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IREFAC closes ALIS with investment insights
January 28 2013

IREFAC closed ALIS with a candid discussion about popular trends in near-term hotel investment, from financing to hot markets to the overall brand outlook.

  • The select-service segment is producing the largest returns on investment, panelists said.
  • Neil Shah of Hersha Hospitality said he sees the most opportunity with brands that franchise rather than brands that manage.
  • The panel expounded on the pace-setting performance in New York.
By Jason Q. Freed
HNN contributor

LOS ANGELES—If expectations from the Industry Real Estate Financing Advisory Council unfold the way panelists described last week at the Americas Lodging Investment Summit, the U.S. will see near-term growth in the select-service segment from the typical, well-established brands.

The segment is producing the largest returns on investment, experts said, and few lenders or investors at this point in the cycle are willing to take risks on new, non-established brands.

Select-service hotels are experiencing “meaningful growth” in new construction, said Anthony Capuano, executive VP and chief development officer for Marriott International.

“Marriott and Hilton (Worldwide) deals are getting done, but I don’t see (lesser-known) brands doing tens of thousands of rooms, and that’s based on sponsorship,” he said.

According to December 2012 data from STR, parent company of, the numbers of rooms under construction in the U.S. are highest in the mid-tier segments, with approximately 22,400 rooms under construction in the upscale segment and approximately 20,400 rooms under construction in the upper-midscale segment.

Mark Elliott, senior managing director at Hodges Ward Elliott, said he would advise hospitality newcomers to invest in the select-service segment because it is producing “very high returns.”

“It’s a simple and safe way to enter the business,” he said. “However, if you want to go for the fences, invest in destination resorts because those are products that will not get financed and development here takes a tremendous amount of capital and a lot of risk.”

Near-term financing trends
While construction lending is returning somewhat, Chris Jordan, executive VP of Wells Fargo Bank North America, said it is only available for the safe, well-sponsored projects. Lending is less driven by spread opportunity and more driven by the quality of the project, he added.

“The same rigorous process applies to construction lending that applies to all lending: sponsor, structure and feasibility,” Jordan said.

He said there are only a few, limited markets in the U.S. that can absorb additional supply, adding, “If a good sponsor in a good market with a good story comes to us, we’ll attack it.”

Jackson Hsieh, vice chairman of the real estate group for UBS Securities, said most of the lending UBS is doing in the hotel space is made up of commercial mortgage-backed securities debt and some high-yield balance sheet lending. Depository banks have a big advantage over banks like UBS, which don’t accept deposits and therefore don’t have the same revolving capital with which to work.

“Our lending is either fast-term CMBS or 10% yield,” he said.

Elliott said the largest hospitality lenders in recent months have been Wells Fargo, Deutsche Bank and J.P. Morgan. Spreads, he said, have compressed 100 to 125 basis points within the last four months.

Hsieh said that while international investment in the U.S. hotel landscape has been somewhat limited, the money that has come in has been institutional. Specifically, Australian and Chinese institutional investors have shown an increased appetite for the U.S. market, he said.

Elliott agreed and extended the sentiment globally, saying Hodges Ward Elliott recently brokered two properties in Switzerland, one purchased by a Chinese institutional fund and the other by a Middle Eastern institutional fund.

Any mergers or portfolio acquisitions in the near future are expected to come from public companies rather than private investors, Hsieh said.

Brand outlook
Elliott said he is observing that younger travelers are seeking “an experience” as opposed to certain brands or square footage, he said.

Smaller, more personalized destination resorts are becoming more popular, he said, as well as off-brands, such as Yotel.

“The long-term viability of Yotel validates my thesis,” Elliott said. “It’s not about square footage, but it’s about experience. The younger generation has grown up—they aren’t 22 anymore, they’re 32—and they’re saying, ‘This is our choice.’”

Neil Shah, president and COO of Hersha Hospitality Trust, said while Hersha owns hotels flagged with many of the leading brand families, he sees the most opportunity with brands that franchise rather than brands that manage. Hersha, he said, achieves the most success when it is able to control the operations.

“If they don’t franchise, we’re unlikely to work with the brand,” he said. “Most are willing to do it.”

Hersha is examining closely the independent space, particularly in gateway markets where Shah said the value of the hotel is “less driven by the brand than its location.”

Michael Shannon, managing director of KSL Capital Partners, said hotel brands historically are best at driving corporate business and at using a systems approach to manage prices.

The panel briefly discussed one of the largest transactions of 2012—Marriott’s acquisition of the Gaylord brand and operations. Capuano said the purchase “goes a long way to solidify our role in the big box market around the country.”

“It opens up those hotels to Marriott-loyal groups that perhaps didn’t have Gaylord on their radar,” he said.

Moving forward, Hsieh said Ryman Hospitality Properties—the real estate investment trust formed to continue ownership of the Gaylord assets after Marriott took over operations—will need to diversify its portfolio. There is too much cash flow coming from too few assets, he said.

“The challenge will be finding the right locations in the right places that see the same demand generation that Gaylord brought,” Shannon added.

New York market
The panel expounded on the pace-setting performance in New York. Hersha, which has 15 hotels in Manhattan and attributes 45% of its earnings before interest, taxes, depreciation and amortization to its New York portfolio, is enjoying the strength of the market, Shah said.

“New York remains a street-corner business, just one with a lot of demand,” he said. “It’s not a market where we look to continue to grow, but it’s part of the business where we have a competitive advantage. We’ll continue to be opportunistic and selectively add assets in New York City but with less of a focus.”

While supply in New York continues to grow steadily, Shah said it appears to be growing faster than it actually is because many hotels announced never come to fruition.

A number of the panelists were involved in the largest acquisition of 2012—the former Essex House, on which Dubai Group defaulted and then sold to Strategic Hotels & Resorts and KSL Capital for $362.3 million. Upon acquisition, Strategic rebranded the hotel as a JW Marriott.

Pressed for details on the deal, Shannon of KSL said Laurence Geller, former CEO of Strategic, called at the last minute to pitch the joint-venture. KSL already was familiar with the property as it had participated in an earlier round of bidding, Shannon said.

“It’s an irreplaceable asset in an area where supply has actually gone down as buildings convert to condos,” he said. “What first interested us was the (JW Marriott) flag. (Former operator) Jumeriah did not have the distribution advantage that Marriott has, and Marriott has real desire to be in that location.”

“It’s irreplaceable real estate, and we love the sponsorship,” Capuano of Marriott said. “You could argue Manhattan was the biggest gap we had.”

Geller said Strategic knew the property “backwards,” as the company previously had owned and sold it to Jumeirah Group in 2005 for $423.9 million.

“New York City has two concepts: branded and non-branded,” Geller said. “Marriott had less here than Hilton and Starwood (Hotels & Resorts Worldwide), so it was very compelling.”

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