Brand choice a key piece of the hotel lending puzzle
 
Brand choice a key piece of the hotel lending puzzle
26 SEPTEMBER 2016 8:41 AM

A sponsor’s choice of hotel brand could have a big impact on lenders’ outlook of a project or transactions.

PHOENIX—Choosing a brand for a hotel project can be impactful even before a shovel hits the ground. A group of hotel lenders speaking at the recent Hotel News Now Lender Roundtable said the choice of flag can hugely affect financing.

Sources agreed there are clearly favorite brand companies among the lending community.

For Neil Freeman, chairman and CEO of Aries Capital, financing favorites include big-brand companies Marriott International and Hilton Worldwide Holdings.

“(Those brands) are the easiest to finance up and down the chain,” he said.

That doesn’t mean other companies are completely out of luck. Freeman said it’s a matter of communication from other branding companies to sell what they have to offer, beyond the scale and distribution power of Marriott and Hilton.

“That’s something where you have to educate the lender community,” he said.

Franklin Lin, director of Deutsche Bank Commercial Real Estate Group, noted that lenders love the simplicity of Hilton and Marriott but also are apt to fall in love with projects that have high-end appeal and can come across as trophy assets.

“If you have a package for a Four Seasons in Chicago, that shows very well (when approaching a lender),” Lin said.

To go beyond that comfort zone, lenders must be convinced of a brand’s staying power.

“We want to be careful that it doesn’t go away over 10 years,” Lin said. “We have to be cautious with how long is that management agreement and franchise agreement. If those go away and performance drops, that’s something to worry about.”

Mike Muir, EVP of hotel lending at Live Oak Bank, said it comes down to finding the right brand for a project and selling the lender on the fit—or even finding the lender who fits that deal.

“There’s a lid for every pot,” Muir said. “Some lenders like doing higher-end deals. Others are in midscale-type properties. It’s just important to have relationships across the board with many lenders.”

Michael Watson, director and head of U.S. lending for BMO Harris Bank Hotel Finance Group, agreed sponsors need to be prepared to make a real sales pitch for their brand choice when approaching a lender. He said that can help get past the fixation on certain brands and truly find the best flag for an individual property.

“If there is a story that should be told by the brand or franchisor and sponsor, then tell it,” he said. “Point at equivalent markets. It might not be the first flag that jumps out, but data supports the fact that it will perform.”

He said performance should always outweigh flash.

“I don’t want a Four Seasons with 10% (net operating income) when it can be a Best Western or Wingate with 40%,” Watson said.

Advantages over independents
While few match the scope of Marriott and Hilton, multiple companies, including InterContinental Hotels Group, Hyatt Hotels Corporation and Best Western Hotels & Resorts, and others have scale to the point where they also offer distribution benefits.

Rick Rogovin, VP of Wells Fargo Bank’s Hospitality Finance Group, noted that sponsors don’t always do a perfect job of recognizing that scale. He said this had led some to try to develop independent properties while underestimating the costs associated with distribution.

“I’m not sure most sponsors do that math when they bring you (a) deal where they can go independent,” he said.

Rogovin said the brand can be seen as a security blanket. In order for any independent property to get financed, he said the lender needs to be especially comfortable and familiar with the sponsor.

“You have to ask, ‘Who is the sponsor? How will they handle this? Does the (third-party) manager manage a lot of these?’ It’s a puzzle you have to put together,” he said.

Heather Duvall, managing director of Access Point Financial, said the specific brand isn’t as important as having a brand at all.

“We’re agnostic to what brand it is,” Duvall said. “But it’s more challenging for an independent to get done. That has to be really market and sponsor focused.”

The 3 elements of success
Lenders speaking at the roundtable identified three key areas for any project: The sponsor, the property and the brand.

Any lender must feel comfortable with all three to commit, sources said.

“In today’s world, a deal doesn’t get done without those three elements,” Freeman said.

But that doesn’t mean the same lenders are looking for the same brands in a variety of markets and locations. Some lenders said there are situations where the value of a brand is diluted almost entirely.

“In the real world, you have to have all three, but I think in some locations the brand is not as important,” said Matt Mitchell, VP of Hall Structured Finance. “(In some locations in top markets) a nonbranded hotel can do very well, but if it’s something off a highway somewhere, the brand is very important.”

Lin agreed.

“Brands are less meaningful if the hotel is on the beach,” he said. “But we care if it’s already branded and it’s doing something today to perform well. We don’t want that to change. It’s all about stable cash flow.”

Muir agreed that brand is important in getting a deal done, but he said it’s not a good idea to build a hotel simply because a developer has fallen in love with a particular brand without the other required elements of success in place.

“We don’t build based on the brand,” Muir said. “Some people do, and it’s crazy.”

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