Hotel lenders and owners discussed financing options, availability and terms at the Hunter Hotel Conference.
ATLANTA—With a competitive lending environment, robust debt markets and the attractiveness of hotels as an asset class, the prevailing sentiment is that now is a good time to be in the hotel business.
However, supply creep and labor costs continue to have an impact on hotel financing decisions, according to lenders and owners speaking on the “Hotel financing: The 30,000’ view” panel at the recent Hunter Hotel Conference.
“We are an ops-intensive business, so we look at the labor side, and the availability of labor is front and center for everyone,” said Adi Bhoopathy, principal and EVP of Noble Investment Group. “There are large markets that have already moved up minimum wage, so the key is to find markets that have more than 2% growth. In a lot of markets, you’re already paying about at minimum wage requirements.”
Arvind Bajaj, senior banker with Morgan Stanley, takes a similar approach to lending in the face of growing supply.
“We’re late in the cycle, but you could have said that two years ago. Real estate and hospitality is so location- and market-specific,” he said. “You can have a hot market like Atlanta or Nashville or Denver, and there’s obviously more development taking place. So you want a market that’s strong but not so strong that it brings a ton of new competitors in.”
Bajaj talked about the current strength of the CMBS market for hotels. “Demand for CMBS loans is very steady,” he said. “Now it’s at about an $80 billion-per-year business, and it’s very competitive.”
Compared to balance-sheet loans, CMBS loans can be less flexible, and flexibility can come in handy if owners want to sell or need flexibility on reserves, he said.
Renovation or property-improvement plan lending is another story, speakers said.
“CMBS is not the best for renos, quite frankly,” Bajaj said. “The rule of thumb is that at acquisition you want a max PIP to be 20% of the loan amount. Changing the flag is very difficult. It can be done, but it’s tough to pre-wire the ability to do that.”
Scott Andrews*, managing director for hotel franchise finance at Wells Fargo, spoke about his group's position as a pure balance sheet lender.
His group at Wells Fargo will finance PIPs associated with a hotel refinancing, and brand-mandated PIPs that come with an acquisition.
Jon Wright, chairman and CEO of direct lender Access Point Financial, said his company will do bifurcation loans for renovations, which break out the land and building costs and “put a high amortization on the CapEx component,” he said.
While cost of capital is higher for a private equity lender like Access Point, Wright said that bifurcation often means the deal is less expensive than traditional mezzanine or bridge financing.
“There’s no shortage of debt capital out there … between CMBS and balance sheet and insurance company (lenders),” Bhoopathy said. “The availability is very much out there; it just depends on your business plan.”
Several speakers agreed that with construction lending, it’s important to choose the right bank with terms that work for your company and the project.
Wright said Access Point is growing its construction lending business.
“Ground-up (development) often has far fewer surprises than major renovations or conversions,” he said. “As a lender, we have more control and can follow the budget more than anything else.”
Andrews* said his group at Wells Fargo does not do construction financing, but will selectively look at construction take-out opportunities once the hotel is in operation.
Bhoopathy said Noble worked with regional banks on the ground-up, dual-brand Moxy Atlanta Midtown and AC Hotel Atlanta Midtown, which opened in January right before the city hosted the Super Bowl.
“It was a complicated deal,” he said. “It was a surface parking lot owned by a public parking (real estate investment trust), so we structured a deal where we maintained their cash flow during construction, then we built a (parking) deck and a hotel on top.”
Timing definitely has an impact on construction, particularly when supply is factored in, Bhoopathy said.
“Our view is based on where construction costs have been, and availability of labor and cost creep,” he said. “If you’re not already in the ground now, moving dirt, you’re late in the cycle … and there’s a good number of those (projects) that will get shoved to the next cycle.”
Acquisition vs. refinancing
“There’s a tremendous bias toward acquisition vs. refinancing,” Bajaj said, and many others on the panel agreed.
Bhoopathy said the decision to sell or refinance should remain deal-specific.
“It’s very rare that we contemplate a long-term refi, and we’d likely prefer to sell over refi, if all things are equal,” he said. “But that said, at this point where we are late in the cycle … whatever you do, find yourself the flexibility. There’s available capital out there, and people will match your terms for a good deal.”
* Correction, 29 March 2019: The story has been edited to correct and clarify remarks published in an earlier version of the story attributed to Scott Andrews, managing director for hotel franchise finance at Wells Fargo.