|By Jim Butler, Hotel Lawyer | Author of www.HotelLawBlog.com
October 1, 2007
The 13th edition of The Lodging Conference in Phoenix is very unique.
For the first time in many years, there does NOT seem to be an overwhelming
consensus about what is happening -- at least as to the credit markets,
and that is the big news here. Lodging fundamentals continue very strong,
although occupancy may slip a small amount in 2008, and RevPAR growth will
likely slow down (but it will continue to grow).
For many years there has been a clear and prevalent industry "mood"
for hotel industry conferences. But this week's conference has a fair number
of knowledgeable people sounding like Chicken Little warning about the
sky falling, and others claiming that we are just returning to a more normal
scenario. The only clear consensus is that -- for at least a while -- this
will NOT be "business as usual" for credit markets. Interest rates will
be higher -- at least 100 to 150 basis points. Loan to value (LTV) and
debt service coverage (DSC) will be tougher -- LTVs are likely to be more
in the 65 - 75% range, and DSCs of 1.0 will more likely be 1.2 to 1.4.
Construction lending will be very difficult to find in the near future,
and underwriting will likely be much stricter. Here is what some industry
leaders have to say.
Setting the scene.
As a hotel lawyer seeing 1,400 of my closest hotel industry friends
at the Lodging Conference this week, I heard some interesting things from
the "thought leaders" of the industry. Some of the items making my list
of notable quotes were taken from private meetings, and some from the Lodging
Industry Investment Council, the lodging industry's "think tank."
Sloppy Loans and Giant Hilton financing Colgging
The CMBS markets are "constipated." They are backed up with billions
of dollars of hotel loans that can't be sold in the public markets right
now. These include some badly underwritten loans -- or at least loans with
high LTVs and lower DSCs, and maybe underwritten on the basis of proforma
income (as opposed to trailing twelve months' income). And the backlog
includes the debt for Blackstone's purchase of Hilton. Some wonder whether
Blackstone's funding sources will abort the financing, finding a big break
up fee to be less painful than losses they might suffer to move the debt
in the current market. What would the unwinding of the Hilton acquisition
do to the market? (See: "Blackstone
buys Hilton for $26 billion.") Wow!
So what did the experts say?
Frank A. Anderson, SVP & Intl Head of Hospitality,
Gaming & Leisure, HSH Nordbank AG
What Is the Impact of All this On Hotel Values?
As early as May, at JMBM's Meet the Money®, we were forecasting
an approaching credit market problem -- not from a decline in fundamentals,
but rather from shoddy underwriting. And this has contributed to the problem
now as lenders are getting loans off their books and into the secondary
market. Ironically, the subprime melt down and credit market issues could
contribute to illiquidity. Some people are reopening the spigot, but underwriting
is not getting any better. As one of the few big "balance sheet lenders"
serving the hospitality industry, we are overwhelmed with a tidal wave
of new would-be friends. I literally have to decide who I call back personally
and who I will have my assistant call back.
Daniel H. Lesser MAI CRE CHA, Senior Managing Director-Industry
Leader, CB Richard Ellis
Until mid August, we were incredibly busy . . . and then the spigot
turned off! Now it seems to be back on. From my perspective, looking back
over the past 25 years, this seems to be small correction. Fundamentals
seem extremely strong. With [the market for U.S. goods] in China and India,
we are "really bullish on the outlook."
Patrick K. O'Neal, National Products Manager / Hotels, PNC Real
Maybe some lenders have turned off the spigot, but at PNC we are open
for business and writing loans.
Clyde E. Guinn, Senior VP - Operations, Stanford Hotels
We are at the point when occupancy is pulling back a little while rates
are still climbing. That usually means we are approaching a peak. If I
look to 2008, I expect to see some more drop in occupancy, and rates will
not continue to climb as they have up to now. Clouds on the horizon include
increased costs from wages, energy, and brand standards. The global economy
is an amazing thing, but it is not clear how it will shake out for us in
the lodging industry. Things will be clearer by ALIS.
Henry G. Vickers Jr., Principal, AEW Capital Management LP
AEW has been sitting on the sidelines since this past spring. There
is a major repricing of risk in all asset classes that is ongoing. It is
"stabilizing down." It is not just a matter of repricing for debt and equity.
The syndication market is shut down now. Lenders are trying to get loans
off their books. There is more CMBS debt currently on lender's books at
this moment [waiting to be sold into the CMBS market] than was originated
in the entire year of 2005. The markets are constipated! CMBS cannot be
sold. Something will happen. This will not take 2-3 years.
Angelo V. Stambules, Vice President, Hospitality, Capmark Finance
Until lenders move existing loan product through the system, they cannot
originate new product. The newer loans [with better underwriting and lower
LTVs and DSCs] will have an easier time. There will be liquidity but not
nearly what there was in 2005-2006. We think that opportunities will be
better in the next 6 months than they have been. Calls we are getting now
look better from our perspective. Things we acquiesced to in loans before,
we are getting back. We will start seeing better terms from a cash flow
perspective and document perspective. We were writing loans at 1:1 DSC
on proformas that were clearing the market. As of now, a 1.3 or 1.4 coverage
is the norm. this has to affect value as well as the repricing of equity.
And the rates that have increased by 100 - 150 basis points are not coming
down in the next 30 days, although the spreads are starting to come down
Robert B. Stiles, Principal & Managing Director, Cushman
& Wakefield Sonnenblick Goldman
Buyers cannot get financing now. So sellers either take the deposit
and move on, or work with buyer to deal with it. Everything is being repriced
or retraded now. And once the idea of volatility is introduced -- the markets
will not accept the same pricing levels again. There are a number of players
buying mezz paper. Archon has been buying paper aggressively. Investment
grade paper is starting to move. Some private transactions are going. It
is the B piece that is dead now -- nothing going on.
Patrick J. Deming, Managing Director, Eastdil Secured
The Hilton deal is clogging the market. This lets some lenders be "irrationally
bearish". I am pleased that the pendulum has swung so hard and fast to
the negative, because now we can work back to the positive. Some CMBS lenders
have seen the light already, and are issuing quotes that they were not
issuing 2 weeks ago, but the traditional B-piece markets are empty now,
as Rob Stiles says.
Craig Mueller, Vice President Development, InterContinental Hotels
We have not seen much of a blip in IHG's pipeline, interest in deals,
or getting deals done. This is significant, because so much of our deal
flow is new development. Of course, we are often signing up deals before
the financing is in place. As always, the developers are pretty optimistic,
but we will have to see what happens. In the U.S., we had 7 new InterContinental
hotels in the pipeline as of June 30. We are signing in the neighborhood
of 30 Crowne Plazas a year. Almost all of our InterCon deals are managed.
We are pushing close to double digit growth in RevPAR for InterCon.
J. Mark Tobin (Mark), President, HREC Asset Management
HREC is not having a lot of challenges in helping clients with financing
needs. There was hyper liquidity which created the issues being thrashed
out now. But on investment grade assets, we are not seeing a problem, and
certainty of execution remains strong. Over the past couple of years, lenders
did not correctly price investment risk and development risk into their
underwriting. We are looking to do $600-800 million in next 12 months.
Adam Valente, Vice President, Rockbridge Capital, LLC
Who says leverage is down? At Rockbridge, we start talking at 75%.
We are seeing 75-85% leverage. But you pay to climb that high in the capital
stack. On a $30 million loan today, to take leverage on an asset from 50
or 65% to 75 or 85%, the mezz piece will be priced in the high teens to
low 20s. We think the mezz opportunity will continue to increase for us.
The construction side of our business has not slowed down at all.
Douglas N. Dreher CHA, President, The Hotel Group
We think that there is 10 or even a 20% reduction in value right now.
There is a bid-ask gap now. But sellers are lowering their prices. This
is creating some interesting opportunities for us on the buy side. We are
seeing deals we passed on now coming back to us that are being repriced
to be more attractive. RevPAR gains are still there. We are seeing expense
Lesser. Why are they selling now then? Values should not be down,
but the only sellers today are distressed sellers, because there is no
reason to sell today.
Deming. I disagree. Prices are not down. Fundamentals are good.
Vickers. There is 10% price decline . . .easy.
Lesser. There is not nearly the capacity in the portfolio lender
area. If something like 70% of the loans are CMBS, there is not much capacity
left. The Hilton deal has clogged the pipeline.
Vickers. This affects the value of the assets.
Stiles. We will work through this. It is a process of expectations.
Until liquidity returns, seller expectations must be adjusted. If you are
in the market today, values have gone down.
J. William Blackham, (former) President & CEO, Eagle Hospitality
Properties now evaluating new opportunities in hospitality
I am happy to say that we successfully completed the sale of Eagle
Hospitality to Apollo in mid August, and there was no repricing of that
deal, but it had been signed prior to market changes and was a fair deal
with investment grade assets. There is a market disruption, and I think
restabilization may well take 12 months. It will be a gradual process.
Importantly, what was done last year, is not the "norm." We are now gradually
going back to a norm or back to a "new norm" that will still be defined.
But here is something to think about: The rating agencies are just starting
to go in and do a re-rating of all the CMBS markets. What could that do?
I think ultimately there will be a higher price of capital, and that has
to affect the price of real estate.
Michael D. Blahosky, First Vice President -Regional Director,
CB Richard Ellis
Values are affected. There is no doubt about that. We just don't know
how much. Nobody has figured that out yet. Sellers will be reluctant to
market properties until this has sorted out.. We have not been affected
by deal flow this year because deals were locked in, but the next 6 months
will be interesting to watch.
Joseph V. Green, Chief Executive Officer, Key Bridge Capital
Key Bridge Capital provides entity level financing for companies with
hotels and any other kind of real estate. Valuation is a critical issue
for us because it determines how much of the company we get for our capital
as an entity level financing source. We think that owners of companies
with real estate and hotel assets, recognize that recent events have had
an impact on asset values -- maybe not a 10%, but 25 -50 bps in cap rate.
Stambules. There is a lot of equity out there that can
make up part of the capital stack, it will be repriced too.
What's it all mean?
Deming. I don't think that equity is getting repriced.
Vickers. Equity has to reprice.
Richard C. Conti, President, The Plasencia Group, Inc.
We are in a transitional period now. Prices will readjust, but have
not adjusted yet with sellers. In the next few months, there will be limited
deal flow. It always takes 3-6 months for these adjustments. It will be
driven by the yields that are required.
Nobody knows. We have a lot of smart, experienced people expecting widely
different outcomes and time frames. It is a great time to take two aspirin
and call the doctor in the morning if you don't start feeling better.
About the Author
Jim Butler is one of the top hotel lawyers in the world.
GOOGLE "hotel lawyer" or "hotel mixed-use" or "condo hotel lawyer" and
you will see why. Jim devotes 100% of his practice to hospitality, representing
hotel owners, developers and lenders. Jim leads JMBM's Global Hospitality
Group® -- a team of 50 seasoned professionals with more than $40 billion
of hotel transactional experience, involving more than 1,000 properties
located around the globe. In the last 5 years alone, Jim and his team have
assisted clients with more than 100 hotel mixed-use projects, all of which
have involved at least some residential, and many have also involved significant
spa, restaurant, retail, office, sports, and entertainment components --
frequently integrated with energizing lifestyle elements. Jim and his team
are more than "just" great hotel lawyers. They are also hospitality consultants
and business advisors. They are deal makers. They can help find the right
operator or capital provider. They know who to call and how to reach them.
They are a major gateway of hotel finance, facilitating the flow of capital
with their legal skill, hospitality industry knowledge and ability to find
the right "fit" for all parts of the capital stack. Because they are part
of the very fabric of the hotel industry, they are able to help clients
identify key business goals, assemble the right team, strategize the approach
to optimize value and then get the deal done. Jim is frequently quoted
as an expert on hotel issues by national and industry publications such
as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes,
BusinessWeek, and Hotel Business. A frequent author and speaker, Jim's
books, articles and many expert panel presentations cover topics reflecting
his practice, including hotel and hotel-mixed-use investment and development,
negotiating, re-negotiating or terminating hotel management agreements,
acquisition and sale of hospitality properties, hotel finance, complex
joint venture and entity structure matters, workouts, as well as many operating
and strategic issues. Jim Butler is a Founding Partner of Jeffer, Mangels,
Butler & Marmaro LLP and he is Chairman of the firm's Global Hospitality
Group®. If you would like to discuss any hospitality or condo hotel
matters, Jim would like to hear from you. Contact him at firstname.lastname@example.org
or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.