Headlines – Week of May 9, 2010

May 17, 2010

Debt Capital Market Update(from Jones Lang LaSalle Hotels)

According to a recent update from Jones Lang LaSalle Hotels there continues to be an imbalance between the limited supply of available properties and the vast amount of available equity capital on the sidelines. According to the report, this has created a unique window of opportunity whereby the market has transformed itself into a “seller’s market”. So far in 2010 only $1.1 billion of hotel transactions have been completed in the United States.

Despite a limited amount of distressed asset sales, increased activity has been seen in structured equity recapitalizations fueled primarily by the inertia of balance sheet lenders and special servicers.

The most activity has been seen with mezzanine lenders who have the ability and willingness to invoke the UCC (Uniform Commercial Code) foreclosure process.  This is the process in which the lenders foreclose out the equity interests pledged by hotel owners (borrowers), allowing the mezzanine lenders to step into the equity position and take control of problem hotel assets. Unlike a real estate foreclosure which can be a cumbersome and sometimes litigious process, the UCC foreclosure process allows the mezzanine lender to quickly and efficiently take control of such hotel properties within a four to six week timeframe.

Jones Lang LaSalle Hotels has been recently involved in some of the well-publicized UCC Foreclosures including the Gansevoort Hotel in Miami, the Four Seasons Resort and Club in Las Colinas, and the W Hotel and Residences Downtown Atlanta. The company believes that as fundamentals continue to improve and the value curve begins its upward climb, we are likely to see more and more mezzanine lenders take action against troubled borrowers and step into a controlling position in order to control their own investment destiny. This will also likely increase the value of such mezzanine positions leading to a more vibrant market for mezzanine position trades.

Extended-stay Hotel Demand at Record High (from The Highland Group)

According to the U.S. Extended-Stay Lodging Report: First Quarter 20010 published by the Highland Group, extended-stay hotels accommodated 19.3 million room nights in the first quarter of 2010 as demand surged 16.5% compared to the same period in 2009. Room nights accommodated were the highest ever during a first quarter period.

Strong demand growth combined with a sharp decline in new rooms opening and occupancy rose more than 10%. Quarterly increases in occupancy of this size have not been seen for at least a decade. Falling decreases in average rate boosted extended-stay RevPar to its first positive quarterly increase following six consecutive quarters of decline.

Project Openings to Be Cut In Half (from Lodging Econometrics)

According to a report from Lodging Econometrics, new hotel opening are now forecast to decline 54% in 2010 as compared to 2009. The company projects 715 hotels with 80,830 rooms will open this year with gross supply estimated 1.7%; lower than other industry predictions.

For the first quarter, the hotel construction pipeline stood at 3,395 projects with 396,797 rooms. The Q1 2010 pipeline represents the first time in four years the pipeline has fallen below 400,000 rooms. Totals have also now decreased 42% by projects and 49% by rooms from the Q2 2008 peak.

According to the report, the 300,000-room pipeline threshold will be attained early next year. For 2011, they expect 654 hotels with 63,141 rooms to come online for a gross growth rate of 1.3%. There have now been seven consecutive quarters of rapid pipeline declines.

They report that Courtyard by Marriot accounts for 16% of all total upscale projects in the pipeline with 110 and that three Marriott International brands make up a combined 42% of the upscale pipeline. IHG has the largest pipeline of any company at 675 projects and 67,992 rooms.

In terms of markets, the top five pipeline markets of New York, Washington, Houston, Phoenix and Dallas make up 49% of the total rooms pipeline and 49% of all guestrooms expected to open in 2010.

Posted by Scott R. Lodde

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