Consistent capital markets spur strong outlook
12 SEPTEMBER 2014 8:36 AM
With the amount of debt capital available expanding, the foreseeable future looks positive to a panel of financing experts speaking during the International Society of Hospitality Consultants’ annual conference.
AUSTIN, Texas—With financing more readily available for hotel investors in the United States and industry fundamentals remaining strong, there’s no reason to think the current landscape won’t continue for the foreseeable future, according to speakers on the “Capital markets” panel at Thursday’s opening session of the International Society of Hospitality Consultants’ annual conference.
The availability of funding—particularly for acquisitions—was a common theme throughout the fast-paced session at the InterContinental Stephen F. Austin Hotel in downtown Austin.
“The spigots have opened even more,” said Robert Stiles, principal and managing director for RobertDouglas.
Stiles said 10-year treasuries have “come in by 50 basis points. No one was predicting that would happen.”
There are 37 active commercial-mortgage-backed-securities shops—more than there were in 2006 and 2007, he said.
“There’s more liquidity in the market.” Stiles said. “Spreads blew out a little bit this summer but have moved back in.”
“There’s much more liquidity than I thought there would be,” said Barry Olson, managing director, realty management division at Goldman Sachs
Olson said the blip over the summer was related more to geopolitical issues than anything the hotel industry did. The industry now is “very aggressive.”
“We’ll continue to bump along like this with little shots to the system,” Olson said.
The panelists said the large number of loans maturing in 2016 and 2017 are already being addressed.
“We’re seeing a lot of borrowers today just looking at the defeasance costs and saying, ‘Look we’ve got a year left on our 10-year financing.’ …. We’re going to go ahead and pay that defeasance and lock in 10-year financing while treasuries are now at 250 (basis points),” Stiles said.
Olson said private-equity shops are picking off limited-service portfolios in the 7 capitalization rate range with interest rates between 3.5% and 4.25%.
Edward Blum, executive VP of development and acquisitions for Interstate Hotels and Resorts, said previous hotel investment experience, the track record of the proposed management company and escrowing the funds for property improvement plans are now common issues raised by lenders.
“Lenders are asking a heck of a lot more questions than they did in the last cycle,” Blum said. “There is more diligence.”
Stiles said he is happy to see that CMBS lenders are still looking at in-place trailing 12-month cash flow as a key indicator about any proposed deals.
“But you’re beginning to see pro forma (instead of trailing-12 cash flow) a little bit,” Blum said.
The CMBS conversation carried over to which markets they best serve.
“CMBS is designed for secondary and tertiary markets,” Stiles said. “It’s like the capital solution. In gateway cities, 35% of all financing was CMBS-originated debt. Secondary cities it was 45% and tertiary cities it was 55% of all new hotel debt. It’s really brought liquidity across the country. That’s for existing hotel debt, not for new construction.”
More players in the game
The addition of capital to the financing arena has brought more suitors to the market, according to the panelists.
“The biggest comment we get from all our capital partners … is the competition is very tough,” Blum said.
Olson said he is surprised by the number of transactions being closed.
“Who would have thought transactional volume would be as great as it was in 2008?” Olson said. “It’s an amazing thing to see. All the big names in the business are rushing to acquire, or rushing to refinance, or rushing to do both.”
Goldman Sachs is a net seller and has a large limited-service portfolio that it hopes to have divested by the end of the year, Olson said. That doesn’t mean company executives aren’t willing to buy, however.
Goldman Sachs has focused on acquiring distressed assets and is already harvesting some of the assets it acquired in 2010.
Olson said Goldman Sachs is a net buyer of hotels in Europe after he was reminded by Blum that the firm recently outbid Interstate for a large portfolio in Europe.
Stiles said targeted returns by investors have moved down to the 16% to 18% range after being in the low 20s for a long period.
Blum concurred, saying some winning bids for deals have come in at 12% targeted returns.
Clouds on the horizon?
Not much worries the panelists.
“I could easily see us for bouncing along in recovery for three, four, five, six years,” Stiles said, adding that he believes whatever issue derails the recovery before that will be an external event.
When asked by moderator Sean Hennessey, CEO of Lodging Advisors, if there were any clouds on the horizon, the panelists did reveal some issues.
“Supply comes to mind,” Olson said. “Be careful there. Do your normal due diligence.
For the most part, things are pretty even keel from the supply standpoint.”
Olson said there’s no silver bullet to determine if there’s too much supply because every market is different. Nashville, Tennessee, is a good example, he said.
“Forward booking for convention center is fantastic for the next couple of years, but what happens after that?” Olson said. “It’s a cliché, but you have really got to look at every market and determine what’s happening and what’s the exit strategy.”
Olson said one other thing worries him.
“I worry a little about over financing but that’s because I spend 75% of my day on the financing front,” Olson said. “After supply, (my worry) would be the capital markets getting ahead of themselves.”
Blum and Stiles pointed to a different concern.
“The fundamentals are strong,” Blum said. “It’s more things that are beyond our control—geo-political issues.”
“Just seeing how hard it is to get non-recourse construction financing, this supply issue isn’t going to be a driving spike in our fundamentals,” Stiles said. “It’s the external shots that we just do not see coming (that) worry me the most.”