June - 1997  More than 300 hotel industry executives heard the latest on hotel finance at "Show Me the Money! Debt & Equity Financing for Hotels,” JEFFER, MANGELS, BUTLER & MARMARO'S 7th Annual Hotel Conference, recently at the Hotel Inter-Continental Los Angeles. Conference chairman James R. Butler, Jr., and cochairman P. Peter Benudiz of the Firm’s Lodging & Leisure Group welcomed participants, who heard from more than 30 leading experts representing various financing segments serving the industry.

The speakers told a “a bullish” story of how the various industry finance segments are welcoming hotel investment, with the recent tremendous involvement by Wall Street with debt and equity offerings, increased competition among investment sources (making it a borrower's market), ongoing consolidation at the industry corporate level, and a guarded interest in new construction. They also outlined what their companies look for in prospective hotel investments. The day also featured observations on the growth of hotel investment by representatives from CapStar Hotel Company, PKF Consulting, Lehman Brothers and Hotel Partners International, who along with Hotel Business, Cornerstone Real Estate Advisers, FINOVA Capital, GE Capital Real Estate Financing and Services, and Lowe Enterprises/Destination Hotels & Resorts cosponsored the conference.

Larry Shupnick of CapStar Hotel Company said, "CapStar will continue to acquire hotel assets as they have in 1996 and 1997. They are in the process of completing their additional credit line to continue acquiring single assets as well as portfolios."

James E. Burba of Hotel Partners Capital Group LLC reviewed forecasts of future lender interest in hotel investment, with refinance, permanent loans, and acquisition financing leading the way, some expected interest in mini-perms and repositioning financings, followed by construction and mezzanine financing. He noted that while Wall Street's appetite for investing in hotels has grown rapidly over the past several years, "traditional" lenders are moving back into the hotel lending arena - giving borrowers more and competitive options. Each industry segment “ banks, life companies, credit companies, pension funds and advisors, and Wall Street “ reviewed their perspectives on the renewed interest in hotel finance. The banking industry, which found itself owning troubled hotels in the early 1990s, is expressing renewed, albeit cautious, interest in hotel lending, with increased interest in corporate finance deals and the increasing consolidation among large industry players.

John E. Oliver of the Bank of Nova Scotia said, “The banks are back and the banks are hungry, but there is a risk/ratio relationship, to be maintained”. BNS is a large lender to the hotel industry, and is looking with great interest at industry consolidation. “Competition is very intense, which is good news for people on the other side of the desk,” he said.

Brian H. Kelley of Long-Term Credit Bank of Japan reported that institutional or publicly owned players are now the major real estate investors. “If you have '20 percent cash down and a dream,' don’t count on a bank sharing that dream. Banks are increasingly looking for strong sponsorship with recourse to a diversified pool of assets and are taking little market risk.” While there is a rumored “RTC-type” sell-off by Japanese banks, Mr. Kelley said that a sell-off is occurring, but quietly and deal by deal, and many LA agencies and branches are back in the lending market, having successfully disposed of most problem assets. The Japanese investor will return, he said, as the stability and risk/return in the U.S. market will continue to look attractive.

According to Thomas K. Day, his bank, Societe Generale, has been active in the hotel industry since the early '90s. In 1994 and 1995, the bank built a solid portfolio of single assets, for which competition now is great, especially by Wall Street, he reported. “The market provides tremendous access to corporate financings,” he said. He expects the trend toward industry consolidation to continue, and Societe Generale will refocus on corporate finance transactions, and upscale and luxury high-quality properties.

John Menne of Metropolitan Life emphasized his company's approach to hospitality investment: assessing a property's income stream (competitive position in market, quality sponsorship, ability to reposition as the market changes), determining the borrower's needs (each loan is case-specific), crafting an appropriate loan structure, and processing and closing efficiently. “We especially like hotels that help us diversify our loan portfolio,” he said.

Jim Searles of FINOVA Capital Corporation, which has a $1.17 billion resort finance real estate portfolio, emphasized FINOVA's active commitment to hospitality finance, offering flexible and creative approaches to tailoring hotel and resort loans. FINOVA is prepared to handle unique investment situations: properties with environmental difficulties, story deals (recent bankruptcy, change in ownership, new management, low occupancy situations), mixed-use situations (golf, retail, timeshare combined with hotels), nonfranchise resort, and transitional loans, short-term loans and loans for improving cash flow.

GE Capital has been a leading provider of debt to hotels, long before Wall Street's recent affinity for the hotel industry, according to Jerry Ellis, vice president of hospitality investments. “We prefer owner/operator borrowers who have weathered all cycles, and properties that have a total capitalization that is discounted to replacement cost and the competitive set,” he said. “We believe there are still quality transactions in the marketplace, however, the investment analysis must be disciplined, as the recent industry trends will not be repeated.”

Bleecker Seaman, of pension fund advisor Lowe Enterprises, whose affiliate Destination Hotels & Resorts manages more than $500 million in hotel assets on behalf of pension funds, says Lowe focuses on luxury and upscale hotels and resorts in first- and second-tier cities, and destination resort locations. Lowe targets properties with highly functional conference and meeting facilities and a full amenity package, with a particular interest in golf.

For AEW Capital Management, a pension fund advisor represented by Henry G. Vickers, Jr., the ideal investment candidate is “a leading operator in a good niche, with meaningful barriers to entry, that has a strong, realistic sponsor and compatible objectives, especially regarding exit.”

C. A. Anderson of Cornerstone Real Estate Advisers Inc., which has approximately $950 million in hotel equity, says Cornerstone offers the advantage of being an all-cash buyer (will buy the property and place with investors later), with rapid due diligence and contracting in 45 days or less. Cornerstone's acquisition criteria include the age of the hotel, fee simple or lease, brand affiliation, the management team, the asset's location, and the value to replacement cost.

John Mehlman of BT Securities said his company is one of the largest providers of debt capital for hotels. BT Securities expects a continuing trend in industry consolidation, such as the recent portfolio purchase of Holiday Inns by Bristol Hotels, and looks for in-place cash flow, good sponsorship, good management and full-service hotels, where deals in a large scale ($100 million or more) are the norm.

Lehman Brothers' Ali Elam and Larry Kravetz reviewed what has happened in the past three years with hotels on Wall Street. In 1993, Lehman saw the opportunity to develop heretofore nonexistent debt financing of hotel properties. Since then, “It has become a borrower's world, although the lender provides discipline. We shouldn't forget where we were two to four short years ago, and need to keep some semblance of balance and order,” Mr. Kravetz said. Mr. Elam, who addressed the increased interest in equity investment in hotel real estate, recalled that 1993-94 saw the creation of the first sizable hotel REITs. Since then there have been $6 billion in hotel equity raised for industry. “Harnessing the interest in equity investment are worries about stepped-up new hotel construction, leading to an emphasis on upscale properties, where such impact is less likely,” he said. He sees a slowing down of new issues, and fewer IPOs in 1997.

Michael G. Medzigian of Olympus Real Estate Corporation, echoed many of the comments of the previous speakers in his wrap up discussion. According to Mr. Medzigian, his company follows a strategy that involves alignment with proven niche operators through joint ventures, and an emphasis on highly insulated upscale/luxury assets and in major urban and resort markets. Olympus has been an active buyer during the past three years and sees continuing opportunity at the upper end of the market.