While the transaction market is heating up, compared to other cycles, there still remains a shortage of hotel properties coming to market. One major factor driving this is that many owners are looking at their improving operating metrics and deciding to delay selling their assets in hopes of realizing greater gains in the future. A second factor is that low interest rates and aggressive competition among lenders has resulted in a market where owners can receive high loan proceeds should they choose to refinance rather than sell. When viewed on an after-tax basis, the refinancing scenario may very well yield higher proceeds than a sale. That said, the common view is that we will see more hotel transactions in 2014 and 2015.
There is an assorted collection of buyers today that include Public REIT’s, Private REIT’s, private equity funds, hedge funds, family offices and sovereign wealth funds. Many of these buyers have similar investment strategies and look for assets in the top 10 to 25 markets. The cost of capital for these buyers can be very low compared to typical individual buyers. Accordingly, many individual buyers have been seeking deals in secondary, tertiary, or even smaller markets. Even so, competition remains strong for almost any type of hotel with a decent location, a productive existing brand or attractive rebranding options, and good bones.
Buyers often find themselves one of literally hundreds of competing entities in trying to purchase an asset. One recent sale our firm handled is a prime example. Within ten days of bringing the hotel to market we had 210 signed confidentiality agreements. This resulted in over 25 offers for the asset. This was a great situation for the seller, but potentially very frustrating for a buyer. We are often asked by buyers how, short of a ridiculously high bid, they can increase the odds that theirs will be the winning offer in the process. Here are a few suggestions:
- Try not to rewrite the Confidentiality Agreement (CA) - Some buyers get hung up on the CA and lose valuable time negotiating fairly unimportant aspects of it. Focus on the definition of the parties, the definition of what constitutes confidential material, and the term of the agreement to determine If you must make alterations.
- Spend an appropriate amount of time reviewing the offering materials - Hopefully, the broker managing the process has made the needed information available to prospective buyers. Certain buyers may not devote enough time to read the materials and opt to send in questions. Often, these questions relate to information already in the offering materials. This is frustrating for the party trying to run an efficient process. The right kinds of questions are great, and a good indicator that a prospective purchaser is really digging in, giving the acquisition their attention. Alternatively, inane questions have the opposite effect.
- Be prepared to discuss and defend your offer - Be aware that the owner has the benefit of reviewing and comparing a number of offers. This allows them to spot offers that seem to lack logical sense. As brokers, we run an Investment Analysis on the acquisition for our sellers that clearly defines return rates at various sales prices. While there may be good reasons for a particular pricing, offers that do not allow for adequate returns are suspect and may indicate that a re-trade is forthcoming. Be ready to explain how your investment strategy supports your pricing and structure, and do this in your initial offer.
- Respect the process - If the seller is running a formal process, it is a low-percentage play to try to circumvent it by making a preemptive bid. Usually, you end up being a ‘stalking horse’ bid for other buyers. While many buyers would like to remove the “competition” from the competitive process, sellers will not know if they are getting a reasonable price without letting the sale run its course.
- Minimize the number of contingencies - I have a saying, “a confused mind always says no.” This is particularly true when reviewing multiple offers on a property. Sellers are balancing maximizing proceeds with surety of close. The more moving pieces associated with your bid, the more likely the seller will look to other less complicated offers.
- Be sensitive to the timing – Time kills all deals. The more time requested, the higher the execution risk. Most accepted offers in today’s market do not have a financing contingency and typically have 30 to 45 day due diligence periods, with an additional 15 to 30 days to close. Obviously, larger, more complex transactions may require more time. Buyers that need time to assemble equity capital, or arrange financing will be at a real disadvantage in the bidding process.
- If you have a good transaction track record, flaunt it - Sellers want to know that the buyer has experience in transacting at the agreed-upon price and within the agreed-upon time frame. Make sure the broker is aware of previous smooth purchases that demonstrate your competence and an absence of a “re-trade mentality.”
- For the best and final round, bid as high as possible - There are no second chances in best-and-final scenarios. Sometimes, the difference between a winning and losing bid is minimal. Buyers should decide on the last dollar at which they will feel good about entering into a deal, and beyond, which they won’t kick themselves later for having lost the property.
These are just a few things a buyer can do to make their offer more attractive. We see many offers that do very little to reduce the execution risk for the seller. The offer selected is not always the highest bid, but rather the highest bid with the greatest likelihood of closing.