Optimistic IREFAC downplays macro threats
30 JANUARY 2015 9:51 AM
IREFAC panelists said the short-term outlook for lending in 2015 remains strong, but some shifts are noticeable.
LOS ANGELES—News from the Americas Lodging Investment Summit this week has centered on brand launches, current events and economic trends, and members of the Industry Real Estate Financing Advisory Council spoke frankly on Wednesday about the financial realities behind these trends.
The upshot: The short-term outlook for lending in 2015 remains strong, but some shifts are noticeable in the areas of supply, U.S. oil market health and the strength of the dollar that might affect the state of optimism pervading the industry.
When it comes to the capital stack, Stephen Plavin, CEO of Blackstone Mortgage Trust, said that "in general, there's more demand for mezzanine than there is for the senior parts of the stack right now. Mezzanine will snap back, but right now it's not recovered." He said he has seen widening of basis points in the mezzanine part of a loan stack, which creates a ripple effect throughout the other parts.
Jackson Hsieh, vice chairman of Morgan Stanley, said he noticed some lenders got more selective after losing some money in the fourth quarter of 2014. "Things got a little heady on the bidding side then," he said. "When things settle down it'll be better for everyone."
Size has been affecting lending terms as well, IREFAC members said, and today's market is favoring smaller loans.
"The smaller loans are more easily executed by banks and insurance companies," Plavin explained. However, once loans cross into the $100-million mark in size (affecting mostly those making large portfolio deals), the loan faces potential syndication, Plavin said, as well as basis points at as much as 100 points higher than during last year.
What does this mean for the types of companies seeking loans for hotel deals? Plavin and Hsieh said it might signal a return for REITs.
"Last year it was private equity driving transactions, not REITs or public groups," Hsieh said. This year might shake out to a different tune. "REITs once again will have a pretty good performance this year."
He also said the industry potentially could expect to see some REITs look at properties outside the top seven metropolitan statistical areas, a basket where REITs traditionally keep most of their eggs. "There are a lot of MSAs from No. 8 to No. 25 and beyond that are performing quite well," he said.
Plavin agreed. "I think the dynamic in the market will shift away from private guys, who use a lot of leverage, over to the public REITs," he said. "It's probably not a bad thing for floating-rate (commercial mortgage-backed securities) to have a little volatility; the high-leverage deals could use a little reset."
Neil Shah, president and COO of Hersha Hospitality Trust, said his company had not seen what Plavin referred to as "the dark side of the CMBS market" yet.
However, his company wasn't really using CMBS much anyway. "The CMBS market was so attractive 10 years ago, and we found ourselves borrowing during 2003 to 2005 with a lot of it," he said. "Then we found that (CMBS) was an impediment for us to sell the asset. It made us focus more on the unsecured market, which still remains very attractive today."
International transactions and the impact of oil
Michael Goodson, head of hospitality for the Abu Dhabi Investment Authority, shared some insights on buying opportunities outside the U.S. The sovereign wealth fund investor in recent years purchased three Edition properties from Marriott International, as well as two major portfolio deals in Australia and the United Kingdom.
He said that while ADIA remains active in the U.S., the company now is looking more outside domestic borders. "Yes, the U.S. is further ahead than the rest of the world, but what we're seeing now are relatively better opportunities in Europe, South America, select parts of Asia and Australia," he said.
He said that while Europe remains about two to three years behind U.S. pace, "the exchange rates are now making Europe and Australia a little more attractive," he said.
And while Goodson said ADIA's investment strategies to this point have not been affected by dropping oil prices, Shah said the impact will be felt more on the travel side than the transactions side.
"Inbound international travelers will benefit somewhat from falling jet fuel prices, so there is some opportunity there," he said. "The real beneficiaries this time around will be U.S. coastal markets, who will receive those travelers."
The brand landscape
With only one representative from a global hotel franchise company on the panel—Marriott's Anthony Capuano, executive VP and global chief development officer—talk about branding naturally turned to Marriott, which this week announced its acquisition of Canada's Delta Hotels & Resorts brand , as well as the first eight locations of its Moxy Hotels brand expansion into the U.S.
Capuano fielded questions about the company's goals for the brands, and talk turned to a larger discussion about brand impact on supply.
In the New York City market alone, for example, Capuano said Marriott has two AC by Marriott hotels and six Moxy deals already in the works. "We think there's ample demand for those products," he said. "There has been a ravenous appetite for urban select service, especially these brands that blur the lines a little between select and full service."
He added that in 2014, 40% of Marriott-branded rooms that opened globally "were in brands that weren't in our portfolio five years ago."
While some on the panel made noises about the impact issues that arise when new brands launch with already-ramped-up footprints, Shah pointed out that at least in New York City, supply seems back on the path to evening out.
"We think we've just gone through the high water mark of supply in New York during the third and fourth quarters of 2014," he said. "We believe those years of 5(%) to 6% of new supply are behind us and should normalize after this year to about 3%."
Shah cited competing sources of development capital in New York, a city where the residential, retail and office markets are set to outpace hotel returns, he said.
"Plus, there's just not that much dirt left," he said. "For the last few years, New York was the one market where you could get development financing, but today we're finding that construction lenders can see opportunities all over the country. With the complexity and difficulty of building in New York City. Well, if you can do it somewhere else, you might as well choose to."