As part of the conference’s Patron sponsorship program, ALIS asked Hodges Ward Elliott’s Dan Peek eight timely questions as we prepare for the 20th annual event July 26-28, 2021, at the JW Marriott/Ritz-Carlton Los Angeles L.A. LIVE. Following are his responses.
What one word best describes the current U.S. hotel transactions environment, and why do you use that word?
Diverse. Certain markets are thriving, others are struggling. Certain assets trade near historical par values, others at considerable discounts. Today’s investors are developing conviction about their view of the recovery and executing investment strategies to match. As Jon Gray was recently quoted in the Wall Street Journal about investing: “In the fullness of time, what mattered was you picked the right neighborhood, not the right house.” Hotel investors are picking their target “neighborhoods”: select service v. full service, resort v. urban, group v. transient, etc.
When do you think the US hotel transactions market will gain momentum, and what do you think the overall volume will be as the rest of 2021 unfolds?
We believe that quietly, on more of an “off market” than “on market” basis, momentum is building every day. If you look at 2020, Q4 transaction volume was roughly equal to Q1, despite the extraordinary impact of the pandemic on travel. That was due in large part to rising conviction around a recovery over the next 24-36 months, and the unprecedented level of liquidity, both in the real estate sector and across the broader investment markets.
As such, we expect to see growth in year over year transaction volume, unlike what we experienced in 2008-2009 with two consecutive years of decline, with heavier volume in second half of the year.
Do you foresee more portfolio transactions or individual asset transactions during the remainder of this year? What will drive that?
Setting aside the just announced Extended Stay America transaction, we see the initial phase of the recovery being dominated by single asset transactions. Sellers are highly selective in what they choose to sell for a variety of reasons: raising equity to invest in other holdings, satisfying maturing mortgages, pruning their portfolio of assets that are no longer core to their strategy, etc. Once we see a more broad-based performance recovery gain hold, we will see more portfolio transactions.
What about all the “dry powder” that we keep hearing about—when will there be an opportunity for the capital currently sitting on the sidelines to be invested in hotel assets and what might those deals look like?
There truly is an extraordinary amount of liquidity in the market today, particularly relative to the supply of opportunities. Private equity funds, hedge funds, HNW investors, all of various sizes and from various geographies, are actively pursuing investment strategies. Additionally, REIT balance sheets and stock prices have recovered dramatically.
While we’ve all anticipated more “distress” in terms of lender-related transactions and runway capital raises, the majority of transactions thus far have been traditional equity sale transactions. A number of factors – PPP and other funding, regulatory relief for lenders and the unprecedented operational impact of the pandemic - have combined to slow the overall volume of distressed transactions than we might otherwise have experienced in a prior cycle.
Will bankruptcies be a catalyst or a deterrent for hotel deals during the next year? Why?
While we certainly see bankruptcies and foreclosures increasing, we don’t see them as a major catalyst. Underlying all of our challenges today is a public health crisis which has resulted in a severe recession. Based on the data today, the health crisis is receding, and the recovery is projected to be very strong. Unlike during the great recession, debt and equity liquidity is significant and that capital should allow a wide variety of hotel owners to secure capital markets solutions for (hopefully) all but the most daunting situations.
What do you think will be the mindset of lenders in general for the next 18 months? Will lenders’ purse strings loosen during that time?
The lending market today is deeper and more competitive than the general market assumption. While certain lenders who were active prior to the pandemic are managing difficult legacy issues, the new loan market has really bounced back. Acquisition and refinancing options are plentiful from an increasing number of banks, debt funds, conduits, and other balance sheet sources. Historically low index rates and solid lender balance sheets have combined to create an attractive market. While we aren’t at peak leverage or ultra-low credit spreads, it is and should continue to be a good time for owners to consume hotel debt capital.
What’s the one takeaway people should know about Dan Peek?
Most importantly, I’m a husband and father, something I grow to appreciate more and more every year, never more so than during the pandemic. Professionally, I’d describe myself as a player-coach. While I truly enjoy the many aspects of my work, coaching brings me the most joy. Working with the next generation of leaders in our industry and providing whatever support and encouragement I can as they develop in their careers, and seeing them succeed, is the greatest reward.