A Flood of Money

At no time in the history of the hotel industry has so much money been available to build, buy, redevelop and reposition lodging properties. Yet, unlike past industry cycles, this flood of money has so far been disciplined in its dispersal. Lenders have shown restraint by generally only offering funds for deals that make sense.

A new survey by Hotel Brokers International, in conjunction with Lodging Hospitality magazine, shows that financial sources have plenty of money and they're ready and willing to lend it for the right deals, even for new-development projects that make both economic and market sense.

“We're at an amazing point in the lifecycle of the lodging industry,” said Bruce Lowery, senior vice president of GMAC Commercial Mortgage Corp., at the recent Hotel Investment Conference in Atlanta. “There is a flood-tide of capital available in our business.”

This tsunami of financing led to a record $21 billion in hotel transactions of more than $10 million each in 2005, outpacing the previous year by a whopping 63 percent. As reported by Jones Lang LaSalle Hotels, the 2005 volume of large transactions was more than double the previous highs registered during the REIT boom years of 1997 and '98.

“The appeal of hotels as an asset class and the subsequent strength in capital market activity is due to a combination of factors: strong industry fundamentals, controlled levels of new supply, high availability of both debt and equity capital, favorable risk-adjusted returns, a lackluster stock market and an overwhelmingly optimistic outlook for the lodging industry,” says Arthur Adler, managing director and CEO-Americas for Jones Lang LaSalle Hotels. “In addition, the number and diversity of buyers, including off-shore investors, and an increasing interest by owners to bring properties to market has spurred activity.”

The company tracked 218 U.S. hotel sales above $10 million in ‘05, representing an average price per room of $146,400. Eight of the 10 largest single-asset transactions were more than $250 million, topped by Dubai Investment's $440-million acquisition of the 605-room Essex House in New York City.

Several respondents to the Hotel Brokers International survey echoed the robust transaction activity reported by Jones Lang LaSalle. Hotel sales activity has been strong at all levels of the market.

“We increased our number of hotel finance transactions in 2005,” says Mark Gordon of Sonnenblick Goldman. “We expect this trend to continue for the foreseeable future and estimate underwriting more than $2 billion in transactions this year.”

Laurie Ivy of PMC Commercial Trust extended 40 loans last year with a total value of $55 million, or an average of about $1.4 million per loan. On the other end of the spectrum, Andrew Benioff says his RFG Hospitality Capital lent $385 million in 22 loans. Similarly, Sam Merchant's Merchant's Financial Group financed 17 deals for a total of $375 million.

THE SURVEY SAYS

An analysis of the HBI survey results shows a broad appetite among lenders for all kinds of deals in diverse segments and locations. While the survey sample included a mix of lenders, about one-fourth of participants are traditional mortgage brokers and SBA providers. Other participants included national and regional banks, hotel REITs, investment bankers and others.

All respondents say they finance acquisitions and refinancing, and most say they will lend for renovation and construction properties. About three-fourths of the lenders will also finance turnaround or underperforming properties.

The preference among the lenders seems to be full-service hotels, yet most say they will also provide funds to limited-service hotels, resorts and extended-stay properties. Fewer than 10 percent of the group say they'll finance timeshare properties, reflecting the specialized nature of that segment of the hospitality business.

The sweet spot for hotel lending is in the mid-market: 90 percent of lenders provide funds to that segment; three-fourths of companies will lend to upscale hotels, while just 68 percent say they'll provide financing to economy properties. And perhaps surprisingly, most of the lenders in the survey say they finance independent properties as well as branded hotels.

Location doesn't seem to matter, as a majority of lenders say they'll finance properties in suburban, urban, highway and airport locations.

Here's a review of survey responses on loan terms, pricing and requirements:

  • Typical loan terms range from two to 10 years, while banks and SBA loan providers say they extend loans as long as 25 years. Amortization periods range from 10 to 30 years.

  • Debt ratio coverages are typically from 1.35 to 1.5. For SBA lenders, coverage is 1.25. Loan-to-value ratio average is 75 percent, although SBA providers say they'll go as high as 85 percent.

  • A majority of respondents say they use trailing 12 months of financials or a previous year's profit and loss statement to compute debt coverage ratios. Some other lenders use numbers from a full stabilized year to make the computation.

  • SBA lenders say they set rates based on prime rate and then adjust them quarterly. Mortgage brokers and investment bankers rely on LIBOR or U.S. Treasuries as they rate benchmarks. Management fees are typically four percent, while four to five percent is the standard for required reserves for replacement.

  • A majority of lenders extend non-recourse financing for stabilized properties, and most say their loans are assumable provided the new borrowers have satisfactory operating experience. Also, most loans can be pre-paid, although they carry a prepayment penalty or charge.

  • Standard loan package requirements include an appraisal, phase 1 environmental and engineering report and a feasibility study, particularly for new-construction projects.

2006 AND BEYOND

“It's a great time to be either a borrower or lender in the hospitality business,” says Greg O'Stean, senior vice president, hospitality financing, for GE Franchise Finance. “The market is very liquid and there is a lot of capital chasing deals. Best of all, I see no roadblocks ahead.”

This optimism undoubtedly means the flow of hotel financing will continue, or, as one lender said, “With the strong outlook for hotel operating performance, debt financing for hotels will continue to be plentiful.”

About half of the survey respondents believe interest rates will remain stable this year. Of those who predict rate hikes, the range of forecasted increases was from one basis point to as many as 50, with a variety of responses in between. Clearly, there is no market consensus on rate movement.

Many lenders believe levels of financing will increase from last year's record totals. Gary Dunkum of Live Oak Capital, for example, predicts “a solid increase in hotel lending in '06.” His firm expects to underwrite $150 million in hotel loans this year.

Some respondents urge caution. One banker noted that while he expects to be even more active in '06, he expressed concern that the price of acquisitions and aggressive leverage by inexperienced players in the industry could cause problems in the market.

Rising prices for hotel acquisitions may soon lead to a new wave of hotel development. Respected industry analyst Steve Rushmore of HVS International believes the tipping point is near in which the economics of building hotels will be more attractive than for acquisitions. His prediction: “By the end of 2006, most of the hotel funds and investors that are buying up existing hotels at rapidly inflating prices will shift their focus toward new development.”

His advice, then, for hotel owners is to sell their properties in the next six to 12 months, a period that he believes will be the peak of the market.

Investor interest in the hotel industry remains strong. Another survey by Jones Lang LaSalle in February showed that 65 percent of U.S. hotel investors intend to buy properties in the short term. The good news for owners is that across North and Latin America, there are five potential buyers for every seller. In urban gateway markets like San Francisco, Chicago, New York, Washington, D.C. and Hawaii, there are 10 buyers for every seller.

According to the survey, investors are less interested in new construction, with fewer than 10 percent saying they have an appetite for new development.

Shorter investment windows by many investors should continue to propel dealmaking in the industry. A new survey says many private equity firms are shrinking the traditional window for hotel investments from three to seven years to, in some cases, two to four years. Some very aggressive investors are seeking to exit their investments in as few as 18 months.

On a macro level, the number of hotel company mergers and acquisitions should accelerate this year, says PricewaterhouseCoopers. According to the consulting firm, there will be between seven and 12 lodging M&A transactions this year, compared to nine such deals in each of the last two years. In addition, the firm expects between two and five initial public offerings, which is in line with the past two years (there were four IPOs in 2004 and two last year.)


Visit www.LHonline.com for more information and related article.

Benchmarks, as of March 27, 2006
Prime Rate 7.5
10-Year Treasuries 4.71
LIBOR Rate, 3-months 4.94

Silver Plate Award to IHG's Porter

Brand builder and franchising master Stevan Porter will be the 48th recipient of the coveted Stephen W. Brener Lodging Hospitality Silver Plate Award at next month's New York University International Hospitality Industry Investment Conference. Lodging Hospitality Publisher Gary Dietz will present the award on Monday, June 5 to Porter, who is president, the Americas, for InterContinental Hotels Group.

Porter, who is also global franchise leader for the London-based company, oversees a portfolio of more than 2,800 properties in the U.S., Canada, Mexico, Central and South America and the Caribbean. Under his leadership, IHG purchased its sixth brand, Candlewood Suites, and launched a seventh, the lifestyle Hotel Indigo flag.

As usual, nearly 2,000 hotel industry owners, operators, developers, brand executives and financial experts will jam the New York Marriott Marquis on June 4-6 for the 28th edition of the NYU Conference. And as in past years, the focus will be squarely on the challenges and opportunities in building, financing and operating lodging properties. The conference will feature a mix of general sessions, panel discussions and social opportunities. Some highlights:

  • Luncheon presentations include a speech from CNBC anchor Maria Bartiromo and a one-on-one interview conducted by Conference Chairman Jonathan Tisch with advertising guru Donny Deutsch.

  • The always-gregarious, sometimes-controversial IREFAC panel will feature nine finance and brand executives. Steve Rushmore of HVS International and Tom Corcoran of FelCor will referee the session.

  • Condo hotels, the hot topic of any recent lodging industry meeting, will be explored in three separate panel discussions.

  • NYU Associate Dean Lalia Rach will moderate a CEO panel that will include Jack Adler of Loews, Mark Harmon of Auberge Resorts, Matt Hart of Hilton and Chuck Ledsinger of Choice Hotels.

  • Statistics are another staple of the conference. In one general session, Rushmore of HVS and Randy Smith of Smith Travel Research will present their industry updates. On another panel, Bjorn Hanson of PricewaterhouseCoopers, Bernard Baumohl of The Economic Outlook Group and David Wyss of Standard & Poor's will debate current and future trends in the economy.

  • Industry segments will be dissected in a number of panel sessions. Among the segments covered will be luxury, select service, full-service, lifestyle residence clubs and limited service.

  • Arne Sorenson, executive vice president and CFO of Marriott International, will receive the IREFAC C. Everett Johnson Award at the luncheon on Tuesday, June 6. IREFAC panel moderators Rushmore and Corcoran will make the presentation.


For more information on the conference and to register online, go to www.scps.nyu.edu/hospitalityconf

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