All Forum Posts by: Shiv Patel

We only own hotels. We do foresee pent up demand going into 2021, but prices really havent adjusted to the level that many think. So why the industry will certainly rebound in 2021, prices are largely going to remain unchanged. This primarily due to the banks providing significant forebearance on the loans. 

You have to be licensed in the state you want to be a broker. In many situations, they'll co-broker the deal with someone that has a state license. For example, there was a hotel we looked at in Florida, the broker was from Texas, but he basically was giving a small cut of the commission to use his license as a co-broker.

So we're in the hotel space. As others have mentioned, there are definitely some outdated assets more than 40 years old that should be torn down or converted, but it really comes down to the price you're willing to pay. I can give you a real life example, there was a 160 room hotel, 60 years old, but good quality construction. A buyer I know was acquiring it for $30,000 a room. Plus on top of this the renovation would be extensive, mainly due to the fact there are no kitchens in any unit. This means you need to run all new electrical wiring with higher wattage to accommodate the stove tops. In addition to this, he had to run separate plumbing lines for each room. For those of you that are contractors, you are aware this is a daunting task. In the end, it ended up costing an additional $25k per room. All in he was at $55k a door, so $8.8m. His occupancy hovered around 70% with a monthly rent of $700 (utilities included). Apartment occupancy in the market was running 95%+, but the reality is when you're only dealing with studios, not everyone wants to live there. So with the rent, he was doing a 40% NOI margin (remember utilities are covered by him). His full year NOI was around $375k. So around a 4.2% cap deal for him. The NOI as a hotel was around $400k. Therefore he added no value. A pretty bad investment.

This is a great strategy, but you have to have the ability to acquire assets at a very low basis in markets where they can hit a strong occupancy and rent. The reality of the above situation is that even if he achieved a 95% occupancy, he'd still be at a yield on cost of 5.8%. Not really an attractive deal for him. At that point, its better to just let these properties continuing operating as hotels. 

There are some assets out there. As you mentioned, they will be in less than stellar locations, but its possible. 

@Sean Gribbons

So if you have any questions feel free to PM me. We own hotels and specifically in the limited service space, it is very profitable from a return standpoint compared to other asset classes, but I also urge those to be cautious and get educated. These assets can typically yield anywhere from 18%+ CoC returns if run properly, but I have seen a lot fail primarily due to poor operators. Most successful hotel operators primarily focus on hotels only and really don't get into other assets like multifamily. This is a time consuming business. I love it and couldn't imagine doing anything else, but it is a commitment. In multifamily, there are lots of buyer types because it is an investment that can be run passively. In comparison, hotels are mix of business and real estate. We achieve much higher returns, but ultimately it is very difficult for these to be considered passive investments. Again, if you want to talk more feel free to PM me, I am always happy to talk to those wanting to learn about the industry.

In the hotel space here and it really varies. I don't really think lenders are looking to NW to match loan amount. The reality is when they underwrite these assets they do a stress test model. For our hotel loans, they pretty much stressed the NOI and looked to the possibility of having backup collateral in place. Again this is all on a deal by deal basis, the more leverage you want, the stricter they will be on NW. However, if you're doing a 50% LTV deal, the bank will focus a lot less on your NW.

So we own hotels. I can talk more in detail if you'd like, but I can give you what I am seeing in the market. The reality is that there will be some distressed hotels coming to market, but nowhere near the level that people think. There was probably more distress in 2008/2009 in the hotel space than now, even though occupancy is much lower in Covid compared to GFC. The reason is that the banks and the govt know that this crisis is nobody's fault. Due to this, many hotels are seeing significant forbearance on their mortgages. Lenders are giving anywhere from 6 months to 18 months of full deferment. We have hotels that were under forbearance and one will be going interest only. This really helps us out cash flow wise. Also the initial PPP money really did help keep cash flow stable. Now this is not to say that the industry won't see foreclosures. There will be foreclosures from CMBS lenders, but these don't comprise a significant portion of the overall market. The majority of the properties that will get hurt are going to be your 500+ room large hotels in urban centers. However, the smaller limited service ones have weathered the storm quite well. This is area where we focus on. Most hotel owners know once there is consumer confidence with a vaccine, there is going to be a massive surge of travel so even owners with distressed assets are trying to keep them alive because unlike the GFC in 2008, there seems to be a more clear end to this recession.

@Cliff T.

Hey Cliff. So it really depends on the area. In our case, we have own one hotel where revenue is down 50%, while another one is only down 10%. There may not be as much distressed sales as people think. Let me explain why. For one, this recession was really self-inflicted meaning that as soon as everything opens back up, hopefully after a vaccine, it should generally mean business as usual. I know plenty of friends with hotels down 70%, but they wont sell unless its on 2019 numbers. Simply because future bookings are up big for next year. People love to travel and as soon as its safe, its going to be a flood of travelers because everyone is tired of being cooped up. Another reason why distressed sales are less is because every bank is willing to work with owners. In our case, we have had deferments of loan payments for up to a year, which really helped us. The initial PPP program helped provide a lot of liquidity to owners as well. A couple areas where I see distress are going to be CMBS loans and large urban properties, where business travel may not pick up as quickly.

I plan to do a webinar on this if anyone is interested covering the industry and the impacts of Covid on potential investments. Feel free to PM as well if you have any questions.

@Quentin West

Hello. We actually own hotels in Maryland. Send me a PM with the info. Maybe can point you in the right direction with some of my Baltimore contacts that would look into it. Typically closed down hotels don't concern investors such as us because we use a STR report to determine how the comp set performs. I'd use this to underwrite the viability and project out future cash flows for the property.

@Maria Merkulova

We own hotels. There is a lot of misconception about them. We own limited service hotels (75-100 rooms), its much better to focus on this than airbnbs because you get scale under one roof. However, these do require significant capital compared to just owning a condo or two. Its very difficult to run a couple airbnbs, but with a hotel you're essentially getting a 100 airbnb condos beside each other. This is more efficient because unlike the condo, the hotel will still typically maintain some level of occupancy to offset costs. Even with Covid, which has been the worst environment for hotels, many of the smaller limited service hotels are generally still able to cover costs even in the midst of a global pandemic.