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Hotels Haven’t Been This Financeable in 11 Years

Carrie Rossenfeld Hospitality & Tourism

HREC recently co-sponsored the 28th Annual Meet the Money National Hotel Finance & Investment Conference in Los Angeles. Here, Greg Porter, Carlsbad, California–based SVP of mortgage brokerage for HREC Investment Advisors, presents insights from hotel industry investors, managers, lenders, and brand representatives at the conference to provide a snapshot of where things stand in the world of hotel investment and finance.

“In summary, this is a great time to sell or refinance as the industry sails forth, with most storm clouds being pushed out toward the horizon, while rising interest rates and labor costs emerge as the primary specters,” Porter says.

Following are more nuggets from the event, offered by Porter.

Buy/Sell/Refinance Decisions
1. Make no mistake — this is a seller’s market, but ripe for those who believe this cycle has legs.
2. Cap rates — 8 percent fully loaded is the standard for well-flagged select service in secondary markets. Industry analysts predict a modest uptick given rising interest rates. (Hello! Today, 10-Year Treasuries touched 3.11 percent, a 7-year high!)
3. How low is low? Ashford bought the Ritz Sarasota at a 6 percent cap on T-12. $1B Hyatt portfolio traded for a 5 percent cap on T-12 and 6.5 percent on proforma.
4. The historic gap between full service and select/limited service cap rates is shrinking (or gone.) The stronger select/limited-service flags have made the leap to “institutional grade.”
5. Lodging Industry Investment Council (LIIC) — Of the respondents, 68 percent say they anticipate refinancing in the next 12 months, 75 percent say they anticipate selling, and 93 percent say they are looking to buy. Most expect rising interest rates.
6. Debt-fund competition — “It’s a race to the bottom.” Last year’s Libor plus 5.5 percent is today’s Libor plus 4.5 percent, which of course is offset by the commensurate 1 percent rise in Libor from a year ago.
7. Hotels haven’t been this financeable in 11 years.

Should We Be Concerned About Where Are We In The Cycle?
1. RevPAR projections are up — Hilton and Marriott just raised their RevPAR growth projections based on an outperforming Q1 2018.
2. Pace of Development is moderating — Development is expected to keep a lid on occupancy growth but not ADR. Rising construction costs and cost of money are preventing unfettered growth.
3. CMBS bonds — When prices spike (i.e., spreads sink), it’s an indicator of risk mis-pricing and a sign of a top. So far, bond pricing hasn’t gone out of whack vs., say, 2007.
4. Consensus among economists — New tax laws, low unemployment, and a variety of other economic indicators point to a continued expansion for the next 18 to 24 months.

Current Hotel Operating and Underwriting Issues
1. Talent retention is critical — especially with full service! Keys to retention are training and employee recognition as much as compensation.
2. The right GM makes all the difference. You have to build the right culture, and it starts with the GM.
3. Payroll costs are rising fast. California minimum wage is set by law to rise from $11 to $15 (36 percent) by 2022.
4. Technology — If properly employed, technology can help offset rising payroll costs. Self-check-in, keyless entry, and robot delivery will gain acceptance.
5. Active revenue management — Your competition is using it; you’re leaving money on the table without it.
6. Does Airbnb matter? Yes, if you are in a market that counts on maximizing revenue during city-wide events that sell out your hotel. It’s harder to double rates on these weeks like the good old days, as Airbnb sops up demand.

Brands
1. An “A” flag can offset an inferior location in an era where smart phone GPS makes finding a poorly located hotel easier.
2. Soft brands work — Hotel customization and localization help the long-term value of the asset.
3. Dual (and tri) brands work — Shared services provide efficiencies, one location with multiple room options captures a wider range of demographics, and defensively you block others from building that second and third flag.
4. No one appreciates secondary brands — until the key money is offered!
5. Boutique? — “Superior revenue management and social media can drive penetration as well as a franchise at half the cost” in the right market.

Hotel Buying/Development Pro Tips
1. Know the gaps in your market.
2. Don’t count exclusively on market studies — base your decision on your own intel.
3. Building your first hotel? – Find a partner with the skill sets you don’t have and you’ll save on costs and time to market.
4. Want to build cheap? — Motel 6 in the low $60,000 per key before dirt.
5. Want to be a luxury kingpin? “Earn your stripes with a soft brand, then take the training wheels off and ride on your own.”
6. Design and training “drive ROI.”
7. Building? “Add 50 percent to your timeline.” Construction lenders haven’t seen a recent deal come in on budget and on time.