Lenders relish the hotel financing landscape
01 APRIL 2015 7:12 AM
Hotel financiers discussed such topics as fixed versus floating rates and new-construction deals during a general session at the Hunter Hotel Conference. But is supply a concern?
ATLANTA—Not much is keeping lenders up at night, according to panelists speaking during a general session at the 27th annual Hunter Hotel Conference last week.
“As you look at the market today, you’ve got to feel pretty good (as owners and borrowers) … that revenues are up and earnings are up. Because of that, there are a lot of lenders in the market today,” said Scott Schory, executive VP of Wells Fargo Bank, during the “Hotel financing: Seizing the opportunities” panel.
He said at this point in the cycle there seems to be financing available for mostly every type of project. However, he said his company tends to be more selective, financing the projects with more seasoned developers in major markets.
Scott Andrews, senior managing director of the hotel group at GE Capital, agreed with that strategy. His company will “never do a guy’s first property” and will lend to hotels with core brands, looking for seasoned developers who own and/or operate about five or more properties.
Floating vs fixed
In 2008, real estate investment trust Ashford had about $2 billion of 10-year fixed-rate debt on its balance sheet when company executives could tell the downturn was near, according to the company’s CFO Deric Eubanks. That’s when they swapped to a five-year floating rate, a strategy he said was decided in 2003 when the company went public. LIBOR then went from five to zero, which saved the company more than $200 million in cash flow.
“We spent a lot of time analyzing hotel REITs that were public during the previous downturn, and we looked at their cash flows through the downturn. We looked at whether they would have been better off if they were floating or fixed,” Eubanks said. “We came to the conclusion that as a hotel owner, it’s a natural hedge to your cash flows to have floating-rate debt.”
“We’re seeing a lot of our sponsors opt for floating-rate financing as well,” Andrews said.
Eubanks said that although Ashford prefers floating rate, fixed rate isn’t out of the question. The company does have some fixed-rate debt on its platform, which is a function of the hold period or a trajectory of where executives think values of the hotel might go.
Eubanks said he believes interest rates will be low for a while.
“If rates start to go up, it’s just going to create too much drag on our economy, and I think they’re going to do everything they can to keep the economy chugging along,” he said.
“We’ve got a lot of floating-rate debt on our balance sheet,” Eubanks added. “So even if rates do start to go up … we don’t like having our hands tied in terms of flexibility to sell assets and refinance assets when values have increased significantly.”
As the conversation turned to new construction, the theme of experienced developers backed by brands continued throughout the session.
“We got back into the space in late 2013, and we continue to have success with it,” Andrews said. “We’re trying to go deeper with some of the stronger developers who have built through cycles.”
Leslie Ng, chief investment officer of Interstate Hotels & Resorts, said brands helped spur the growth in new construction due to proliferation of new product.
“As lenders evaluate projects, they are much more comfortable with brands behind them,” Ng said. “If it’s a good sponsor, you will get it financed.”
“Everyone wants to talk loan to cost on new construction,” Schory said. “We focus on our underwritten debt yields. We don’t want to be a long-term owner of the property; we want you to be.”
When asked whether non-recourse debt was available for new-construction projects, Jon Wright, president and CEO of Access Point Financial, said “not for us.”
“We aren’t owners or operators, nor do we want to be,” he added.
Supply a concern?
With new supply coming online, are lenders at all concerned?
“We’re already looking at that today on every transaction that we see, whether it’s refinance, acquisition or new construction. We’re evaluating how much new supply is already being built in that marketplace,” Andrews said. “At the end of the day, sometimes we’ll get comfortable with that depending on the sponsor. … And we’re sticking to core brands within those marketplaces.”
The company also is looking out a couple years to attempt to get a handle on where its debt yield will be when all the new supply hits the market.
Wright said Access Point Financial also is looking forward 24 months and not basing underwriting on current metrics.