LIIC: Hotel lending competitive but healthy
03 FEBRUARY 2014 7:11 AM
A little competition has done well for the hotel-lending landscape, according to members of the Lodging Industry Investment Council during a recent roundtable.
Editor’s note: This is the first of three installments covering the Lodging Industry Investment Council roundtable, which was held 27 January at the Luxe City Center Hotel. Monday and Tuesday’s coverage was drawn from a breakout roundtable of seven LIIC members, while Wednesday’s coverage includes insight from a larger panel open to all LIIC members.
LOS ANGELES—Anne Hampton saw little competition in the hotel-lending space during 2010 and 2011. The same was mostly true for 2012.
But the past 12 months?
“That’s when we really saw (more competition),” said the VP of Wells Fargo’s Hospitality Finance Group last week during a breakout roundtable of the Lodging Industry Investment Council, sponsored by Hotel News Now.
It’s as if the banking community suddenly woke up and realized the risk-return opportunity was strong in the hotel space. Now banks, life insurance companies and even commercial mortgage-backed securities have all entered the fray, she said.
Fortunately, she said, Wells Fargo remained a constant presence throughout the downturn, giving it a leg up over competitors. When asked why the group chose to trudge through the economic malaise, Hampton said, “We like to lend at the bottom of the market as opposed to the top of the market.”
“We knew the markets were going to turn,” she later added.
Less certain is the market’s enduring state of discipline.
“That competition is here; it’s happening and it’s healthy today,” said Gregory Clay, chief investment officer at real estate investment and development company JMI Realty.
Fast forward 24 to 36 months, however, and things could look very different.
While lenders—and buyers, to an extent—are putting deals through extra vigor and sound underwriting, an avalanche of investor interest could inflate another bubble, said Steve Van, president and CEO of operator and advisor Prism Hotels & Resorts.
He’s seen it happen once or twice before, most recently in the frothy days of 2007.
In a word
For the time being, the lending market is simply “competitive,” Hampton said when asked to describe the hotel industry in a single word.
“Momentum,” said Doug Dreher, president and CEO of owner and operator The Hotel Group. “There’s a lot of momentum, obviously.”
Clay described the landscape as “solid.”
“Momentum is great; the underwriting is real and legitimate. The lending community is in a place that they should be, which is being restrictive but also seeing there are others out there,” he said.
Sean Hennessey, founder and CEO of consulting firm Lodging Advisors, used “healthy,” pointing to a favorable imbalance between supply and demand, an attractive cost of debt and a positive outlook for the broader economy.
Van employed a time machine for his description: “2005.”
“Everything was great in 2005,” he said. “We had a couple more years’ run. Everything looked OK. We’re at 2005 again in terms of the cycle, so enjoy it while you can.”
Mike Cahill, CEO and founder of brokerage advisor HREC, was slightly more poetic in his characterization, calling the industry “beautiful.”
“There’s just kind of this natural honesty in the world,” he said.
“Having gone through what you’ve been through in the cycles that all of us have been through, very rarely once in every 10 years you have a really beautiful 10 months. It makes sense for people to buy; it also makes sense for people to sell,” Cahill said.
The only thing that could wreck the party in 2014, Cahill said, is “some unforeseen major national occurrence that could happen.
“So goes the economy, so goes the hotel industry. That’s where we are. If something tanks the economy, the hotel industry’s going to go down,” he said.
Dreher shared similar concerns, pointing to terrorism and other security matters.
On the homegrown side of the threat spectrum is the wage disparity debate percolating throughout the country, he added.
“We as an industry need to continue to … speak of it as being an industry of opportunity,” Dreher said.
Clay agreed, suggesting an increased effort to unionize could be the result.
“I wonder if that movement doesn’t resurface pretty heavily this year and how that affects the cost structure of operating our assets,” he said.
Van was more concerned about the $18 billion worth of debt maturities coming due. “I think some of that will be problematic,” even if net operating income gets back to 2006 levels, he said.
Clay wondered if lenders will take a stronger stand on those maturities than they did during the downturn. Instead of kicking the can down the road, they might throw it in the garbage heap.