Panelists debate supply, cap rates, brands
01 APRIL 2015 8:05 AM
Overbuilding isn’t yet a concern for panelists speaking at the Hunter Hotel Conference, but the market for low cap rates and brand proliferation are among their biggest concerns.
ATLANTA—A typical day for hotel industry leaders includes worrying about cap rates that are too high, low interest rates that might be rising soon and brand proliferation running amok.
Those were the parting thoughts from the 27th annual Hunter Hotel Conference last week as executives speaking on the closing “Seize the day!” general session panel were clearly upbeat but realistic about current market conditions.
A common thread throughout the three-day conference evolved around whether there’s too much supply in the pipeline. During one of the earlier sessions at the conference, STR’s Vail Brown said there are 129,000 rooms under construction in the U.S. These panelists didn’t sound too concerned about it—and a couple of them pointed to a specific barometer that will indicate an overbuilding situation.
- Click here to read all coverage of the 2015 Hunter Hotel Conference.
“Hopefully the dentists aren’t building yet,” said Teague Hunter, president of Hunter Hotel Advisors.
“We’ve heard today, this morning, that certainly the major banks aren’t looking at doing construction financing for doctors,” said Rob O’Neill, CEO, American Hotel Income Properties. “They look more for the large companies that have a good track record, who are doing bigger deals. Our concern is when we get into the top 50 markets at the bottom end you’re going to see (doctors) coming in there.”
O’Neill said 75% of the company’s revenues come from 38 hotels that have contracts with major U.S. railroads—and that often pits his hotels against those being built by non-hoteliers.
“We understand secondary and tertiary markets,” O’Neill said. “They don’t scare us.”
The industry remains a hotbed for transactions, according to the panelists.
“Bigger assets are trading and there’s more of it,” Hunter said. “The velocity is picking up. The money’s happening.
“Today it’s all about portfolio,” he added. “There’s a portfolio premium and the best way to get money out of peoples’ pockets is by selling them all.”
AHIP has taken advantage of that trend by adding 28 hotels during the past two years to triple the size of its portfolio, according to O’Neill.
The Abu Dhabi Investment Authority also has been active during the past 24 months, adding portfolios of hotels in the United Kingdom and Australia and single large assets such as the Atlanta Marriott Marquis—where the conference was held.
Mike Goodson, ADIA’s head of global hospitality, said the Authority likes what limited-service hotels can do to a portfolio.
“We have exposure to well over 100 (select-service) hotels through a series of investments, and we would do more there,” said Goodson, who spent the majority of his career with IHG.
Mit Shah, CEO and senior managing principal for Noble Investment Group, agreed. Noble’s analysis includes taking limited-service and extended-stay hotels out of data sets, and it’s far more stable than most people realize.
“From a market standpoint, from a brand standpoint, from cost per room and prudent leverage, you can sustain yourself through all these downturns,” Shah said, pointing to the ruble collapse of 1998, the dot-com bust of 2000, 9-11 and the Great Recession. “Our limited-service and extended-stay portfolio cash-flowed through each of those. That’s more of a secular bet than a cyclical one.
“If there’s that much appetite for yield of this product type, then (developing) it is not a bad way to push the business,” he added.
For more transactions perspective from the Hunter Hotel Conference, read “Deal flow to ebb in 2015”
The right product and the right hold period
Shah said that regardless of the type of properties being acquired one thing has to remain constant:
“It’s about strategies for the hold periods,” he said. “If you’re going to be a long-term holder, and part of this search for yield has driven this whole conversation of core and core plus, even in the world of lodging. In terms of today, we believe in long term.”
Taking advantage of deals is often about being in the right place at the right time. Hunter and Shah discussed a deal involving an unbranded hotel that Hunter brokered for Noble in 2011. Noble acquired the former Hotel Midtown for a reported $15 million and converted it to the Hyatt Atlanta Midtown.
“I would ask Mit, the Hyatt midtown deal … how long would it to get that deal done today?” Hunter asked.
“That was ‘a moment-in-time deal,’” Shah said. “That moment in time with as many physical ailments as that box had, at the time frame when the market really didn’t show the kind of inflection that it’s shown over the last 12 months. It wasn’t as obvious.”
The types of deals being finalized in this environment still have strict investment guidelines, according to the panelists. Most buyers are chasing yield—which isn’t an easy thing to unearth.
“We’re not opposed to buying yield … there’s not a bunch of 9-, 10-cap deals falling off trees in markets we like,” Goodson said.
Floating rates are preferred
The bottom line for any deal, however, lies with interest rates. The majority of the panelists said they prefer floating rates at the moment.
“We can take the floating rate risk,” Goodson said. “There are some interesting floating rate opportunities out there.”
Shah said Noble likes floating interest rates and five-year horizons. O’Neill said the new branded hotels the company bought were 10-year, fixed-rate, interest-only deals.
For more on hotel financing from the Hunter Hotel Conference, read “Lenders relish the hotel financing landscape”
Goodson said interest rates, gross domestic product and revenue per available room “kind of run together” and there’s no reason to think there will be any significant changes in any of them for the foreseeable futures.
“It’s not just U.S. interest rates; global interest rates are just as low,” Goodson said. “It’s going to be interesting to see how long that lasts. Our economists predict modest interest increases but nothing benign.”
O’Neill said his real concern is all the new brands launched during the past few years.
“It’s like a Subway that decides they’re going to have a fish filet, and they open a new restaurant called ‘Subway Fish Filet,’” O’Neill said. “I just don’t get where a brand gets to open three projects within three miles of you with a letter that says ‘I hope you’ll welcome them.’ I’m not terribly impressed.”
Other panelists agreed.
“The brand guys have turtle skins because they don’t care what you think,” added Michael Murphy, head of lodging and leisure capital for First Fidelity Companies.
Shah said brand proliferation is a concern for all hotel owners, but acknowledged some brands have plenty of value.
“The leading brands have significant distribution through their rewards program,” Shah said. “You open up a hotel, plug it in and 50% of the revenue comes in.
“Our biggest challenge today is not identifying the best brands for the next two, three, four years,” Shah said. “It’s identifying which brands will be able to grow with scale so they’re real brands five, 10 years from now. The market will reward that.”