Hotel owners and lenders are equally cautious when pursuing the right kind of investments as each decision at this stage of the cycle requires the appropriate amount of scrutiny.
ATLANTA—As the hotel industry’s cycle continues to age, both owners and lenders continue to be cautious with the deals they pursue.
During a Hunter Hotel Conference session titled “Equity and hotel deal structuring,” panelists discussed the impact of the cycle on their due-diligence efforts and how they look for new types of deals that make sound investments.
J. Dana Tsakanikas, EVP at Stonehill Strategic Capital, said “everybody’s being a little more cautious,” but added he’s not sure if the hotel industry has reached the peak.
“I think we’re probably at the top of the market or close to it,” he said. “Instead of it being a peak, it’s more of a ridgeline we’re running along.”
But Tsakanikas said now is the time to renovate hotels so they’re in good condition when a recession comes.
“We see the opportunities in ground-up development and deeper development projects,” he said. “We’re contrarian because new seems to win in hotels. So, all things considered equal, we’re going to go into recession, I don’t know when. But I prefer—assuming my basis is right—to come out of that recession with the newest, shiniest project relative to everybody else that probably hasn’t reinvested in their project and they’ve had it for a while.”
Carlos Rodriguez Jr., COO of Driftwood Acquisitions & Development, said hotel owners can make portfolio decisions that set themselves up for long-term success.
“We’re seeing (revenue-per-available-room) growth slow and expenses rise, but as long as you’re underwriting correctly and your capital understands the situation and you finance yourself well, you’re ready to handle that downturn when and if it comes,” he said.
Rodriguez said private-equity expectations of ROI on transactions have come down, and the U.S. Federal Reserve’s recent announcement that it won’t raise interest rates in 2019 has made lenders “a bit more aggressive.”
“As a general sentiment, underwriting the expense growth and all that, that’s where we’re being more cautious on the deals, and the assumptions going into how far can you really take this asset despite still having positive RevPAR growth, so I think all those factors weigh in to saying yes there are still deals,” Rodriguez said.
Matthew Ram, investment and asset manager at Liberty Group, said there are deals to be had for “patient capital.”
“I still think that this late in the cycle, you have to be very cautious; a lot of supply still hasn’t come online,” Ram said. “We’re seeing a lot of downward pressure on certain markets because a lot of supply has come online. But if you’re very selective and you’re cautious in your approach, I do think there are still plenty of opportunities.”
Attractive deals, assets
While caution is key in the current investment cycle, the panelists differed on what types of assets make the most business sense.
Ram said his company is “100% focused” on select-service extended-stay hotels, but added it’s important to factor in the impact of the market on an asset’s value.
“The question as far as what product type works, I think that’s extremely market-driven,” he said. “There are some projects that do well or markets that do really well with full service, other markets do well with independent hotels, so I think that’s more of a localized question.”
Guy Crawford, VP of acquisitions and development for Lightstone Group, said his company isn’t focused on a specific asset type but prefers properties with a sound business plan.
“We’ll make market bets, but we also want the asset to have some kind of business plan,” Crawford said. “We need to be certain there’s an opportunity to cut expenses, which is becoming more and more difficult. Operators are so good now it’s one out of 100 where you can actually cut costs.”
Tsakanikas said his company likes a diversified hotel portfolio but in general stays away from hotels that are reliant on big group business.
“We’re select service, compact full service, focused service, whatever everybody is calling it these days,” he said. “But we like a good mix of business transient and weekend business. Business transient is a good opportunity to drive revenue, but we don’t want to just be full Sunday through Thursday, either.”