Investor demand for distressed US hotels on the rise

New York

PENT-up vacation demand has boosted investor demand for beach resorts and roadside hotels. That crowded wager is already pushing one investor to explore ways to bet on business travel.

Dreamscape chief executive officer Eric Birnbaum said his firm, which has more than US$1 billion to buy hotels, sees more opportunity to acquire lodging properties that cater to business clientele, despite corporate America's hesitance to put workers back on the road.

"Looking out into the future, the recovery may take longer for group-focused or big-box convention hotels," said Mr Birnbaum, who previously co-founded Imperial with former Vornado Realty Trust CEO Michael Fascitelli. "That may be where the most unique opportunities sit."

Mr Birnbaum is partnering third-party manager Aimbridge Hospitality to explore opportunities and operate the hotels. The first acquisition was the boutique Warwick Hotel in Philadelphia's Rittenhouse Square.

Dreamscape is operating in a crowded field of investors waiting for distressed hotels to hit the market. When the Covid-19 pandemic halted travel globally during the first half of last year, it was widely assumed that the shock to hotel revenue would lead to foreclosures and forced sales.

It has been a slow burn. Most lenders were willing to offer forbearance in the early days of the crisis.

Emergency loans from the US Small Business Administration also helped hotel owners hold on to assets. Now, vaccinations are fuelling optimism about a travel rebound.

That has led some people to predict that the wave of distress may never materialise - especially since debt funds are raising cash to make rescue loans to help hotel owners bridge the gap to brighter days.

Net asset values for hotels owned by real estate investment trusts (Reits) have ticked up 4 per cent since the end of January, due partly to "the significant amount of capital on the sidelines looking for a home", said Michael Bellisaro, an analyst at Robert Baird & Co.

At the same time, delinquencies on hotels financed by commercial mortgage-backed securities have decreased, with roughly 16 per cent of such properties at least 30 days delinquent in February, down from 19 per cent in January, Trepp data shows.

Still, companies are expected to be more cautious than tourists as Americans start to travel.

And Mr Birnbaum sees more hotels hitting the market as lenders' patience runs out. "We're now getting to a point where they have to potentially put in their own capital," he said. "They're going to have to make a decision: 'Do they want to be in the hospitality business or not?' I can assure you, most lenders don't." BLOOMBERG

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