Even if the cash on the balance sheet is at all-time highs, long-term debt is only slightly below the historical peak.
Capital is a powerful word in the hotel space these days. Capital provides companies the opportunity to invest and grow, and without it, companies must deleverage and downsize.
Creative capital
Debt capital is expected to be available in 2012 as lodging fundamentals enjoy a favorable outlook.
However, lenders are anticipated to be selective in capital deployment, with a focus on strong sponsorship, cash flow, brand affiliation and location.
Potential borrowers will need to put more effort into securing financing and may increasingly need to explore wider financing possibilities, such as private mezzanine funds, high-yield bonds or even financial support from brand operators, in order to maximize their options.
From an equity perspective, a considerable amount of capital allocated to real estate is waiting to be deployed. Companies continue to plan raising capital through various means, including initial public offerings (IPOs).
Understanding your capital agenda
Hotel executives continue to look for ways to grow shareholder value by focusing on their capital agenda: preserving, optimizing, raising or investing capital.
Our research on the largest hotel C-corps and REITs shows that even if the cash on the balance sheet is at all-time highs, long-term debt is only slightly below the historical peak. Its recent decline can be attributed to refinancing opportunities to pay down existing debt, as well as to asset dispositions.
As of year-end 2011, the following factors are impacting hotel companies’ ability to raise debt funding:
- The ongoing debt crisis in Europe
- The effective shutdown of the CMBS market
- Volatility in capital markets
Further, the hotel sector is challenged by one of the highest delinquency rates — 12.66% in the real estate class as of November 20113 .
Finally, public REITs continue to face a challenging financing environment because of depressed stock valuations.
3 “Commercial Real Estate Price Declines,” Commercial Mortgage Alert, 9 December 2011.
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