Members of the Lodging Industry Investment Council met during the 2018 Lodging Conference and shared their thoughts on the latest interest rate increases, assessed the lending environment and explained what would jump-start the pace of M&A activity.
PHOENIX—Because the hotel industry fundamentals are solid and the U.S. economy continues to grow, members of the Lodging Industry Investment Council said the ongoing increases in the federal interest rate pose no real threat to growth.
It’s not that big of a deal here, said Guy Maisnik, partner and vice-chairman of the Global Hospitality Group at Jeffer Mangels Butler & Mitchell, during the recent LIIC meeting at the 2018 Lodging Conference. The market hasn’t reacted all that much, he said, but he is curious about what will happen in December.
The most recent rate increase, like the ones before it, was already factored in to companies’ forecasts, said Robert Stiles, principal and managing director at RobertDouglas. Over the last nine months, as LIBOR moves up, the spreads are narrowing, he said, and the industry continues to see that. Even over the last 30 days, there’s been a narrowing of the spread.
“Overall, borrowing rates are still really compelling,” he said. “(Interest) rates would have to move a lot for it to have a big impact.”
There is more debt funding available now than there used to be, and there are plenty of lenders, and there is appetite for financing, Stiles said. The interest rates are not a worry yet, he added.
The commercial mortgage-backed security spreads came in 10 to 15 basis points based on September securitizations, said Greg Porter, SVP of mortgage brokerage at Hospitality Real Estate Counselors.* In August, they take off; and in September, everybody wants to see where the appetite for the bond market is, which helps offset the rising rates, he said.
“We’re solidly over a 3%, 10-year Treasury (bond) right now for the first time in a while now,” Porter said. “If you’re a chartist, there’s nowhere to go but up. So I think the smart money is fixing rates right now.”
Stiles disagreed slightly on that point, saying in the hotel space sometimes it is better to go with variable rates to follow the economy more. The switch of a lot of private equity firms to more and more debt facilities is a function of where the industry is in the cycle, he said, adding they would prefer to be paid to be in a debt position that’s much safer than in an equity position. There’s a ton of excess liquidity, so equity investors are converting their positions to debt because it’s safer through the cycle.
“They’re anticipating there’s going to be a cycle change,” Stiles said.
Watch the videos below to see what members of LIIC had to say about the current lending environment and what it would take to increase the pace of M&A activity.
*Correction, 8 October 2018: This story has been updated to correct the terminology for CMBS loans.