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Investment Perspective by Richard Warnick

Happy feet

(The views and opinions expressed in this blog are strictly those of the author.)

The following blog is by Thomas Morone, a Los Angeles‐based partner at Warnick + Co.

2011 started with a big bang as REITs consumed large hotel deals. The action was on the coasts and in larger resorts. Opportunity funds also made bets on some very large deals. REITs shut down in the second quarter when their cost of capital skyrocketed. Late in the year, opportunity funds also seemed to move to the sideline while they digested their newly acquired portfolios.

Get ready for a wild ride in 2012; private equity has formed in significant pools, and opportunities will abound.

  • The CMBS bubble is about to burst and will provide opportunities to get at some very interesting assets.

  • The traditional refinance market will be scarce because values have declined and underwriting is strict; that said, banks need to lend money to make money, and the opportunities to charge big spreads will be tempting.

  • As hotel owners look to save their properties, new equity will enter the market; salvation capital’s time has come!

  • There are new players entering the hotel space that have big appetites and clear visions about making money in hotel investments; they will be buyers “by the pound” and at steep discounts to replacement cost.

  • There remains operating stress in most markets as costs are rising faster than revenue, and with the anemic growth forecasts for 2012 and 2013, many just won’t want to or be able to hold on.

  • Extend and pretend hasn’t worked too well at the commercial, regional and national bank level either; look for them to start shedding assets as they realize values are not increasing.

  • REIT mania is over for now. Sellers are rationalizing their pricing, and the only money in the market is “smart money” that demands a market rate of return — and there will be a meeting of the minds as the bid ask narrows to within reach.

Time to get ready for the big feast 2012 promises.

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