Good lending environment upcoming—time to take advantage

Signs point to a continuing strong hotel transactions market in 2014, so buyers and sellers are identifying trends and implementing strategies to take advantage of financing and market strength while times are good. Suril Shah, head of North America hospitality acquisitions for Starwood Capital Group, summed it up by saying, “it’s time to take a bold step with your portfolio.”

“Transaction volume in 2013 was way up, and now we’re looking at a 10- to 15-percent increase in [global] transaction volume in 2014, even with Asia dipping,” he said. “People with assets will benefit.”

Strong demand for hotel rooms is the first factor pointing to a good lending environment. “Hotel demand is highly correlated with GDP growth,” said Deric Eubanks, SVP of finance for Ashford Hospitality Prime. “GDP growth now is reasonable, allowing hotel demand to continue to grow.”

Low interest rates also play into this equation. Christopher Jordan, EVP of Wells Fargo Real Estate, said the slow-but-moderate GDP growth plus what he called “abnormally low” interest rates “may be a blessing.”

While distinct types of buyers have dominated parts of the cycle in the past, it really is a mixed bag right now. Certain trends do apply, but experts say there is hotel product for every type of interested investor. “Private equity is focused on existing product right now,” said Joel Eisemann, CDO of the Americas region for InterContinental Hotels Group. “Right now you’ll get the best pricing on existing hotels. A lot of [owner/franchisees] are selling assets to private equity and using that cash to build new product.”

Eisemann and Liam Brown, president of the U.S. and Canada select service & extended stay lodging and owner & franchise services, The Americas, for Marriott International, agreed that buyers clearly are looking ahead to their exit strategies, and institutional-quality assets with strong brands will sell easier down the road.

On the real estate investment trusts front, panelists said to not expect lodging REITs to continue trading at the lower end of REIT classes. “In the mid to late 1990s, hotel REITs were trading at the highest side of the industry,” said Leslie Ng, CIO of Interstate Hotels & Resorts. “I think we’ll see hotel REITs pay higher dividends over the next 12 to 20 months.”

Just as there’s an asset for every buyer, different firms are operating on different lending terms. For those dealing in commercial mortgage-backed securities, expect 2014 to bring more of 2013’s positives. “Estimates for 2014 are already calling for the CMBS market to exceed $100 billion this year,” said Angelo Stambules, SVP of Hunter Hotel Advisors. And transitional lenders like Blackstone Group, who buy, rehab, grow cash flow quickly, then exit, are having luck with larger single assets and also with limited-service portfolios, as a rule.

For those working with longer-term loans, like CMBS, changing interest rates spark interest, though the threat of rising rates isn’t worrisome to most. “We know rates will go up, we just don’t know when,” said Joe Vassallo, managing director for Natixis Real Estate Finance Americas. “We know it probably will happen within the term of most of the loans we’re writing today. Does it change the way we look at things? Yes, but we look on the transactional side, and we have to see real growth in the markets of the properties we look at…in order to take out that loan and face a higher-rate market down the road.”

Bridge lenders working with private equity are also finding market conditions just right for a hotel project. “Our litmus test is the Main Street lender in that middle-market space,” explained Jon Wright, president and CEO of Access Point Financial. “What we see is more and more community banks that get in the project; they see how it’s repositioning and getting investment, and then we see owners that hold at that point because there’s no upside for the community banks to stay in. So we take projects that we know have great management and sponsorship.”  

As hotels trade, franchises are born, giving brand execs buy-in. For Steve Joyce, president and CEO of Choice Hotels International, now is the time to take advantage of financing pick-up. “Don’t wait,” he said. “You want to open hotels, have three years or so to stabilize them, and then when the cycle turns you’ll be in better shape.”