Hotel owners are enjoying strong performance results, but financing new deals remains tough for those looking to grow or get into the game, members of IREFAC said during the NYU Investment Conference.
NEW YORK—Hotel financing has returned for nearly all types of projects, but borrowers must be flexible and—most importantly—patient, according to real-estate finance experts during the NYU International Hospitality Industry Investment Conference.
Members of the Industry Real Estate Financing Advisory Council said the hotel finance market is bifurcated, with commercial mortgage-backed securities lenders returning to provide debt for fairly straightforward deals. On “hairy” deals, often comprising a rebrand, the cost of debt is more expensive, said Michael Murphy, head of lodging and leisure capital at First Fidelity Companies.
“There is money available for virtually everything, but borrowers have to be more patient,” he said. “It takes twice as long to secure capital today.”
“If you’re a deal junkie now, you’re going to have a problem tomorrow,” added Laurence Geller, CEO of Strategic Hotels & Resorts. “I’ve joined ‘Acquisitions Anonymous.’”
Neil Shah, president and COO of Hersha Hospitality Trust, perhaps summed it up best: “If you own hotels right now, you’re happy because they’re performing, but financing new deals is tough.”
Murphy said many bankers consider hotel real estate too risky because of bad deals done in the past. He suggested investors spend time with their bankers, educating them on the specific hotel asset class.
“Share your STAR report,” he said. “Some of them are looking at life through a rearview mirror.”
Kind of deals
The hotel industry is at the point in its cycle where hotel owners will begin considering portfolio sales, said Paul Whetsell, CEO of Loews Hotels. He said Loews is focused on expanding its brand’s distribution mainly through one-off transactions in primary markets in the United States. However, he said Loews won’t ignore merger-and-acquisition opportunities.
“I’ve been able to grow some companies pretty rapidly, and that’s very difficult to do one transaction at a time,” he said.
Whetsell said Loews has a core competency in the group business—the company owns and operates group-oriented hotels—so his philosophy is to broaden the customer base by adding more commercial or corporate-type hotels.
Marriott International made a big splash with its recent acquisition of the Gaylord Hotels brand, and Tony Capuano, executive VP of global development, said the company will entertain additional merger-and-acquisition deals that would fill gaps in Marriott’s business similarly.
“We look at M&A as an opportunity for new growth platforms, and any M&A activity from Marriott would be largely fill-in rather than transformational—opportunities to plant flags in areas where we’re significantly under represented,” he said.
Gellersaid there are plenty of assets available in the urban markets where the bid-ask spread is narrow. In the resort segment, he said the bid-ask spread is still wide.
“I actually think there’s a lot more product on the market than people think,” Geller said.
On the flipside, Shah said Hersha has been disappointed by the lack of opportunities. Sellers have held on for so long now that they want to hold on a little while longer, he said.
“Since we’re only focused on five or six markets, we’re pleased if we can find one or two to acquire in a year,” Shah said. “We’re not spreading our geography to find deals.”
Katie Taylor said since Four Seasons Hotels and Resorts bought the Regent brand 20 years ago the company hasn’t been focused on large merger deals. Fifteen of those assets remain in Four Seasons’ portfolio today.
“Adaptive re-use is a big part of how we will grow the portfolio,” Taylor, the company’s CEO, said. “And we will look more at small collections that could be bolted on.”
She said there is a theory that more consolidation in the industry is necessary to create synergies. Four Seasons, however, “doesn’t think about it in that way.”
New-construction financing can be found, but only through the right relationships, the experts said.
Capuano said Marriott partners are finding success in developing in the select-service sector.
Murphy said new-construction financing is being secured mostly in primary markets. In secondary and tertiary markets, financing can only be secured “off signatures,” or between partners with close relationships.
“When you get into markets like Atlanta and Chatanooga, you just have got to take more time to get something done,” he said. “Our firm secures construction financing, and we’ve got one deal that took two years. Today, I don’t think it would take two years, so we’ve got a tailwind.”
Murphy asked attendees to remain optimistic that deals will get easier.
“Don’t despair,” he said. “There’s been a negative feeling around this conference, but in private everyone appears rich and happy.”