Value Proposition?

With hotel performance bottoming out over the past few months as a result of the Coronavirus, it is certainly not surprising to see asset values take a hit as well. While the extent of the declines can vary based on a number of factors, most estimates have pegged the current discounts for hotels to be in the range of 15 to 25 percent off pre-COVID-19 values.

Mark Elliott, president, Hodges Ward Elliott, weighed in during a virtual session entitled “ALIS 6 x 8: Recovery Top Of Mind” as he looked to provide insight into “what is the value today of a hotel that is shut down and may be slow to reopen?”

Elliott noted the company decided to execute the marketing process on several properties to try and determine market pricing as far back as six weeks ago. He acknowledged that initially the discounts were in the 30 to 45 percent range, but added that number came down roughly a week later to 25 to 30 percent and has continued to decline.

“I think the market is rejecting those big discounts and where they’re going to settle is in the 15 to 20 percent return range. I think that 25 percent discounts are going to be fleeting and short-lived,” he said.

J. Robison Hays, III, president and CEO, Ashford Hospitality Trust, Inc., validated that point as he noted during a recent earnings call that the company also listed a pair of properties for sale in an effort to effectively gauge market pricing.

“Those assets came in maybe 40 percent off of what we thought generally pre COVID-19 values were and that was pretty significant. It was something where we didn’t think that was a reasonable number so we moved on from those alternatives,” he stated.

Hays, however, wouldn’t rule out a future disposition for the company—which has a portfolio of some 116 hotels—although he did note it is somewhat unlikely at the moment due to its current debt level on many of its properties.

“There may be a time where asset sales do make some sense. There may be assets where we do end up wanting to hand them back [to the lender] or work with the lender to team up for a sale. There’s always a price where someone comes in with an offer that’s too good to say no to; that’s always possible,” he said.

Elliott further refuted the idea that asset pricing would be dramatically impacted by the recent pandemic as he referenced a recent conversation with a well-known hotel investor. “He said, ‘I think the entire market is sitting there waiting for these massive, massive discounts that may never come. The discounts are going to be what’s dreamed and what’s real. I think we should act on what’s in front of us and not what we potentially hope for.’ This is primarily because if you look at the private equity capital that’s available today it’s twice what it was in 2009,” commented Elliott.

He was later asked about the process of coming up with valuations for hotel properties during such an unpredictable time. “It all depends on your view of the recovery, whether it’s 2022 or 2023 to return to 2019 levels. I think the consensus is 2023. Once you peg the recovery year then you can get some conviction around value,” he said.

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