Financing Is Tougher In Soft Economy; Nixes MeriStar Merger, Lodgian Buyout

NEW YORK— For the better part of the past decade, financing for most any lodging purpose has been an inordinately tough sell to direct lenders and to those in the business of finding, and funneling, capital to hotel entrepreneurs. Financing now promises to become noticeably more difficult as the nation’s economy continues to slip and slow. In fact, the very premise of limited availability to capital has similarly stopped several widely anticipated lodging-related projects and transactions dead in their tracks— most notably the proposed Edgecliff Holdings acquisition of Lodgian and, more recently, the projected $1.2-billion deal bringing together MeriStar Hotels & Resorts and American Skiing Co. In both instances, a perceived and/or demonstrated inability to adequately access capital sources was cited as the primary reason for aborting the transaction. To be sure, sources of funding— and the industry’s loan brokers— take into account a wide range of indicators before reaching a decision about whether, and how much, capital should be risked on a particular lodging undertaking. Accordingly, when organizations like PricewaterhouseCoopers (PWC) blatantly maintain that “the lodging industry is in line to experience its weakest RevPAR performance since the early 1990s,” it becomes clearly understandable that those seeking debt-financing for lodging projects can expect to find fewer sources of money. Moreover, a quick check with local “capitalists” suggested that in those instances where loans are ultimately arranged, owners/developers should anticipate increased equity requirements for their projects. Again, with predictions for lower RevPAR levels popping up all across the lodging marketplace, this increased need for equity capital becomes exacerbated by decreased property-level profit margins as forecast by researchers and analysts at UBS Warburg. As specifically related in the organization’s most recent research note (to date), Keith Mills and his associates purport that “risks are increasing that U.S. lodging property-level profit margins will fall short of estimates this year.” The report further maintained that, “beginning in February, RevPAR growth for hotels in the largest U.S. markets began to moderate due to weaker business- and leisure-travel demand.” Based on the firm’s research, it was projected that “this revenue-growth weakness will continue.” But it apparently doesn’t always hold true that cumulative hotel industry RevPAR suffers dramatically during recessionary times. While painting neither a particularly bright nor a particularly bleak picture of the current economic slowdown and its ramifications, sources at Morgan Stanley Dean Witter (MSDW) nonetheless noted “industry RevPAR growth— on a nominal basis— declined only once in the last five recessions [down 2.8% in 1991].” However, MSDW did point out that “industry RevPAR growth— [again]on a nominal basis— decelerated in all five of the last recessions, and it decelerated in many quarters that did not formally qualify as recessions.” Also adroitly hopping on the “tough (performance) times ahead for hotel” bandwagon was Goldman, Sachs & Co. Under Steven Kent, the stock-watching/market-analyzing organization maintained that while “other income lines and a reduction in interest expense may help offset some of the RevPAR declines and allow first-quarter estimates to be met,” it is feared performance for the balance of 2001 may very well be at risk. As such, the company reported that it is “lowering [its]earnings forecasts for 2001 and 2002 earnings-per-share estimates for lodging stocks, based on expectations of sustained economic weakness throughout all of 2001.” Offering a lenders-and-brokers perspective, Michael Sonnabend, AFC Realty Capital Corp., and Alfred Bauer, Sumitomo Real Estate Sales, agree that it will become harder for owners and developers to finance their hotel projects. The way Sonnabend sees it, whereas debt-financing may have been availab