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SNL Blogs
Tuesday, October 13, 2015 11:13 AM ET
Cuba, construction and capital: Some Lodging Conference highlights
By Jake Mooney
The Lodging Conference, held at the Arizona Biltmore in Phoenix from Oct. 7 to 9, saw industry figures celebrating the current strong fundamental
moment, but wondering how much longer it will last. In particular, much of the talk focused on new supply, access to capital and overlooked investment
opportunities. Some highlights:
* Can't get good help
In panel appearances throughout the conference, industry figures pointed to relatively muted new supply as a reassuring factor amid concerns about
slowing revenue growth.
"We are seeing that the cost to construct is going to be a pretty important limiting factor on new supply," said David Emery, CFO of InterMountain Hotels. "We
had lack of capital for a while, which was keeping a lid on supply. … Now there's a lot of people, a lot of deals, a frightening number of deals out there being
approved, a frightening number of brands being created, so more deals being approved. What we're finding, though, is that while there's a low labor force
participation rate, and there's falling commodity prices, the cost to construct is still constantly ratcheting up."
Though the rising cost of materials has been frustrating, Emery added, "We take a little bit of comfort from the fact that it's hard to build a hotel still."
Jim Amorosia, president and CEO of G6 Hospitality LLC, called labor costs particularly tight on the coasts, especially for certain skilled trades such as
roofers and electricians, and added that costs of materials such as gypsum and concrete have also risen.
Simon Turner, president of global development at Starwood Hotels & Resorts Worldwide Inc., said the construction lending market, too, is still difficult for
some types of properties.
"I think if you can do a smaller deal with a single lender who knows the market and is in the community, I think those are still relatively straightforward," he
said. "I think if you start to go to a situation in a secondary market where the loan has to get syndicated, then it just becomes a little bit more cumbersome,
because now you've got to find two lenders to work together, and that's no different today than it was years ago."
Moreover, he said, "I think for the less established developers, who don't have house banks, if you will, or relationships, we're seeing those take a little bit
longer to get done."
* In the money
In general, though, property owners are finding that they can raise capital, for construction or otherwise.
"For the right deals, the right sponsors, credit's relatively available," Mathew Crosswy, president of StoneHill Strategic Capital, a lender, told SNL.
"On the CMBS side, as long as it's priced right and you have the risk priced in and you have the structure right, for the most part you can get a deal done,"
he said. "But the underwriting is still very tight for hotel assets. They're now underwriting to 2012, 2013 numbers, stressing revenues and NOIs, not thinking
that this current environment is sustainable. Which is understandable."
Crosswy's firm, an affiliate of Peachtree Hotel Group, has capitalized more than $350 million in various forms of financing so far in 2015, including financing
of 11 hotel projects in the last 75 days. The money that is available for hotels is more discriminating in general, he said.
"For a Hampton Inn that in 2007 you could build for $80,000 a key, you're building today for $120,000 a key, and you're truly putting 35% hard equity into the
project," Crosswy said. "The project has to pencil. You can't just financially engineer a return by building at an extremely low basis, getting 85% leverage at
LIBOR plus 350 [basis points], and just live off of that cash flow that you're going to generate because you have a relatively affordable senior mortgage.
Now you're looking at your straight equity returns, not just your leveraged returns."
Even considering the still-tough underwriting, the widespread availability of construction financing signals a loosening of capital markets compared to recent
years. Some panelists, such as Joel Ross of Citadel Realty Advisors, said borrowers should resist the temptation to take on too much leverage, because the
current strong fundamental environment may end unexpectedly. Yet that may be easier said than done.
"I think Joel's advice, to borrow prudently, to underwrite prudently, to stress downside and capital structure, is spot on," Bernard Siegel, a principal at KSL
Capital Partners said. "But again, in a low-cost-of-capital environment, it's hard to push away from the table when you're buying at inside your residential
mortgage coupon rate, which I've only seen a couple of times in my career."
The low price of debt may itself be a warning sign of an overheated future, he added, "because in my general view, hospitality is much riskier than a home
loan. But that's just me."
* Proceed with caution
Source: S&P Global Market Intelligence | Page 1 of 2
Article
In a discussion about promising hospitality investment markets, the talk surrounding Cuba was skeptical.
"It's going to have to take some time," said Cliff Risman, a partner at Gardere Wynne Sewell LLP. "Anytime you have a country or an economy where an
asset has been expropriated by the government, when they start to open it up and privatize it again, there'll be years of litigation, and companies and people
trying to get their property back, and there'll be issues with clear title for a long, long time."
Robert Alter, president of Seaview Investors LLC, quipped, "I think Carnival has the right approach. They're going to bring their big ship full of 4,000 people,
they're going to bring food, already paid for by the customers. They're going to let the people off in Cuba, they'll spend the day at the beaches, then they'll
get back on the boat and go back home."
Even in countries that seem more similar to the United States, legally and culturally, investors should exercise caution, Risman said.
In Mexico, for example, "the legal system is not nearly as developed," he said. "To some extent — I'll choose my words carefully — it remains somewhat
corrupt."
Some property disputes "are accomplished with private security forces and armed guards," he added. "When the resort is printing money and everybody's
happy, it's very similar to the United States. But when something goes wrong or it's not working well, it's very different from the United States."
Source: S&P Global Market Intelligence | Page 2 of 2