LIIC: Strong returns broaden investor profile
04 FEBRUARY 2014 7:35 AM
The hotel-acquisition space is becoming more crowded, but for now discipline still rules the day, according to a Lodging Industry Investment Council roundtable.
Editor’s note: This is the second 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 six LIIC members, while Wednesday’s coverage includes insight from a larger panel open to all LIIC members.
LOS ANGELES—Attractive returns are luring investors of all shapes and sizes into the hotel market, according to members of the Lodging Industry Investment Council during a breakout roundtable last week, sponsored by Hotel News Now.
“There are all types of investors entering this space that weren’t here before, including traditional domestic institutional funds that have been in real estate forever but avoided hospitality up until right now because they weren’t willing to get into an industry that they thought was anything less than healthy,” said Gregory Clay, chief investment officer at real estate investment and development company JMI Realty.
“You’re seeing not only foreign investors but domestic investors too, even the institutional funds, enter the hotel space,” he added.
The Hotel Group has seen more high-net-worth families buying into its fund, according to Doug Dreher, president and CEO of the Edmonds, Washington-based owner and operator.
“It’s a great sign. It’s the perfect time to say we’re in a stable healthy environment,” Clay said.
Mike Cahill, CEO and founder of brokerage advisor HREC, described the investment landscape as “welcoming.”
It’s also more disciplined, he said. Whereas a highly coveted asset could go through 15 rounds of pricing, today would-be buyers are much more willing to pull out.
“You really get to the second round and everyone kind of says, ‘I’m done,’” Cahill said.
At that point it’s up to the seller, Dreher added. “The competition’s the equality of the equity and the management and so forth.”
Riding the supply imbalance
As the deals market becomes more crowded, some investors are looking for opportunities in the form of new development.
The timing is ripe, explained Anne Hampton, VP of Wells Fargo’s Hospitality Finance Group.
“This time around in terms of the supply cycle it’s different than we were in last cycles,” she said.
Whereas there were nearly 200,000 rooms under construction in the build up to the 2007 bubble, as of 31 December 2013 there were only 91,339 rooms under construction, according to STR, parent company of Hotel News Now.
Those muted numbers left Hampton to believe there’s some good runway left for new builds.
Clay’s outlook was less certain, clouded by conflicting reports on the availability of construction financing. Some developers tell him it’s readily available, while others describe difficult conversations with their lenders.
JMI Realty recently oversaw a new-construction deal for a full-service hotel in downtown Austin, Texas, for which construction financing proved “very difficult” and required significant guarantees, he said.
Funding select-service hotels is much easier, Dreher said, pointing to the 10 select-service hotels in The Hotel Group’s development pipeline as proof. Gaps might appear on the equity side, but the holes are not so unmanageable they can’t be patched by a good partner, he added.
“The debt’s there; the loan to value’s different than it was pre-crash, quite a bit different. All that said, we remain a street-corner business,” he said.
“Nationally the new supply’s not a big deal,” Dreher added.
In addition to supply, the roundtable’s participants each shared other indicators to keep an eye on.
“The broadest metric is (gross domestic product),” said Sean Hennessey, founder and CEO of consulting firm Lodging Advisors. “Employment’s another critical number as well.”
“Mine’s probably employment,” Clay said, adding he pays more attention to individual cities than the national number. “I want to make sure there’s employment growth in any city I’m acquiring a hotel.”
Cahill said actual employment is often more revealing of economic health. He also monitors the sale of durable goods.
“In a real economic growth period the sales of durable goods increases significantly compared to past years. When durable goods increase, that means people are investing in longer-term items, and that’s a sign, a reflection, that the economy’s better,” he explained.
Dreher pointed to minimum wage, arguing that any rise in the metric will impact hotel net operating income.
Like any good lender, Hampton said she watches closely shifts in interest rates under the U.S. Federal Reserve’s quantitative easing policies.
Van does the same. “What will interest (rates) be in 24 months? Only because that impacts cap rates so much. Cap rates go up a point or two and all these loans that were good are no longer good loans.”