LOS ANGELES—Lenders are creeping back into the hotel space, but the financing outlook remains murky at best, panelists said during the opening general session of the Meet the Money Conference on Tuesday.
Lenders are “extremely selective” in the deals they choose, said Jonathan Falik, a managing director at Cantor Fitzgerald & Company. For instance, he said ground-up development financing is generally only available in high-barrier-to-entry markets.
“They have so many projects thrown at them, they really have their pick,” Falik said.
That’s not to say lenders aren’t also competing with each other in some cases. Benjamin Leahy, a managing director at Goldman Sachs, said he has seen situations where 10 lenders were butting heads over lending deals valued at less than $100 million.
Debt yield is the underlying force behind underwriting today, Falik said. However, he added, some lenders are willing to sacrifice debt yield for cash flow.
Leahy said Goldman is underwriting to debt yields of between 9% and 13%. “We don’t go above 80% (loan-to-value) on an appraised basis,” he said.
Capital expenditures also can throw a wrench into a debt deal, Falik said. CapEx issues were a big factor in the InnKeepers USA bankruptcy, he said.
Kevin Colket, VP of acquisitions for Starwood Capital Group, agreed that CapEx is an important factor for lenders to consider. “In most instances, it is the CapEx that determines if it is a good deal or a bad deal,” he said.
Still, Colket said he is “long-term bullish” on hotels. Data presented earlier during the general session painted a largely positive picture of the industry.
Vail Brown, VP of global business development and marketing for STR, parent company of HotelNewsNow.com, said earlier during the session that average-daily-rate growth is expected to increase by 4.6% during 2013 from 4% this year. And supply growth is expected to be 1.1% in 2013, up slightly from 0.5% this year.
One less rosy data point is revenue-per-available-room growth, forecast at 5.5% in 2012, below the widely quoted RevPAR growth rate of 7%, Brown said. Two reasons for the lower forecast: lower RevPAR from independent hotels and lower group ADR.
Still, demand growth during the first quarter was at a record 245 million roomnights sold, and the ADR rebound trajectory is trending well, she said.
The ‘Blackstone effect’
But despite the sector’s recovery, the lending landscape remains uneven. The panelists were asked if the so-called “Blackstone effect” was having any effect on the market. The Blackstone effect is the idea that Blackstone Group is so large, the company can affect a bidding process simply by showing up.
The panelists agreed that while Blackstone is a major force—and one with a healthy appetite for hotel assets—the company, as massive as it is, cannot fill every company’s capital needs.
“I think there is an effect, and it obviously is attention getting,” Leahy said. “But the reality is the capital hole we’re looking at is massive.”
Colket said Blackstone won’t be a presence in every deal. The company has a vast amount of capital it needs to put to work so Blackstone most likely will be drawn to large deals rather than small ones.
“It will be very difficult for Blackstone to play in that space,” Colket said of $20 million to $100 million deals.