Real Estate Forum - July/August 2009

some of these assets is at this point in time, partly because of leverage issues. But if you buy into the idea that most of these assets are upside down from an equity standpoint, how do you pay anything to an equity holder when the properties, in many instances, aren’t worth the debt?

I don’t know how anybody pulls the trigger in this market. We have a fund that we’re sitting on and I’m sure we will be sitting on it for the balance of ’09. But, what’s your exit strategy? In order to get out of these deals at some point in time, you’ve got to find replacement financing because everything that you’re looking at today is fairly short term. Well, when it comes time for you to refinance, it will be at a time when several billion dollars worth of CMBS financing is rolling through the pipeline in 2011 and 2012. You have think really hard about where you’re going to get replacement financing when your loan matures. It’s a very scary proposition for a lot of folks.

DAVIS: In order for the transaction market to be efficient, there needs to be debt in the market. Right now, there is not enough debt. When debt capital does come back, it’s going to be largely geared toward refinancing performing assets. We need the CMBS market to generate about $100 billion a year in real estate debt for the market to get efficient again. And then you won’t have a refinance problem.

WOOD: How would you value a property in today’s environment? DAVIS: Right now, it’s more art than science because all values are based on a crystal ball going forward, and we’re all guessing where RevPAR’s going to go this year, next year and thereafter. But

you could generalize that values are off 30% to 50% from the peak.

Obviously, you have to judge each case individually. We try to help our clients understand whether there’s going to be any appreciation in the asset, or whether it makes sense to hire a skilled manager and do a hold-and-wait for a better day. Or whether they’re better off just creating liquidity today and taking what they can. BEDSOLE: Another issue with respect to value is that there are not a lot of comp sales. HVS came out with a concept of market value versus liquidation value. The market value meaning that you have a willing seller with no pressure to sell and a one- to three-year time period. Liquidation value involves a seller that has to sell or is going into foreclosure.

WARNICK: The triple whammy is you’ve got depressed EBIDTA, radically escalated cap rates and no debt. So if you are a buyer today, you’d probably need to be looking at an all-equity transaction. That has a tendency to drive values down. Somebody’s going to have to take those hits in order to attract capital back into the marketplace.

HOLTHOUSER: I know lots of owners that are holding because they don’t have to sell. But they plan to sell in the next one to three years. I would imagine at some point there’s going to be an awful lot of hotel assets on the market at one time.

DAVIS: At the end of this year, you’re going to see a lot of these REOs and distressed assets make their way into the system. Then, probably at the end of 2011 or 2012, everybody who weathered the storm will try to move those assets as well. But that’ll only happen if we get some efficiency back into the debt market. ◆

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