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Michael Desiato, VP of the Real Estate Media division.LOS ANGELES—Even with the capital markets in disarray, the tone of this year’s Americas Lodging Investment Summit was far from somber. Indeed, speakers during the conference’s opening day on Monday said a correction and a return to more conservative underwriting was long overdue and a welcome change, even if uncertainty reigns at the present time.

One session, “New Transaction Paradigms–How to Improve Your Odds for a Successful Transaction,” discussed the new capital market reality. The panel was moderated by Michael G. Desiato, VP of ALM’s Real Estate Media division, publisher of GlobeSt.com. On the panel was Joel W. Hiser, CEO, Horwath Hospitality & Leisure LLC; Joseph Long, EVP, acquisitions and development for Kimpton Hotels & Restaurants; James T. Merkel, managing director, RockBridge Capital LLC; and Anupam Narayan, EVP and chief investment and financial officer for Red Lion Hotels Corp.

The panelists were in agreement that the capital markets have undergone a major shift, evidenced by the lack of available debt and tougher, and more expensive, lending terms for that which is being priced. This has led to a near-standstill in transaction activity. Another reason for the slowdown in dealmaking is the wide gap between asking prices by sellers and what buyers are willing to–or can–pay.

In attempting to complete acquisitions, Narayan said that he has come up against what he termed “seller’s denial” about the new pricing reality. Conversely, he is seeing less competition and less “crazy money” driving up values. Further, he said he foresees a pick-up in activity in the second quarter.

On the other hand, investors are adjusting to the new market conditions. Hiser noted that buyers are still aiming for IRRs in the high teens or low 20s. The only way to get those yields, he said, is with more aggressive projections or to negotiate the price down. To get a deal done with 85% leverage, the cost is 150 basis points more than it was a year ago, he stated.

He added that, even during the heady times, “There was always the sense that something would occur to correct it.”

Merkel agreed that buyers will have to adjust their purchase prices, using more conservative underwriting on a go-forward basis. At the current time, the capital markets are re-pricing risk, he said. Prior to the capital-market freeze, many deals, Merkel said, got done because of financial engineering based on the low cost of debt. “There was an erosion of underwriting standards, and many deals got done that shouldn’t have gotten done,” he said.

Long said that the market hit the peak of pricing in mid-’07, and that values will come down 10% from that peak, depending upon the geographic region.

The panelists agreed that equity funds are the most likely to prosper in this more restrained capital environment. However, Long predicted that 2008 will be a slow investment year. “No one wants to be the last person to pay at the peak of pricing,” he said. “People are not sure where pricing will go.”

The panelists also discussed other elements that are indicative of a sea change in the funding marketplace. Among them are more seller financing and recourse in deals as well as drawn-out transaction periods and negotiations. But even if they did not appear overly concerned about an economic slowdown, they also maintained they are prepared to weather the choppier waters.

Long, for instance, said his company is projecting 8% RevPAR growth this year. “I’m not seeing anything that tells me we won’t meet that goal,” he said. However, he said that Kimpton is currently evaluating any areas where expenses can be reduced in an effort to be proactive.

The ALIS conference will continue until Wednesday at the Hyatt Regency Century Plaza here. At the opening session, a group of lodging prognosticators gave their take on what this year holds in store. All were agreement that even with upheavals in the financial markets, the lodging sector should stay on an even keel, thanks mostly to a subdued development pipeline. Mark Lomanno, president of Smith Travel Research, said supply growth is below the 20-year average. So even in an economic slump, “the industry doesn’t have to work off excess supply,” he said.

Unlike past down cycles, the top 25 markets in the US and the upper-end segments of the lodging market should hold up fairly well, Lomanno said, which, in turn, should keep average daily rates high. He predicted, however, that US occupancies will dip from 63.2% in ’07 to 62.7% in 2008.

R. Mark Woodworth, president of PKF Hospitality Research, said that any softness in the economy will be short lived and would be a “dip between peaks.” A debilitating slump in the lodging industry “is not in the cards” due to a lack of fresh supply, he said. What the capital markets are now experiencing is a “healthy correction,” Woodworth said, adding that cap rates will rise by 160 basis points by 2010.

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