in the buy side and the third party management side.”

Driftwood Hospitality Management principal and EVP of Acquisitions Steve Johnson’s parting words of advice? “Stick to what you’re good at and be able to close all cash,” a sentiment Hecht echoed. “Cash is king again,” Hecht added.

Next up was another look at how to complete deals, the “Aligning with Capital: How Operators Find Capital Partners” panel, moderated by Scott Stephens, principal at HREC Investment Advisors.

Return expectations from partners being crucial, Jay Burnett, VP of Corporate Strategies at GF Management, said that the returns equity partners expect depends on the circumstances. “It’s deal dependent,” he said. “Our typical deal now is a turn-around play. Equity partners say they’re looking for returns in the twenties.” Anything in the mid to high teens, however, he said that he felt comfortable presenting to partners.

Wrapping up the panel, Stephens asked if panelists saw values coming back anytime soon.

“I think the froth has abated to some extent,” said David Duncan, CFO of Denihan Hospitality Group. “The transaction we did with Pebblebrook we couldn’t have done that transaction today,” he added, referencing a $910-million joint venture the two put together in June.

Others weren’t so optimistic. “It will take a while,” Thomas Prins, principal at Gemstone Hotels & Resorts, said. “The expectation and the reality needs to take hold and it hasn’t yet. The good news is that there’s lending coming back.”