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| Mark Elliott (left) and Lawrence Brian Wolfe talk deals at the NYU International Hospitality Industry Investment Conference. |
NEW YORK—Debt for hotel acquisitions is available and deals are getting done, and the pace is expected to pick up during the second half of 2012, according to experts at the 34th annual NYU International Hospitality Industry Investment Conference.
Speaking to a general-session audience Tuesday morning during “The Hottest Transactions of the Year” panel, experts agreed that there is action in the hotel transactions market.
“(Debt is) clearly recovering, it’s available—all traditional debt sources are active,” said Kevin Mallory, senior managing director for CB Richard Ellis Hotels,.“Today we have a very active equity market.”
He cited commercial mortgage-backed securities, banks, mortgage funds and insurance companies (which have laid out the largest investment allocations in their history) as the traditional debt sources.
He said debt yields from aggressive lenders range from 8 to 8.5, which suggest cash flow for an asset. Debt yields for lenders with traditional underwriting parameters range from 10.5 to 11.5. Spreads range from 250 to 450 depending on the position of the loan in the capital stack, and debt pricing is driven by trailing 12-month net operating income.
Lawrence Brian Wolfe, senior managing director for Eastdil Secured, said lenders are looking for income in place to size at least the major portion of the capital stack, adding that European banks are out of the picture in the U.S., but CMBS providers have picked up the slack.
“A year ago the financing market was very bifurcated,” said Mark Elliott, senior managing director for Hodges Ward Elliott. “Today it’s starting to blend. Balance sheet lenders are saying, ‘if I can find the right quality of hotel and market, I might price closer to a 5. That’s new in the last 90 days.”
Arthur Adler, managing director and CEO of the Americas for Jones Lang LaSalle Hotels, said there are plenty of reasons to be optimistic about the capital available for acquiring hotels.
“Debt funds, mortgage (real-estate investment funds), specialty lenders are more pricey in terms of cost of capital, but they are more aggressive,” he said. “The emerging CMBS market will be a game changer for the industry.”
Adler said the CMBS market will drive the pace and pricing of transactions as the second half of 2012 unfolds, adding there is money available for new construction.
“If you look at market places, it’s equity chasing yield,” he said. “A lot of specialty lenders are equity basically. You can get up to 75% (loan-to-value debt) if you layer in mezzanine financing, which has come down from 18% a year ago to 11%.”
Elliott said syndicated loans have taken on a life of their own in the hotel space.
“The increasing number of syndicated loans are being sliced two ways,” he said, explaining that some of the loans are structured “vertically” so each lender has an equal slice and some are structured “horizontally” so one lender has a lead piece.
Never meant to happen
The panelists said the anticipated deluge of deals as a result of distress caused by the recession was never meant to happen. The signs should have been clear to everyone in the industry, according to Adler.
“The fallacy was the expectation that there would be tremendous volume dumped on the market,” he said. “It hasn’t happened in the last several cycles, it’s not going to happen in the future.”
He said the main reason is that banks learned their lesson when they were stung by the savings-and-loan crisis in the late 1980s.
Wolfe said the banks clearly knew the task ahead of them when the recession first appeared on the radar in 2008.
“There’s been a more orderly recapitalization of the space than what was expected a few years ago,” he said. “Many situations that we thought were dead underwater have been recapitalized and have a fresh capital stack.”
Elliott said the extend-and-pretend philosophy in which banks figured out a way to extend loan terms for owners who showed a promising upside has worked well.
“People haven’t panicked,” he said.
However, there are assets that need to change ownership for various reasons, and Adler said there will be “a lot of deleveraging in the next five years. … A number of major transactions in major markets will be announced in second half.”
Picking up the pace
Adler said there has been $5.1 billion of hotel transactions through May of this year in the U.S., and the panelists said they anticipate a more robust second half of 2012 than the second half of 2011 when the transaction market slowed because REITs pulled back.
“The primary reason activity is down is not the lack of capital but the lack of pipeline,” Elliott said.
Adler said investor activity begets more assets for sale because sellers see deals and want to be part of the action.
The growth in private equity—in the last two months six new funds between $500 million and $2 billion have closed—will fuel activity going forward, Elliott said.
In addition to REITs, the panelists agreed that international capital funds will become more active in hotel transactions. The sources of capital include sovereign wealth funds, Dutch pension funds and emerging wealth in China.
“Over half of our book over the last 18 months have come from international capital,” Elliott said.
Elliott said there would be a lot more international capital investing in the U.S. if there was a more favorable tax structure. “Literally investors could pay two or three times the taxes on their investment here than they do in Europe,” he said.
“There are two mega trends in international capital,” Wolfe said. “One is the trans-Pacific investor that is looking for opportunities initially focused more on western U.S., but they are working their way east. The other is just beginning, but Europe is going to have unbelievable capital needs and that will be competition for (the U.S.).”
Mallory said the capital situation in Europe is easily gauged.
“There is an exodus of talent to Europe from North America preparing for the opportunity there,” he said.
