Last week’s Midwest Lodging Investors Summit addressed many topics during sessions and informal discussions at breaks and networking functions. Between scenes such as Raul Leal, president & COO of Virgin Hotels, beaming while talking about the brand’s development of its Chicago hotel while overlooking the nearby building from the rooftop bar at The Wit-a DoubleTree Hotel, to Ravi Patel, executive VP of Hawkeye Hotels, passionately explaining why getting into the film-making business has been so much fun and educational to him, the conference delivered an encompassing view of the hotel landscape.
Following are some final thoughts from the conference, held in the shadow of the construction of a 400-plus room tower at the Hyatt McCormick Place.
Property-improvement plans continue to weigh heavily on the minds of buyers. A number of deals have stalled because financing for the renovations required by brands simply isn’t readily available.
Bill Sipple, managing director of HVS Capital Corporation, said construction financing for large PIPs is limited by the lack of lenders in that space. “Good, well-located properties with a small purchase price with a large renovation are the hardest deals to get done,” he said.
Mike Everett, chief investment officer for Sage Hospitality, said there are two or three players in the large PIP-financing arena “who can essentially name their price on their debt. … If I was a lender, that's the type of business I would want to be in.”
Buyers with money
Everett said there are a lot of suitors with 50% to 60% leverage looking for assets. “It’s fairly easy to get to a term-sheet stage,” he said. “Once we get to term-sheet stage, it does become a bit more challenging. Getting the debt done is just as difficult as buying the asset. That's probably a good thing.”
Teague Hunter, president of Hunter Realty, said most successful deals are getting done with the buyers writing checks then figuring out the financing package. “It's the middle tier that's the no-man’s land,” he said. “It's all about sponsorship. The guys that don't need it can get it.”
Sipple said the most expensive money brought into a deal is when brands provide it. He said some brands are aggressively coming to the table with financing incentives.
So where are the deals?
Everett, formerly of Destination Hotels & Resorts who joined Sage at the beginning of July, said he’s seeing opportunities in secondary markets. “It ties back to conversion opportunities—taking things that have been sub-branded for a long period of time and moving them into better brands. … The (real-estate investment trusts) typically don't go into those kinds of markets.”
During his acceptance speech after receiving the conference’s “Game Changer Award,” Bruce White, chairman & CEO of White Lodging Services, said he likes the stability of the Midwest.
“We try not to follow the herd in (central business district) markets,” said Peter Willis, executive VP and chief investment officer for Chatham Lodging Trust. “The barriers to entry are generally lower in the Midwest. We take a real hard look at that, but you do need barriers to entry to support long-term (investments)”
What’s coming in the next six months?
Uncertainty permeates the industry. Political rhetoric aside, a recurring topic at every industry event seems to be the lack of direction for the U.S. economy.
Everett: “Clarity and certainty about the direction the country is heading would be outstanding. That could lead to more companies freeing up their budgets and (spending) more on travel and group events. I'd like to think there's a tiny bit of potential.
“On (the) negative side, the continued bumpiness of the economies of Europe will continue to affect the U.S. I don't see a lot of negative impacts at our hotels, but it does impact the attitude and mental state of investors and potential buyers.”
Willis: “I'd like to see more consumer confidence and real job growth. Real job growth is the key.”
Hunter: “Follow the money. … Private REITs are in a bit of a bind today. Guys are out there raising $50-million chunks, and they'd like to be raising $500-million chunks.”
Sipple: “The continued availability of capital at low rates is going to have an impact on the industry. As the economy continues to bump along at a snail’s pace, the possibility of a slowdown of cash flow could affect our industry. If we fall out of favor with the capital markets, that will make things more difficult.”
Management contracts under scrutiny
James “Mike” Hines, president & CEO of HP Hotels, said his company doesn’t like a lot of back and forth when it comes to signing a contract. “If a contract comes back to us more than twice, we don’t do business. It sets you up for a contentious relationship.”
Alex Cole, partner with Perkins Coie, and Albert Pucciarelli, partner with McElroy, Deutsch, Mulvaney & Carpenter LLP, said management contracts are getting more contentious, especially with court rulings that have found that a management contract is a service contract—which means the owner has the power to terminate the service agent at any time.
“It’s a perennial problem for management companies,” Pucciarelli said.
“You are in fact holding the owner’s money, running the owner’s asset,” Cole said. “Judges have said (to management companies), ‘You are an agent and you do own these duties.’”
I’ll take a two pack, please
Craig Mance, senior VP of development, North America, for Hilton Worldwide, said during a session about urban markets that his company is seeing more development of so-called “two packs,” which involved putting two separate branded hotels on one piece of real estate to share back-of-house functions.
“We’ve had some luck with these in urban areas,” he said, adding they are more of a challenge than those in suburban locations because of the limited property footprints.
So, what’s next? Hilton just received approval for a “three pack” in Oceanside, California, where an Embassy Suites, a Homewood Suites and a Hampton Inn & Suites will be built. The three hotels will have separate entrances, public space and room towers, but the back of the house will be shared.
Open season for construction
Mance said Hilton has had more than 90 new construction starts thus far this year—up from 45 for all of 2011.
Mike Cahill, CEO and founder of HREC, expects construction to start building momentum in the hotel industry.
“The big picture nationally is that we’re entering into a two-year window where new build projects will pop up,” he said. “Construction deals are still a little bit slow. However, every week it is getting better and better and better.”
He cited a project in northwest Houston called Springwoods Village as “the single best hotel development opportunity I’ve seen in my career.”
The 1,800-acre housing and commercial development adjacent to the Exxon Mobil campus is in the request for proposal stage of hotel development.
“Exxon Mobile is adding 10,000 people there, and we’re tracking to generate about 200,000 roomnights itself,” Cahill said. “It’s an urban corridor that’s being built.”
One of the biggest challenges for urban hotels is keeping labor peace, said Doug Dreher, president and CEO of The Hotel Group.
“Every few years you have to re-up the labor agreement, you have to spend quite a bit on the legal front,” he said. “Once you get that done as long as you (have) competent management, it doesn’t become a big thing.”
Highways are a good way
Interstate hotels are getting done, according to panelists addressing that segment of the industry.
“(Local politicians and businesspeople) say they want a nice property in their town. It’s amazing how many of those guys are there,” said Craig Ragland, director of franchise sales for AmericInn. “There are still markets out there untapped.
“Everyone in those markets is excited,” said Patel of Hawkeye Hotels. “Local developers, banks, the city are all on board. They just want a nice, swanky property in their town.”
Greg Hanis, president of Hospitality Marketers International, said highway travelers are just one facet of the interstate market.
“You have to have demand diversity—you don’t just build it for the highway traveler,” he said. “A lot of communities have demand. You don’t realize the impact of a 500-person freshman class (at a local college) and how much room demand it creates a year. It ends up being thousands of roomnights a year.”
What were they thinking?
Patel said Hawkeye Hotels, which has approximately 70 properties in its portfolio, is acquiring a number of hotels, including a recent deal for a hotel that had zero net operating income at the time of the transaction.
“They had all kinds of things that you don’t need,” Patel said, pointing out the property employed an armored car service to pick up daily cash because it was in an affluent market and wanted to maintain an affluent appearance. “You look at properties where you can add value, and sometimes it’s really easy to do that.”
Hanis said during the “Interstate Markets” panel he doesn’t understand why there’s a negative vibe permeating the industry because there’s plenty of activity happening in the hotel world.
“I’m getting fed up with the negativism,” he said. “There is an element of developers in the hotel industry that’s saying, ‘Full speed ahead. Let’s forge ahead and figure out what to do.’ They’re coming up with more equity.’”
AmericInn’s Ragland said his company has had no deals fall through because of financing issues.
“If you want to get the deal done, (there are) ways to do it,” he said.