Why Lenders And Investors Love The Hotel Industry

Hotel industry investors and lenders are probably sleeping better these days. The sector is seeing improvement in key performance metrics, and certain fundamentals are helping to generate interest from investors and lenders.

‘The hotel industry is doing pretty well and steadily improving,’ says Jim Butler, chairman of the Global Hospitality Group for the law firm Jeffer Mangels Butler & Mitchell LLP in Los Angeles. ‘On a national basis, 2012 was the year that revenue per available room (RevPAR) finally matched peak levels before the crash, although we will not match prior peak levels on an inflation-adjusted basis for a couple more years.’
According to data from Hendersonville, Tenn.-based STR, the U.S. hotel industry reported increases in all three key performance metrics for the fourth quarter of 2012 in year-over-year measurements. The hotel occupancy rate increased 2.4% to 56.6%, average daily rate (ADR) rose 4% to $106.54 and RevPAR was up 6.5% to $60.34.

Rate growth is important, Butler says, because during the recession, hotels discounted rates in order to raise occupancy levels. That is not happening now. Butler notes that economic uncertainty, the still-high unemployment rate, the election, the fiscal cliff talks and troubles in Europe did not stop business or leisure travelers from taking trips and staying at hotels.

‘In fact, the hotel room demand for the fourth quarter of 2012 was quite robust,’ Butler says. ‘The stage is set for continuing improvement in hotel industry fundamentals and hotel valuations at least through 2017. This presents a very attractive scenario for investors.’

Investors are indeed interested. Jatin Desai, chief investment officer for Peachtree Hotel Group in Atlanta, says the increase in real lodging demand across all segments, plus the low cost of capital, has caused a resurgence of deal activity.

‘Capital inflows to the hospitality industry are on the rise, which pushes up pricing for acquisitions,’ he says. ‘Most hotel investors anticipate a robust recovery in ADR and RevPAR in the near future to justify acquisitions and development opportunities.’
Alan X. Reay, president of Atlas Hospitality Group in Irvine, Calif., observes that investors have been waiting for these positive signs. ‘Many buyers who have been sitting on the sidelines have jumped back in as they see prices rebound from the bottom,’ he says.

Reay adds that the improved economic fundamentals and stronger cashflows mean there will be more buyers than sellers in many markets. Some of the strong buyers include real estate investment trusts (REITs), which have pushed down cap rates with their low cost of capital.

‘We are even seeing more lenders get back into the market with very attractive rates and terms, as low as four percent for prime deals with strong borrowers,’ he says.

Hunter Hotel Advisors, in its First Quarter 2013 Industry Update, predicts a jump in investor interest this year, including an increase in activity by equity funds and REITs. The increase is largely due to investors broadening their interest from only the major markets to secondary markets.

In addition to investor interest, the outlook for hotel lending is positive, says Angelo Stambules, senior vice president of capital markets for Hunter Capital Markets in Bethesda, Md.

‘We are seeing continued improvement over positive trends that started last year,’ he says. ‘Wall Street primarily has led the charge in terms of appetite for hotel lending.’ He adds that higher-leverage bridge loans, construction and renovation financing continue to be difficult, but commercial mortgage-backed security (CMBS) financing is returning to the sector.

‘If Wall Street stays as aggressive and hungry for hotel debt product, it will create a competitive pressure on other types of lenders,’ Stambules says. ‘The commercial banks and life companies will have to get a little more aggressive in their underwriting to maintain or improve their market share.’

Other experts are also seeing a return of CMBS financing.

‘CMBS lenders are getting back into the market, offering non-recourse financing with interest rates in the range of 4.3 percent and loan-to-values of up to 70 percent,’ says Anwar Elgonemy, director of investments for San Francisco-based Equinox Hospitality. Elgonemy adds that the upscale market remains the most attractive buying opportunity, and the mid-scale market remains the second-most attractive. He also predicts foreign investors will be active in 2013.
Reay believes prices will continue to increase this year and there will be strong sales volume. ‘In certain markets, we are seeing new hotel development come back, especially for the higher-end limited service brands,’ he says.

There is more construction now than last year. According to the January 2013 STR Pipeline Report, U.S. hotel development comprises 2,637 projects totaling 307,289 rooms in the construction, final planning or planning stages. That represents a 4.9% increase in the number of rooms in the total active pipeline compared with January 2012 and a 38.3% increase in rooms under construction.

Butler predicts that the recovery will spread to the top 25 markets.

‘The feeding frenzy to buy hotels in New York, San Francisco, Los Angeles, Miami and Boston will spread to other major urban areas and even to secondary and tertiary markets as buyers look for value and find it,’ he says. ‘Hotels will be added to major regional malls and shopping centers over the next several years as the retail sector has recovered sufficiently. Owners want to harvest the synergies of having a major hotel component in their malls, and they have the cash to do it.’

Nora Caley is a Denver-based freelance writer. She can be reached at noracaley@comcast.net.


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