Fitch: U.S. Hotel Debt Capital Access Good, Some Concerns Present


NEW YORK—Lenders will continue to make debt capital widely available but some evidence of weaker loan underwriting standards and non-economic development as well as the shadow lender impact on the lending environment are longer term concerns, according to Fitch Ratings.

Secured property-level mortgage lenders are constructive on hotel collateral, given higher yields/returns relative to other commercial property types (i.e. multifamily). In addition, balance sheet lenders across the size spectrum are lending for hotel acquisition, refinancing, and, increasingly, new construction.

Pricing remains competitive; underwriting metrics are weakening. Lenders have generally loosened debt service coverage (DSCR) and loan-to-value (LTV) ratio requirements to achieve higher yields amid heavy lending competition. Higher assumed property values (e.g. lower cap rates) and more interest only (I/O) loans with lower debt service coverage understate the amount of deterioration in issuer-underwritten LTVs and DSCRs within Fitch-rated U.S. CMBS conduits. Debt yields and Fitch stressed credit metrics, which are not affected by these factors, have weakened markedly.

Loan structure is also bending, and Fitch expects terms to steadily weaken for the balance of this upcycle as lending competition intensifies. I/O and partial I/O loans are more readily available. Lenders remain focused on cash management; however, less stringent springing cash sweeps with lower coverage triggers are increasingly common. Lenders are reportedly holding firm on key structural elements, such as requiring seller non-disturbance agreements (SNDA), as well as tortious interference clauses.

In addition, Fitch views non-depository financial institutions (i.e. shadow banks) as a potentially destabilizing force within the hotel lending market. Shadow banks are helping to shape the lending environment. They have heighted loan competition and contributed to weaker underwriting by frequently making loans at higher LTVs.

Shadow banks arguably are less likely to service the market if/when lodging fundamentals deteriorate, in Fitch’s view. Their lending appetites are not conditioned by liabilities arising naturally from operating activities (i.e. deposits and premiums) in contrast to traditional regulated balance sheet lenders such as banks and insurers.

U.S. May Performance Data: 5 Things to Know

Five Things to Know:

“The United States hotel industry reported the highest occupancy of any May on record, while annualized occupancy was still at 65%.  That means all key performance indicators again set new records on an annual basis, according to an analysis from Jan Freitag, Senior VP of Strategic Development at STR, the parent company of Hotel News Now.”


How to Deal: Leveraging Assets for Optimal Returns


The hotel business is attracting a lot of investment money and there’s a good reason for that. “The market fundamentals are as good as we’ve seen since we’ve been in this business,” says Jim Merkel, president and CEO of Columbus, Ohio-based hotel investment firm Rockbridge. “And we expect the high level of activity to continue for the next 18 months.” With demand continuing to outpace supply and RevPAR growth breaking records in several areas of the country, it’s a good time to own and operate a hotel. These conditions are driving a flurry of acquisitions, new development, and renovations of every scope throughout the United States. However, in such a robust transaction environment, it can be difficult to get good deals done, especially with so many interested parties circling every new opportunity.

“Nobody rings a bell to tell you when an up cycle starts and when it ends, so you have to focus on executing the particular projects that make sense to your business,” says Beau Benton, president of LBA Hospitality, a property development and third-party management company based in Dothan, Ala.

You have to move fast but still do your due diligence, he says, since the amount of money moving into the lodging space increases the chance that some deals will move forward simply because the capital is available to do them. “You have to understand the 30,000-foot view of each market you’re going into and be able to zero in on all the factors impacting hotel demand,” says Benton. The process of identifying the right submarket, quantifying the demand generators, seeing what the flag need is, and figuring out the appropriate product segment is all happening at a faster pace than ever before, making it that much more difficult to find out when something doesn’t add up.

“We’re at the top of the cycle where everything is moving as fast as it can,” says Benton. “Now more than ever­—sometimes the best deal is the one you don’t do.” Merkel agrees that there’s something to be said for being selective. “Experienced firms know when to walk away from a deal,” says Merkel, adding that there are plenty of opportunities out there with so many owners and developers looking to take advantage a lending environment that’s been freed up.

According to Merkel, Rockbridge tends to be specific about the deals it does and is able to execute quickly when the right opportunity comes along. “We reposition, recreate, and reinvent properties to create an experience that’s intensely focused on what guests are actually looking for in a particular area,” he says. “This is an approach that’s more difficult to execute but one that never seems to go out of style.”

To that end, Merkel spent the past four years building up the development and construction arm of the company. “As we customize each project, it’s become critical for us to make sure the dollars are going where they need to go during the design and development phase of the project in order to have the most impact on guest experience.”

A good example of this approach in action is the 173-room, boutique hotel Rockbridge is building in Savannah, Ga. Located on the site of the oldest bottleworks factory in America, the new property will incorporate historic elements from the old plant in its design. “The hotel is right on River Street, an area that’s difficult to develop because of historic preservation restrictions,” says Merkel. These restrictions have put the project on the slow track for the past few years, but now development is really picking up. “We plan to leverage what Savannah has to offer in this hotel and really localize the experience through the property’s look and feel by providing distinctive food and drink experiences.” Slated to open in late 2016, the new hotel will be part of Starwood Hotel’s Tribute Portfolio soft brand.

This is the latest move in what’s been a busy year for Rockbridge. At the end of 2014, the private equity firm closed its largest-ever fund at $438 million. They immediately invested in deals across the country that include the Aqua Waikiki Wave Hotel in Honolulu, the Cliff House Resort & Spa in Maine, and a new-build AC Hotel in San Jose, Calif.

“We are well capitalized and in a very good position to execute on our investment strategy,” says Merkel. “We can focus on doing the right thing for our assets and position them correctly for what the end user wants.”

Considering how much guest preferences have changed in recent years, this idea of creating an ideal experience for them is a moving target. It used to be that most guests—and business travelers especially—wanted the same thing everywhere, they didn’t necessarily care where they were. “They just wanted to go to their room, be by themselves, and order room service,” says Merkel. “Today’s guests want to experience what an area has to offer. And that’s where we can bring value to the deals we make going forward.”

None of this matters if you can’t line up the money behind your project, and that’s where maintaining long-term partnerships comes into play. “While the capital markets are healthy and there’s more interest in hotels today, you still need to have a good track record and good sponsorship to get your projects financed,” says Merkel. “If you’re a known entity, you stand a better chance of getting your deal done.”

Successful dealmaking often involves placing long-term bets with limited information. Rockbridge’s Jim Merkel offers a few rules for successful dealings.

Don’t underspend on the asset. Make sure you invest the right amount of money into assets so you don’t have any deferred maintenance in a hotel. “You can’t survive long term if you buy an asset and don’t fix it, especially when it comes to the infrastructure, as these are the things that can negatively impact the guest,” he says. “And when the market gets soft or demand goes down, the hotels that don’t address these issues get harmed the most.”

Stay disciplined in your approach. “We’ve carved out a niche in doing deals that repositions assets to create value,” Merkel explains. This means taking hotels that are well located, that have been under invested in and therefore are under performing, and investing the correct amount of money and positioning the hotel correctly to create value. “This means creating an experience that compels guests to pay a premium over the alternatives in the market.”

Try to create a better box. Matching the right location with the right property will drive a lot of revenue. “If you have a good physical asset that meets consumer needs, then you’re going to have success,” Merkel describes.

Ashford Trust shifts gears, drops Select plan

Five months after announcing a platform devoted to owning select-service hotels, Ashford Hospitality Trust is reversing course.


DALLAS—Ashford Hospitality Trust’s decision to scrap its previously announced plan to have an ownership platform focused specifically on select-service assets will help investors and investment analysts better understand its strategy, intentions and value proposition, according to its CFO and treasurer Deric Eubanks.

Ashford Hospitality Trust, a real estate investment trust that trades on the New York Stock Exchange under the symbol “AHT,” will predominantly focus on upper-upscale, full-service hotels in geographically diverse U.S. markets after announcing Friday that it is reversing a decision announced in January to launch Ashford Hospitality Select during 2015. The company had planned to spin off 16 of its 60-plus select-service hotels to get Select up and running. 
The announcement will not affect the standing of Ashford Hospitality Prime, a spin-off REIT formed in 2013 to focus on luxury resorts in gateway markets, Eubanks said. AHP’s strategy focuses on high-end hotels in the top six or seven markets in the U.S. AHT is more geographically diverse and focuses on full-service properties in the U.S.
According to the Baird/STR Hotel Stock Index, AHT closed trading on Thursday down 3.15% to $8.30 per share. The Stock Index itself was down 0.5%.
“We made an announcement in January that we wanted to form a select-service strategy, and initially we thought we could do it a few different ways,” Eubanks said during an exclusive interview with Hotel News Now on Thursday. “We ultimately concluded, and after visiting with shareholders as well, it doesn’t make sense to spin those hotels off into a separate REIT. We think the market was a little concerned we might do that.
“We’re trying to define the investment strategy a little bit better,” he added. “Investors really wanted us to clarify our strategy going forward. … With the announcement that we’re no longer focused on select assets, it’s a significant change in strategy.”
The intent of the shift in strategy is not to put AHT in a position to merge with or acquire another REIT, nor is it to position itself for a sale, Eubanks said.
“The intent was to clarify to the market our strategy,” he said. “Trust is not going to pursue a select-service strategy.”
AHT has 116 hotels comprising more than 25,000 rooms in its portfolio.
As part of the revised plan, the company will sell 23 select-service hotels. AHT owns 68 select-service properties. The portfolio being marketed does not include any of the eight select-service hotels AHT announced it was acquiring in May and closed on 18 June.
There is no timetable for selling the hotels, Eubanks said. Because the environment is ripe for premium pricing on larger portfolios, AHT would prefer to sell them in one transaction. 
Attractive valuations
The attractive hotel transactions environment was a factor in the decision to kill the select-service plan, according to Eubanks. With many assets fetching record sales prices, the timing is right to market select-service product to a sector that’s flush with capital for acquisitions.
“We feel Ashford Trust today is being undervalued by the market,” Eubanks said. “By selling these hotels, hopefully at an attractive valuation, it will show the market where the value of Ashford trust is.”
Ashford Inc., the external advisor to AHT that is run by the same management team, could still develop a select-service hotel ownership platform, but it will not involve the REIT, according to the CFO.
“There are a lot of different ways that Ashford Inc. could go forward with launching a platform like that,” Eubanks said.
Competitive advantage
The 23 select-service hotels Ashford plans to sell are all managed by brands. 
“We’re not interested in assets encumbered by brand management,” Eubanks said. “This portfolio, we feel we’ve gotten a lot of the value out of it … We can’t change the manager.”
Because law prohibits REITs from both owning and operating hotels, the company prefers to have its hotels managed by Remington Hotels. Remington Hotels was founded in 1968 by Archie Bennett—one of the principals that launched AHT in 2004—and manages approximately half of the hotels in the Ashford Trust portfolio and one hotel in the Prime portfolio.
“It’s a huge competitive advantage for us because we do have a third party affiliated with us,” Eubanks said. “We can have a little more control over the operations.”
The arrangement allows AHT to acquire assets that its executives believe are under-managed, install Remington as the operator and create more value for the investment, he said.
Trust will continue to take an opportunistic approach to holding or disposing the balance of its select-service portfolio, he said. Proceeds from the sale of any assets will be redeployed into hotels that fit the revised strategy.
“I suspect over time we will get out of that business and sell (all of) those assets,” Eubanks said.

– See more at:

Data Analysis: Top 25 vs. rest of US Markets

The top 25 U.S. markets historically have outpaced the rest of the country. Is that still the case?
  • Roughly 35% of all rooms sold are generated in the Top 25 markets.
  • Absolute ADR and occupancy values are not as high, but the changes in a recession and a recovery are not as pronounced.
  • The long-run average record for U.S. occupancy was 64.9%, and Top 25 markets have reported occupancy higher than that since mid-2011.
REPORT FROM THE U.S.—The American economy continues to improve, and corporate profit figures as well as unemployment numbers show steady progress. This article examines the performance of the Top 25 markets (as defined by STR) and compares that group to the rest of the U.S. to see if positive changes on the macro level are mirrored across all lodging markets.
Roughly 35% of all rooms sold are generated in the Top 25 markets. Chart 1 shows that during the last up-cycle (2004 through 2006), annualized room demand increased much more strongly in these markets. But during the most recent downturn (beginning in 2009) and ever since then, the demand performance of both groups showed roughly the same trend. Demand declined around 7% and then rebounded, interestingly in lock-step, without any real premium in the larger markets.
Despite the similar healthy demand increases, average daily rate performance always has been lopsided. Prior to 2008, the Top 25 markets generated an ADR premium of around $40, which shrunk during the recession but never went away. Today, room rates are again around $40 lower in the markets outside of the major metros.
Interestingly, the ADR percent change performance seems to indicate that markets outside the Top 25 are a good hedge against the wild ADR fluctuations that the industry experienced during the downturn. While it is correct that the absolute ADR and occupancy values are not as high, the changes in a recession and a recovery are not as pronounced.
Investors have to judge what type of portfolio they would prefer to invest in. That said, over the past few years ADR change has been positive across the board, and all market participants have reported very healthy room rate growth.
Stronger ADR is likely a function of higher occupancies, and the Top 25 markets are leading the U.S. and all other markets no matter what part of the economic cycle we’re in. It is noteworthy that the annualized occupancy for these larger markets has been above 60% in the past 63 months and below 60% in only 3 months since 2002. The long-run average record for U.S. occupancy was 64.9% (achieved in the mid-‘90s), and Top 25 markets have reported occupancy higher than that since mid-2011 (for 48 months).
Over the past few months the percentage point delta between Top 25 markets and the rest of the U.S. has increased to double digits. Since new supply is expected to have an impact on performance in the coming years, it will be very interesting to note how this occupancy point premium will change going forward. For the first four months of this year, supply growth in the larger metro areas was around 1.3% versus only 0.9% in all other markets. It is not unreasonable to assume that this will affect occupancies in the larger markets more and lead to declines in the occupancy premium.
When examining the interplay of monthly room rate growth against the actually achieved ADR, the above mentioned occupancy point premium comes into clear focus. But once again the oscillations of ADR change are more pronounced in the larger markets, despite the obvious occupancy advantages.

But for now, revenue per available room growth continues to be positive, just like it has been in the past 62 months. As supply growth increases we expect eventually occupancies to decline across the board, and it will be interesting to note how hoteliers react with their yield management strategies and if the reaction in the in the Top 25 markets is different from the rest of the U.S.


US hotels report uptick in occupancy


In year-over-year results, the U.S. hotel industry’s occupancy was up 0.8 percent to 67.5 percent, according to STR, Inc.

Tuesday, June 23, 2015 – Occupancy and demand in the U.S. hotel industry skyrocketed during one of the best Mays on record for hotels, according to data from STR, Inc.

“May 2015 broke the occupancy record for the month, and demand broke an unprecedented 104 million room nights,” said Jan Freitag, STR’s senior vice president of strategic development. “Annualized occupancy is still at 65 percent, so all indicators are again at record levels on an annual basis.”

In year-over-year results, the U.S. hotel industry’s occupancy was up 0.8 percent to 67.5 percent; its average daily rate rose 5 percent to $120.64; and its revenue per available room increased 5.9 percent to $81.43.

Freitag also noted that RevPAR in the U.S. has increased for 63 consecutive months. Among the top 25 Markets, Denver reported the largest increases in each of the three key performance metrics. Occupancy in the market increased 6.1 percent to 80.6 percent; ADR was up 15 percent to $123.86; and RevPAR rose 22 percent to $99.86. Six additional markets reported double-digit RevPAR growth, led by Nashville (+17.4 percent to $100.34), and Seattle (+13.2 percent to $111.66). In addition to Denver, three top 25 Markets posted a double-digit ADR increase: New Orleans (+12.5 percent to $162.09); Nashville (+11.5 percent to $128.42); and Chicago (+11.4 percent to $163.53). “The largest markets had a great start to the summer with occupancy over 76 percent and ADR $30 higher than the U.S. average,” Freitag said. “RevPAR growth (+6.5 percent) was again leading all other markets (+5.4 percent) and was driven by ADR growth (+5.2 percent).” Houston reported the largest decreases in the three key performance measurements. Occupancy in Houston dipped 6 percent to 71.4 percent; ADR was down 2.5 percent to $121.40; and RevPAR decreased 8.3 percent to $86.67. New York was the only other market to show decreases in each of the three key performance metrics. Occupancy in the market dipped 1.2 percent to 89.4 percent; ADR was down 0.9 percent to $281.05; and RevPAR dropped 2.2 percent to $251.38.

Record US results set stage for more growth

The U.S. hotel industry is posting all-time high performance benchmarks, setting the stage for further growth, said STR’s Amanda Hite at the NYU Investment Conference.

Amanda Hite of STR said the U.S. hotel industry is experiencing some of the best underlying fundamentals in history. (Photo: Patrick Mayock)
NEW YORK CITY—Hoteliers in the United States should expect further growth as performance continues its historic upswing.
The industry broke more records during April, according to Amanda Hite, president and COO of STR, during the “Statistically speaking” session at the 37th annual NYU International Hospitality Industry Investment Conference. (STR is the parent company of Hotel News Now.)
Among the all-time highs posted in the 12 months ending in April were:
  • Occupancy: 65%
  • Average daily rate: $117
  • Revenue per available room: $76
That’s setting the stage for more growth during the next two years, Hite said.
STR’s forecast for 2015 calls for RevPAR growth of 6.6%, driven primarily by a 5.2% increase in ADR. RevPAR growth will decelerate slightly during 2016 at a 5.8% growth rate, she added.
Source: STR and Tourism Economics
Hite, along with co-presenter Steve Rushmore Jr., president and CEO of HVS, addressed a number of other topics during the 30-minute presentation.
Supply’s upward march
“As compared to 2007, we actually have 158 million more roomnights to sell today than we did in 2007,” Hite said.
Annualized supply growth was 0.9% as of April, which is below the industry’s 20-year compound annual growth rate of 1.7%.
Pushing supply growth is an evening of the costs to build versus buying. In the upscale, upper-midscale and midscale segments, it is now cheaper to build a new hotel than to acquire an existing one, Hite explained.
That’s particularly true for select-service brands, which are fueling growth in the upscale and upper-midscale segments. Combined, those two segments account for 67% of all rooms under construction, she said.
New York City, where 13,209 rooms are under construction, has the largest percentage of rooms coming online as a percentage of existing supply (12%). Houston (8%) and Miami (7%) follow.
While supply continues to creep up, the pace of hotel closings is slowing, Hite said.
On average the U.S. hotel industry closes approximately 30,000 rooms each year. That peaked at 64,900 during 2005 and has since slowed to 23,800 rooms in 2014.
As of April 2015, 6,600 rooms had closed—the majority of which are in the economy segment, Hite said.
Occupancy continues to accelerate
April 2015 saw the highest annualized occupancy in the U.S. hotel industry’s history, Hite reiterated.
During the 12 months ending in April, demand was up 4.5%, which is above the industry’s 20-year compound annual growth rate of 1.6%.
“We continue to experience some of the best fundamentals that we’ve had with demand growth well outpacing the supply growth,” Hite said.
Source: STR
“We’re in a great part of the economic hotel cycle. … There hasn’t been a lot of new supply coming into the various markets,” Rushmore said.
Absolute occupancy levels are particularly strong in the high-end of the market. The luxury segment, for instance, finished the first four months of the year at 75.1%. The upper-upscale and upscale segments were close behind at 72.9% and 72.6%, respectively.
Group rebounds
“We’re happy to see the group demand coming back. … We think this bodes very well for hotels across the country for the remainder of the year,” Hite said.
Demand within that customer segment increased 3.4% April year to date. Transient demand, by comparison, was up 2.3%.
Group demand is showing even stronger gains on an annualized basis. After reporting negative growth as recently as 2014, the segment is up more than 5% during the past 12 months. ADR for group business has grown steadily at nearly 4% during the past few years, according to STR data.
Group ADR varies widely by market, Hite said. In San Francisco, for instance, ADR for the segment is up 12.9% April year to date. On the other end of the top-25 spectrum in New York, group ADR is down 4.8%.
Revenue is rolling
The U.S. hotel industry has collected more than $136 billion in room revenue during the 12-month period ending in April, Hite said. That’s up $44 billion since the trough in 2010.
Total revenue, which includes room revenue among other departments, was up 7% in 2014 compared to 2013, she added.
“You see positive increases across the board,” Hite said.
House profit is increasing as well. Total revenue during 2014 was $176.7 billion, a $13.8 billion increase from 2013. House profit, meanwhile, was $65.8 billion during 2014, up $7.4 billion from the prior year.


Real Estate Forum: An improved economy has driven hotel performance into the stratosphere by several measures, including demand


Hotel Perspectives: A Fundamental Shift 

No matter how you slice it—and there is no shortage of possible ways—the hotel sector is doing well. In fact, the hospitality corner of real estate is so strong that when one describes the performance of a metric as “record setting” it’s practically a ho-hum moment.

Byproducts of the economic recovery, such as job growth, consumer confidence and increased spending, are creating sky-high hotel room demand. increasing occupancy and healthy revenue. These trends likely will continue for some time, hoteliers and analysts tell Real Estate Forum. In even better news, hotel watchers note that these flush times give property owners the ability to “push rate” while allowing developers to secure lending at a low cost.

However, some industry professionals do have cautionary notes to sound, recognizing that all good things must come to an end. In fact, some parts of the country already are showing some weakness—including a major city. Still, the tone of the hotel sector is overwhelmingly positive, with most forecasts calling for results to remain on the upswing for the next few years.

“We broke a bunch of records in the US hotel industry in the past 12 months,” says Jan Freitag, SVP at Smith Travel Research in Hendersonville, TN. “As of March, on an annualized basis, all six key performance indicators are at all time highs.”

“There are more rooms available than ever,” which he contends is good for the industry. “While operators may bemoan the fact that competition is heating up, developers everywhere are seeing the hotel industry as a great ‘play,’ with healthy performance metrics.”

Among the other indicators, Freitag adds, “We’ve sold more room nights than ever before, we raised more room revenue than ever and that led to the highest occupancy, room rate and RevPAR.”

More specifically, he reports, for the 12 months ending in March 2015, nationwide room supply increased by 0.9%, demand by 4.6%, occupancy reached 64.9%, ADR hit $116, RevPAR came in at $75 and room revenue soared by 9.5%.

“One previous positive RevPAR cycle lasted 121 months and the post-9/11 period was 56 months of positive RevPAR growth; we’re at 61 months now,” Freitag notes. “So we expect at least another 12 to 24 months of healthy RevPAR growth.”

Mark Woodworth, senior managing director of PKF Hospitality Research in Atlanta, is particularly bullish on demand. “Demand will continue to grow at a faster pace than supply,” he says. “As a result, occupancies will continue to increase this year and next. Current conditions have led to a sellers market with pricing power firmly in the hands of hotel managers.” He expects these conditions to persist “comfortably” through 2016, and perhaps 2017.

In the short term too, hotel analysts have an upbeat forecast, along with a rosy lens on last year. “We anticipate pretty significant RevPAR growth in the economy midscale with a rise in leisure travel,” predicts LaBerge. “Summertime leisure travel via car is expected to be off the charts this year. The other big statistic of interest is international visitors. In 2014, approximately 75 million inbound US visitors—more than the combined populations of the United Kingdom and Belgium—spent $180 billion.”

At LW Hospitality Advisors, Evan Weiss has a similarly positive outlook on demand. “I’m astounded by the robustness of the market,” says Weiss, New York City-based executive managing director and principal. “Even though there’s a strong pipeline, supply growth is expected to be sub 2% while room demand will be up by 5%. There aren’t a lot of dark clouds on the horizon. It’s a market where people are making hay while the sun is shining.”

Developers also see good times ahead after enjoying the already-healthy market. “We’ve witnessed demand growth every year since the recovery started in 2010,” says Mitul Patel, Atlanta-based COO of Peachtree Hotel Group. “We don’t see anything prohibiting demand growth, unlike what happened in 2006 and 2007 when there was overbuilding, coupled with the rug being pulled out from the market in 2008.”

In addition to the general improved health of the economy, one analyst notes that the low price of oil is impacting the hotel market. “The direct impact of oil prices are going to fuel demand and operations for at least the next 12 months,” according to Gregory LaBerge, national director of Marcus & Millichap’s national hospitality group

“The average price is about $52 a barrel,” he adds, “but every day it stays below $50, it pumps $400 million into the economy in discretionary income and $200 million in business savings. Actually, as long as it stays between $45 and $65, it’ll be a major benefit to the economy and no one seems to believe it’ll go north of $70 to $80 this year.”



Meanwhile, the profitability of hotels last year hit astounding highs. In its latest report, “Trends in the Hotel Industry,” PKF-HR, a CBRE company, reveals that US hotels (on a unit-level same-store sales basis) achieved a 12.3% increase in net operating income during 2014. This marks the fourth consecutive year of profit growth in excess of 10%, a trend PKF forecasts will continue through 2016. That makes the six-year period from 2011-2016 the longest streak of continuous double-digit gains on the bottom line for the nation’s hotels since PKF began tracking the industry in 1937.

“In 2014, the average hotel in our ‘Trends’ sample achieved a bottom-line profit of $17,849 per available room,” Woodworth states. “This is nominally greater than their 2007 pre-recession peaks, but perhaps of greater importance is that hotel profits, in inflation-adjusted terms, will exceed 2007 levels in 2015.”

And in even better news, the property types that are benefiting from this increased profitability have expanded beyond select service—the hotel segment that has been the darling of the industry in recent years.

“The NOI of bigger, full-service hotels has started to increase, particularly in the past six to 12 months,” declares Mark Owens, managing director—hospitality group at the Ackman-Ziff Real Estate Group.

Agrees Geoff Davis, president and senior principal, HREC, “If you’re talking about hotels in the top 25 MSAs, yes, you’ll see increased performance.

“We recently traded a full-service hotel in a suburban location that went for below replacement costs,” he continues. “If you can buy full-service hotels in suburban markets for less than replacement costs, that allows you to compete with select service and you’ll have meeting space—they don’t offer that.”

In part, adds the New York City-based Owens, the uptick in NOI at full-service properties “is being influenced by a rebounding meeting and group segment. At the end of 2014 into early 2015, we saw a big pickup in the meeting and group segment in large hotels we’re financing. That’s really important for full-service hotels and it’s a big component of the business at some airport hotels.”

He explains, “During the recession, meeting business had a short-term booking window but now it’s extending, which is really good because if, for example, an owner has a 400-room hotel and knows in advance that 100 rooms are booked, it gives that owner the ability to play with room rates. People were hesitant to push rate this year because of the newness of the market’s success but we’ll see that this year.”

That pricing power is the linchpin of hotels’ success, and properties that have it will go beyond select-service hotels, Owens asserts. “I expect to see strong rate growth in the full-service and luxury segments, largely because of the uptick in meeting business. It doesn’t just sell rooms, it also creates food and beverage revenue, as well as ancillary revenue.”

Overall, asserts Freitag, “Room rates will be 5% higher this year and next.”



All of this positivity is increasing the hotel sector’s appeal to lenders. “There’s a huge appetite for lending in the hotel space,” reveals Weiss.?“A lot of the equity providers—such as foreign entities like sovereign wealth funds—as well as pension funds, private equity, hedge funds and even REITs all are looking to put out money. We saw Blackstone recently raise $14 billion in record time. There’s a lot of money chasing very little yield.”

Further, he adds, “Deals are getting done at 65% to 75% loan-to-cost, and underwriting is a lot more rigorous, even for the life insurance companies. They’re looking at land values, insurable values, sales comparables, cap rate comps—there’s a keen focus on the metrics.”

Weiss says, “There’s a robust level of focus on sponsors, their relationship with the lender and the hotel’s management team. Also, we’re seeing personal guarantees and construction guarantees. Construction lending is available as well for the right sponsors.”

Like developers, lenders are favoring the select service segment, states Romy Bhojwani, COO at Excel Hotel Group, a hotel developer, owner and asset manager based in San Diego. “Institutional capital has started to move in a high velocity toward select service because it likes the fundamentals. It’s not as volatile as full service because the type of demand is more resilient to a downturn while full-service properties are very dependent on group business.”

He adds, “We have a lot of Hilton Garden Inns, and similar properties—travel in that segment is fairly predictable. Plus, we don’t have a cost structure as onerous as that of full service properties.”

Money is available at a good rate too, adds Geoff Davis. “The cost of capital is very low compared to historic levels. It’s 5% to 7%, whereas a few years ago it was 9% to 10%. There’s plenty of debt available for renovation, refinancing and new construction.”

Still, lenders aren’t just writing blank checks, notes Jeffrey Davis, New York City-based managing director, investment sales & hotel investment banking at JLL. “There’s plenty of liquidity in debt lending, though there are tight standards. Today, underwriting is more constrained relative to in place cash flow. Sponsor, location and branding all are important. Paper from the CMBS market may start taking a more conservative approach. But being conservative helps to keep things in check.”

He continues, “I’m not sure that we’ll see the same forward looking underwriting as we did during the last peak but during the downturn, KKR, Apollo and Blackstone all established debt funds and—while those are a bit more expensive—they provide more alternative capital sources. Traditional bank lending is available too. There’s liquidity across the market.”



Despite the white-hot climate of the hotel industry, “There are pockets of weakness, contends Jeffrey Davis. “Some markets have oversupply and absorption issues; New York City is probably in the red zone.”

He adds, “NYC has had its largest increase in supply in 25 to 30 years since 2011/2012—we’re talking about thousands of rooms—and new inventory is still delivering. Occupancy is back to peak levels and the supply is select-service, making it hard for owners to push rates. That’s undercutting full-service properties’ ability on rate. New York has had a bad first quarter—we’ve seen negative 4.2% RevPAR year-over-year.”

As a result, Davis continues, “The city could see negative RevPAR for 2015. Some people say it’ll be flat, some say it’ll grow by 1%.”

Adds Weiss, “In terms of year-over-year RevPAR growth, New York has been an underlier to the downside. The city has 12,000 rooms under construction in Manhattan with another 10,000 to 15,000 in some phase of development. Even the Bronx and Staten Island are adding a fair number of rooms to their historical level. It’s about 500 to 1,000 in the Bronx; that’s about a 40% increase.”

“Looking at all of that,” he continues, “the pricing power has been somewhat eroded in New York City. “But that’s temporary; New York City is under-hoteled. There’s enough demand, it will just take some years for all of the new supply to get absorbed.”

Weiss’ numbers further make the point. “There was an 8% decline in RevPAR during the first quarter in New York City; I would expect  -2%% to 2% RevPAR growth for the year.”

Other parts of the country may see slight declines too, according to industry observers. “You have to watch markets like Nashville, where new supply was added recently, and New Orleans,” notes Jeff Davis. “But the fundamentals are strong and we’re seeing glimmers of light from group business.”

Notes Freitag, “Nashville had the highest room rate growth last year because we have the brand-new Music Center, a 1.2-million-square-foot meeting/convention center Downtown with an 800-room headquarters hotel next to it and the city is building a Westin and maybe a JW Marriott. Then you have a lot of new limited service hotels and a lot of announcements for boutique properties from Virgin Hotels, 21c Museum Hotels, Thompson Hotels and Starwood Hotels & Resorts,” the latter as part of its Tribute brand.

Another issue sparking concern from several market watchers is the rise of the dollar. “The dollar could be a problem for all of the major markets, including Miami, New York City, Orlando and some West Coast cities, possibly even Las Vegas,” says Weiss. “It could impact middle class travelers from Europe and elsewhere.”

“The dollar is very strong against the euro and yen,” asserts Freitag, “and while individual tourists don’t look at a room rate today and say, ‘wow, it’s 30% higher than a year ago,’ all they have to do is read the newspaper. Once they read stories that say Europe is on sale and the US is expensive, Europeans will decide to stay home while Americans will realize Europe is cheaper than it was a year ago.

And, he continues, “People don’t book their family vacations at the last minute, so even if the dollar gets weaker, people who said, ‘Let’s go to Greece’ when the dollar was high aren’t going to switch.”

Woodworth sounds a cautionary note on nationwide demand. “The rate of increase in demand will be lower than it has been in recent years.  An increasing number of markets are selling out more frequently, thus they do not have the capacity to accommodate comparable levels of demand growth.”

But this swing toward higher occupancy and smaller rate increases shouldn’t shock anyone in the market, he adds. “We are beginning to see one of the basic laws of economics play out: as price goes up, demand reacts negatively.  This is to be expected at this point in the lodging cycle.”

Adds LaBerge, “We believe 2017 will have mixed results. At that at point, supply will outpace the long-term average—2.3% growth is our forecast—and that’ll create some softening fundamentals in terms of ADR and other metrics.

“There will be higher interest rates,” he continues, “which will discourage investment in facilities, moderate the flow of capital and we’ll have higher inflation so that’ll weigh more on consumer wages, which will impact demand. I’m not forecasting a steep fall-off, it’s just the year when I think the market turns a corner.”

Supply growth also is a factor in determining which direction the market heads in. “There’s going to be a lot more select-service properties being built, and full-service is starting to ramp up again,” notes Rick Mansur, president, CEO and principal, Azul Hospitality Group, a San Diego-based hotel developer, owner and asset manager. “It’s always a little concerning when a lot of supply is coming in but we’re seeing properties go into urban areas where there already was demand.”

In other words, he contends, “People are being smarter than they were in past surges about where they’re building.”


Short hold times prove lucrative for some

Now is a good time to sell a hotel, many owners say. One indicator of that trend is a shorter hold period for well-performing assets.
The recent sale of Great Wolf Resorts to affiliates of private investment firm Centerbridge Partners illustrates the notion that owners are fetching good prices for properties they haven’t held onto for long.
Affiliates of Apollo Global Management sold the portfolio of indoor waterpark resorts just three years after it picked up the operator for $703 million including debt. While the price Apollo got for the turnaround to Centerbridge Partners hasn’t been publicly disclosed, news sources such as Reuters and Bloomberg put it at around $1.35 billion including debt.
“Apollo did make some improvements to the Great Wolf portfolio—they could shrink some overhead, cut some costs, get one new resort open and another in the ground—but they definitely benefited from the upswing in the market,” said David Sangree, president of consulting firm Hotel & Leisure Advisors.
That upswing is playing a significant role in how some owners calculate the risks and returns involved in owning hotels today. As a result, it’s leading some to reap rewards in turning hotels around in a relatively quick timeframe.
Greg LaBerge, VP and national director at Marcus & Millichap, said the typical industry standard in terms of underwriting an asset is a five-year hold period, which mirrors that in retail and multifamily housing. However, in recent years he has seen many owners generate the internal rate of return they’re looking for in less than five years, which then allows them to sell that hotel and achieve a higher yield.
While representatives for Great Wolf seller Apollo did not comment for this story, Sangree, whose firm does feasibility studies and other research for waterpark resorts in particular, said Apollo executives likely realized they were at an ideal point in the industry cycle to sell at such a high price so soon after acquiring the company. In this specific case, Sangree said other positives include the fact that the family amusement segment is performing well, with companies such as Cedar Fair, Six Flags Entertainment Corporation and The Walt Disney Company trading at high stock prices.
Other factors
LaBerge, whose company has facilitated sales of about 70 hotels so far this year, said shorter hold periods “absolutely are happening,” and for several reasons.
One of those is net operating income.
“In general, NOI for hotels has been growing at a double-digit pace for (awhile) and that hasn’t happened in at least three decades,” he said.
The other factor is that owners see the writing on the wall and have a lot of research at their fingertips to know how supply in particular will look in certain markets as the industry approaches the end of the cycle.
“If I’m a buyer today, and I think we have maybe 36 months left of a strong market, every day that goes by between now and then, I should in theory be willing to pay less and less for an asset than I would have bought yesterday,” he said. “Unless I’m going to hold that asset (through the next downturn), I should probably dispose of (it) sooner rather than later.”
Sangree agreed, saying that while there certainly are hotel buyers who are purchasing with the intention of holding an asset for a long time, “many buyers today buy hotels with the hope they could turn it around and sell it again before the next recession.”
According to year-over-year data from HNN sister company STR Analytics’ Hotel Investors Gauge, which surveys hotel lenders, developers and investors quarterly on the state of financing market conditions, projected hold periods are rising. In the first quarter of 2014, investors projected an average hold period on hotel assets of 6.7 years. In the first quarter of 2015, investors projected an average hold period of 7.7 years (though at both periods, the median hold period was 5 and 5.5 years, respectively).
Who are the sellers and buyers? 
Sangree’s firm is involved in a project where the owner of a full-service new-build hotel in the Midwest is considering selling the hotel—before it’s finished and operational—to a real estate investment trust.
“In today’s market, the potential is there to sell a hotel before it’s even open and earn a larger profit, rather than wait,” Sangree said.
LaBerge agreed that certain hotel buyers have a lot riding on picking up quality assets before the next downturn. Those behaviors influence pricing.
“There’s so much equity chasing a limited supply of good, quality hotels for sale,” he said. Some buyers therefore are digging deep into their wallets and paying high prices in order to deploy capital and earn money for investors.
“That pressure allows for higher prices to be paid, which is partly facilitated by the current great interest rate environment,” he said. “It makes sense that you have owners that are now willing to sell in shorter time frames than they would have otherwise planned for.”
What’s next? 
LaBerge and Sangree agreed that many elements factor in to an owner’s decision to hold versus sell. In general, owners of premium-branded hotels that benefit from strong industry fundamentals (and that don’t necessarily need a lot of post-acquisition capital investment) are in a good position to fetch high prices.
However, LaBerge warned the industry likely will see fewer and fewer examples of hotels changing hands quickly at high prices.
One reason he gave is the inevitable change in interest rates. Rising interest rates “have a direct impact on cost of debt, and are one example of why it’ll be more and more difficult in a short window to sell at a profit,” he said.
The other example he gave is that as NOI growth drops, “it’ll be more and more difficult to make sense of a deal,” he said.

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A Hospitable Investment – The hotel industry is gaining momentum in 2015

It is evident in the cities where we live and travel — big and small — that new hotels are being constructed, and established ones are being refurbished and modernized. The economy’s overall resurgence has meant a strong turnaround for many industries, including hospitality. But there’s more than just anecdotal evidence showing that resurgence.

A PKF Hospitality Research study projected that the U.S. lodging industry will achieve 65 percent occupancy this year, the highest rate since this data was first reported in 1987. The study also forecasted that by the end of 2015, demand for lodging accommodations will have increased by 25.8 percent since 2009. Furthermore, the study claims that all hotel chains in most major markets can anticipate higher revenue per available room (RevPAR) through 2017.

These predictions certainly support changes seen on the frontlines. Specifically, more hotel franchisees are pursuing funding to establish ownership or to significantly renovate properties.

The economy’s downturn left the hotel industry with a multibillion dollar backlog of brand-mandated refresh programs. Many hotel owners deferred their property improvement plans (PIP) because of financial hardship, turning their focus instead to streamlining business operations and minimizing expenses.

For the past few years, property-upgrade investments took a back seat as businesses worked hard to stay above water. Now, many of these long-awaited projects are finally coming to fruition, and that means more opportunities for lenders, borrowers and brokers.

Rising demand for financing

In the past year or two, many hotel franchisees have been able to put delayed projects back on the table. In addition to completing renovations, the stimulated economy has led to many hotel assets changing hands. Often franchisors will contractually enforce updates with the new ownership, hoping to reposition the property in the improved market.

A renewed focus on property improvements together with an increase in hotel transactions is driving a rising need for financing. To initiate either desired or mandated renovations, many franchisees are seeking short-term, bridge loans and capital expenditure (CapEx) loans. These options enable them to undertake everything from renovations to PIPs to brand conversions.

Today’s competitive hospitality landscape makes selecting a lender and obtaining financing a top concern for hotel owners. There are more cash buyers and foreign investors than ever, which encourages brokers to identify lenders that can close on these loans quickly.

Consequently, more hotel owners are exploring specialty lenders that focus solely on the hotel space, because a strong understanding of the business and the purposes of specified projects often translates into faster closings. In some cases, these lenders can close on CapEx loans in as little as two days and bridge loans in two weeks. Such loans typically take traditional lenders about 60 days.

Beyond an accelerated timeline, specialty lenders offer another major distinction: Unlike a traditional bank, these lenders take projected profit into account, not just a property’s past performance. They have the unique ability to evaluate the anticipated financial viability using metrics such as estimated RevPar, typically using historical property data as well as data from comparable hotels to determine this number.

In many parts of the country, hospitality
is an incredibly seasonal business.

Finding a specialty lender that has this capability gives franchisees the opportunity to complete acquisitions or renovations to stabilize a property before seeking permanent, long-term financing. Once they have a financially stable property, they are typically able to secure permanent financing at a better rate and with higher proceeds.

Construction loans

Construction lending has been strengthening alongside hotel lending. These lenders are more carefully vetting borrowers and employing methods to mitigate risk, because it typically takes a minimum of four years to stabilize projects. Lenders also are paying closer attention to the lifecycle of the loan in an effort to prevent costly project delays.

Another trend gaining traction in construction lending is the separation of furniture, fixtures and equipment (FF&E) expenses from construction loans. A specialty lender can work with a franchisee to carve these costs out of a construction loan, effectively lowering the cost to the construction lender and spreading the risk — which construction lenders almost always wish to accomplish.

In this case, franchisees and brokers often can get greater overall financing by working with two lenders simultaneously. At the same time, mortgage brokers can make their clients extremely attractive borrowers for construction lenders, because they  already have the green light and approval from another lender.

Increasing lender options

Mortgage rates are projected to remain attractive for hospitality projects throughout 2015, which should continue to attract new investors to the market. New lenders also are expected to enter the market, while additional  established lenders will likely create hotel financing arms to capitalize on the industry’s upward trend.

A greater variety of lenders will certainly give hotel owners and franchisees more to consider when making their selections. And, although interest rates and dollar signs are a natural first consideration when looking for a lender, owners and franchisees should also determine just how quickly potential lenders can provide necessary funds.

For instance, a franchisee might need financing to renovate the hotel’s pools and build patio bars, and want this project completed before the busy summer season. Alternatively, a franchisee that just acquired a hotel may be required to undergo a mandated refresh, or a longstanding hotel owner might simply be eager to complete a project that had been put on the back burner years prior. Whatever the case may be, the faster funding is secured, the faster the desired renovation can commence.

It goes without saying that lenders across the board are more carefully assessing prospective borrowers. Lenders today are determining more than just a property’s financial health when deciding whether to provide financing — they are looking at an owner’s personal credit and financial history. They want to identify whether owners themselves have personal funds to contribute if necessary and evaluate how they have historically managed their own finances.

Outside influencers

Other market influences will always affect the hospitality industry. Falling oil prices are one factor the industry carefully watches, because cheaper oil drives down fuel, making road trips and hotel stays more feasible and attractive for consumers.

The cyclical hotel market created by the seasons also influences lending. In many parts of the country, hospitality is an incredibly seasonal business, so lenders now wish to carefully monitor not just a hotel’s annual cash flow, but its monthly cash flow as well. Lenders do this to ensure that the owner of a beachfront hotel, for instance, will still be able to pay debt obligations during the slower, winter months.

The improved hospitality industry has driven new trends in hotel financing. More organizations and individuals are striving to participate in this strengthening market, and hotel franchisees are looking to specialty lenders as well as alternative financing options to accomplish acquisition and renovation goals. The key today lies in identifying new strategies and new partners that will be instrumental to a franchisee’s profitability in the near future as well as their financial success for years to come.