It's a late August weekend at the Grand Geneva Resort & Spa in Lake Geneva, Wis., and the place is a beehive of activity. Two wedding parties and a community wide Venetian Night have combined to fill every one of the venerable facility's 355 rooms. Tee times are booked solid on the hotel's two golf courses and the spa is busy with women lined up for massages and manicures. Maybe the malaise that has struck the lodging industry so low this year is about to lift after all.

But then again, that may be wishful thinking. Since the start of summer, the lodging sector has been in upheaval across the country. In Dana Point, Calif., the 400-room St. Regis Monarch Beach resort was handed back to its mezzanine lender, Citigroup. Sunstone Hotel Investors skipped payments on the mortgage for its 258-room W hotel in San Diego and said it would hand the asset back to mortgage administrator Centerline Servicing. Meanwhile, Millennium Partners stopped paying the $90 million mortgage on its 277-room Four Seasons San Francisco and was close to default.

Corporations are slashing their travel budgets while both occupancy and room rates are in free fall as the lodging industry faces a dark gloom not seen since at least the mid-1970s, and perhaps longer. Many hotel owners are faced with stark choices between default and bankruptcy. The best capitalized may survive by merely writing off debt and somehow restructuring their operations while waiting for the market to turn and the recession to end.

“Our hope is that the lodging marketplace has reached bottom,” says Gregory Marcus, president and chief executive of Milwaukee-based Marcus Corp., the owner of the Grand Geneva resort. “But it's hard to tell since our industry tends to lag the economy.”

The buzz of the moment in this beleaguered industry is “jingle mail” — the practice of returning the inn keys to the lender. Such an alternative once would have seemed humiliating, but today jingle mail is considered a viable corporate strategy.

Out of this chaotic ruin, nevertheless, new fortunes stand to be made. Investors who have bided their time on the sidelines — the merger-and-acquisition landscape has been barren in the past year — are now watching more intently as discounted assets are poised to come up for sale.

There is a rising expectation that as the market scrapes bottom, probably in the fourth quarter this year, hotel deals will begin flowing again. There is plenty of capital available, and as banks continue to fix their balance sheets it's likely that debt will loosen up and leverage will make a comeback.

Raising capital for deals

Who exactly will be shopping for hotels? Practically everybody. The newly created Starwood Property Trust raised $810 million in an initial public offering (IPO) of stock in mid-August to invest in both distressed debt notes and properties. LaSalle Hotel Properties, based in Bethesda, Md., has raised $260 million in two equity offerings this year to prop up its balance sheet for deal-making opportunities.

Host Hotels & Resorts, also based in Bethesda, has issued both debt and equity and built up a war chest of more than $1 billion. Management has made no secret of its intention to be a net acquirer of new assets beginning in 2010. The biggest dealmaker of all might become Chicago-based Hyatt Hotels, which has filed with the Securities and Exchange Commission to raise $1.15 billion in an IPO so that it can chase after acquisitions.

There is a long list of private equity investment firms with capital. Morris Lasky, CEO of Lodging Unlimited in Chicago, is nearly finished raising a $350 million hotel investment fund and believes that opportunities are imminent.

“We're talking to a lot of lenders who inform us they'll be taking assets back this fall,” Lasky says. “They had been holding off on foreclosure with the hope that things would get better, but they haven't. In a few months we expect to be dealing with lenders as sellers looking to get rid of assets they don't want to own and manage for very long.”

To stabilize their balance sheets, many hotel companies are seeking to prune their portfolios, and they're already finding interest from overseas buyers. In July, for instance, Starwood Hotels & Resorts Worldwide of White Plains, N.Y., announced the sale of the W San Francisco for $90 million to Hong Kong-based Keck Seng Investments.

Marcus Corp. has a credit line of $113 million available from its lenders and is watching and waiting. The company invested more than $15 million earlier this year in renovations on the Grand Geneva, and has embarked on an even larger rehab of the 730-room Hilton Milwaukee City Center adjacent to Beer Town's convention center.

Business has fallen overall at the company's 19 hotels, with revenue per available room (RevPAR) likely to end 2009 down 15% or more over 2008 levels. But Marcus hasn't made a deal since 2007, when it acquired and rehabbed the long-shuttered 240-room Skirvin Hotel in Oklahoma City. Management is getting itchy to start growing the hotel group again.

“I can't predict the exact timing, but I know something has to happen to spur deal making in hotels,” says Marcus. “We expect that the market will become more active, and if the pricing is right we hope to participate.”

William Otto, president and chief operating officer of the Marcus Hotels & Resorts division of Marcus Corp., echoes those sentiments. “We have capacity on our balance sheet and could do a $100 million acquisition if something came along that was compelling. But what is compelling these days? There are a lot of people, perhaps us included, who feel that there is still more real estate fallout ahead, with rising foreclosures creating bigger discounts on assets.”

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