What the experts are doing in the current market
|May 16, 2007 - Meet the Money® 2007 brings capital providers and
developers together. On May 3, 2007, Jim Butler, Chair of JMBM’s Global
Hospitality Group® hosted JMBM’s annual Meet the Money® conference,
the premier hotel finance conference in the United States. A stellar list
of speakers representing some of the industry’s most active players provided
insight into the current market.
Hotel development is continuing to ramp up. Some believe that we are approaching the peak of the hotel cycle. So what are the best plays right now?
If you can add value, “Buy!”
Navin Dimond, CEO of Stonebridge Companies put it this way: “Before we buy, we look at three components of a property: management, property and brand. If all three are broken, and we can fix all three, we will do very well.”
Jin Lee of HEI Hotels & Resorts agrees. “We dig down deep to find cost-side and revenue-side inefficiencies.” Which is exactly what they did before their purchase of an Orange County property. “We understood the market, and also understood the property. We found redundancies, an off shore owner that was not involved, a GM on leave of absence and lots of opportunities to fix things that were low-risk in nature.” Further, HEI’s analysis showed that Food and Beverage, as well as revenue from parking, had a very big upside. An initial $150,000 “fix” netted them a $3 million gain.
Kirk Kinsell of InterContinental Hotel Group (ICHG) said that brands add value because of their knowledge of hotel technology. “We see a lot of the costs and techniques used in the market, so we can create value because we see it all. We are breaking down the speed bumps for owners,” he said. Kinsell also believes that an engaged owner is key to a property’s value.
Doug Dreher, President of The Hotel Group said adding value all starts with the room. “If your property has a great exterior but the rooms stink, you are in trouble,” he said. He should know. Improvements in their Norwalk, CT property resulted in a successful $50 room rate increase. Dreher reminded his fellow panelists of the “bed craze” where brands successfully differentiated themselves by providing more comfortable beds. “Until that time, customers slept on better beds at home than they did in hotels.” Doug Dreher suggested that the same movement is happening toward providing better bathrooms.
Stan Kozlowsky of Forestpark Capital Advisors agreed: “At the least, you have to provide customers with the amenities they have at home.” CB Richard Ellis Hotel’s Michael Blahosky gave everyone a laugh when he added, “And if you don’t make good decisions, the brands will sure tell you where to spend your money!”
Choosing the right brand also adds value and The Hotel Group chooses carefully. “We are absolutely focused on brands that deliver market share. When we buy, we go above the brand’s standards,” Doug Dreher said. “But then, who pays the Property Improvement Plan (PIP)—the buyer or the seller?” He noted that sometimes items in the PIP are really deferred maintenance and that PIP line items can be negotiated with brands. HEI’s Lee finds that the PIP does not always relate to the specific property, as it should. “Some brands will use a boilerplate PIP depending on the age of the property,” he said. As a good buyer, HEI likes to fully understand what the PIP will be.
Adding “lifestyle” elements can also create value. Navin Dimond said that people will pay a premium to stay in a Lifestyle hotel. “It goes beyond core demographics. Older people will often buy into the young scene.”
“Lifestyle works if the clientele is deep enough and sophisticated enough,” said Jin Lee, whose company is involved in the W Hotel at Hollywood & Vine. “This is a niche play. It is very defined—it is NOT ‘if you build it they will come’. Consumer depth has to be there. You have to do your research.” HEI also carefully researched the LA residential market for the condo portion of the Hollywood W project. “LA has not had new high-rise product in 20 years,” he said. “We are not selling 1,000 units; we are selling 113. Even if there is a market correction, we will do OK for the tier of buyers that want to live at the W in Hollywood.” He added that they have also considered doing a fractional with one floor of the project.
Dolce International’s Debra Bates stressed that value can be created by working with local communities. “There are many suburban communities that want high quality properties, but find the cost of the major brands’ reservations systems to be too expensive for their markets. That’s where we come in.” Dolce’s successful reconstruction of an old IBM facility in Belgium is a case in point. “The project is good for the local community, not just for Dolce,” she said. Dolce International is a medium-sized brand with 23 properties in six countries. They focus on the group meeting business, a niche that experienced superior continuing RevPAR growth of 11-12% last year.
Clyde Guinn used the last 24 months to execute Stanford Hotel’s strategy of focusing on the upper upscale market and consolidating the brands they work with. “Although we are not sellers by nature, we did sell a few properties. We see a flattening of RevPAR growth and occupancy trailing off. And how much can you push rate? You’re getting rate push-back from guests in selected markets. In this environment, you have to be very picky with acquisitions.”
William Littlefield of American Property Management (APM) believes we are not yet at the peak of the cycle, pointing out that RevPAR is still growing. Like Stanford Hotels, APM has used this cycle to upgrade their portfolio. APM has a longterm view of the market. “The numbers look great now, but you need to ask: If we have to sell in five or seven years, what will it look like? Our discipline will allow us to go through the cycle,” he said. “We are aggressively buying, on an asset-by-asset basis.”
“The asset—and what you can do with it—is everything,” said hotel veteran Larry Shupnik of Interstate Hotels and Resorts. “Cap rates mean nothing. We buy the asset.” And nobody knows assets or deals better than Larry Shupnick. “And interest rates are still very attractive,” added Doug Dreher. “Spreads are not that material.”
Richard Conti said the Plascentia Group is continuing to buy and sell. He noted that it was beginning to feel a lot like 1998, because “everything is being driven by rate.” He also pointed out that a massive number of CMBS loans come due next year. “If interest rates are still low, those loans will be refinanced. If interest rates go up, it will be difficult for some companies to re-fi. Brokers could get very busy in 2008.”
Patrick O’Neal of PNC Realty Finance said that things are changing in light of the rating agencies (like Fitch and Moody’s) imposing more discipline on the CMBS market, in response to demands from investors. The result will be an overall tightening of underwriting criteria. He predicts that terms like ‘interest only’ will go away and that spreads will widen. “80% LTV will stay with us,” he said.
“This is not all bad—we need more discipline in the market,” said James DeAngelo of CWCapital. He wondered if one lender will increase spreads by ten to 15 basis points. Even so, he added that the industry was awash in capital and deals would continue to be made. Patrick O’Neal thinks it could increase CMBS spreads by 75 basis points, but he and others don’t think that is a significant deterrent to good deals getting done.
“If you are a seller, I think you will see capital trickle up a bit,” said Navin Dimond. Major players have bought projects from his company, and properties in tertiary markets had the highest yields, followed by secondary markets and then primary markets like Los Angeles and New York. On interest rates, he said it’s simple: “If you don’t want to shoulder the risk, fix your rate.”
Financing can be more flexible in the European markets according to Debra Bates of Dolce International. “Europe is a good playing field for building our brand,” she said. “There is less focus on real estate and more emphasis on delivering revenue.”
“Interstate Hotels has been in Moscow since 1994 and Russia has been an excellent market for us, particularly on the management side,” said Larry Shupnik. “There is great business to be had in Europe and other international markets, but you really need to understand how the tax aspects affect your company.” In addition to their European properties, Interstate is doing joint ventures in India and Mexico. “But we are waiting for Cuba to open up. That could be a real opportunity,” he said.
“That’s the biggest fear in Cancun, right now,” said William Littlefield. “Cuba is closer to the East Coast and to Europe than Cancun, and they feel the threat.” He added that APM is “thrilled” with its properties in Mexico, and sees continued growth opportunities there.
There was discussion about the weak dollar creating both opportunities and problems in the international markets. Jerry Best of JER Partners said that JER hedges its currency risk so it doesn’t worry about the value of the dollar affecting their deals. JER has invested $3-4 billion in hotels over the past 36 months. JER is also a selective seller. “We are well past the mid point” Best said, “But there are still some legs left in the cycle.”
As the moderator of Hotel Transactions: Who are the buyers, who are the sellers? What is the key to getting deals closed? Alan Reay of Atlas Hospitality Group closed by asking this question of his Meet the Money® panelists: “Buy, Sell or Hold?” Here are their answers:
Copyright © 2007 Jeffer, Mangels, Butler & Marmaro LLP (JMBM).
|Also See:||Notable Quotes Captured from Hotel Industry Leaders at the ALIS Conference / Jim Butler / February 2007|