Money is Still Available; It Takes Longer to Obtain
Don’t try to tell hotel entrepreneurs to be patient. But that’s exactly what they need to be in order to find financing for lodging deals, said multiple members of a panel at this week’s New York University International Hospitality Industry Investment Conference at the Marriott Marquis in New York.
“Money is available for just about any project but you must be more patient. Today, it takes about twice as long to secure capital than it did five years ago,” said W. Michael Murphy, head of lodging and leisure capital for First Fidelity Companies during a general session that included members of the Industry Real Estate Financing Advisory Council of the AH&LA. As example, Murphy said he recently closed a construction financing deal that took two years to consummate.
Laurence Geller, a noted industry wit and president and CEO of Strategic Hotels & Resorts, put the situation in a more pithy way: “If you’re a deal junkie, you’ve got a real problem. Me, I’ve joined ‘Acquisitions Anonymous.’”
And while the speakers in the IREFAC panel spoke of the need for patience, they also agreed money is available for nearly all kinds of transactions. In fact, as Capital Trust CEO Stephen Plavin said, “There’s actually a lot more capital than there are opportunities in the marketplace [for deals].”
In part, he said, the current environment is because many of the troubled loans issued in 2005 and ’06 are being worked out by lenders and servicers with few of them coming to market as anticipated. Yet, Plavin continued, the environment can change on a dime.
“The financing climate was improving until the last few weeks when the unsettling conditions in Europe caused the market to seize up,” he said. As a result, some lending commitments have since been withdrawn. Thursday’s sharp upturn in the Dow reinforces his opinion that sentiment can shift quickly in this economic environment.
Neil Shah, CEO of the Hersha Hospitality REIT, echoed Plavin: “We’ve seen some opportunities for transactions on assets that require the purchaser to add value [to the hotel], but in general we’ve been disappointed in the volume out there. I believe it’s mostly because so many properties are performing better.”
Murphy provided some details on what kind of financing terms are available for purchasers who can find deals. On a pure acquisition where the buyer intends to maintain the existing brand on the hotel, he said it’s possible to attract capital at an 11% or 12% debt yield. “Of course, you’ve often got to deal with a PIP on top of that so you end up with a package that’s somewhere in the range of 60% leverage and 40% equity,” he said, noting it’s the kind of deals CMBS lenders have found attractive.
“However, most of the deals we’ve seen are hairier than that where those acquiring the asset see value in changing the brand—generally upbranding, although there have been some downbranding opportunities as well. These deals are slightly more expensive and sometimes have a recourse requirement.”
Murphy also said while money for ground-up construction is hard to source, developers should begin to lay the groundwork for these deals. “It’s a good idea to spend time with your banker to educate him [or her] on this asset class,” he said. “And you’ll find outside of New York most bankers and insurance companies don’t really care about what’s happening in Greece.”
Several representatives of ownership and brand companies on the panel shared their strategies for expansion. At Marriott, said Executive Vice President and Chief Development Officer Anthony Capuano, “We’re more interested in fill-in type transactions than we are in transformational deals,” citing its 2010 co-branding deal with AC Hotels in Europe and Latin America and last week’s acquisition of the Gaylord Hotels brand and management contracts. “We’ll look at M&A opportunities that either create a new growth platform, that help us plant our flag in areas in which we’re underrepresented or that realize real efficiencies for us.”
The newly aggressive Loews Hotels is also following a fill-in growth strategy, at least for now. New President Paul Whetsell said the firm is interested in acquisitions that help plug gaps in its distribution in gateway cities in North America. A good example is Loews’ purchase last week of the Renaissance Hollywood (CA), which will convert to the Loews brand following a renovation.
“Yet, it’s hard to grow rapidly one deal at a time, so having the liquid parent we do (Loews Corp.) we’ll have our eye on M&A, especially when the industry cycle approaches maturity,” he said.