John Belden
President/CEO, Davidson Hotels & Resorts
From hand-holding newbies who’ve come to the hotel space to having skin in the game with trusted partners, the role of management companies as the strategic support system for hotel owners has been front and center the past several years as the good times have continued to extend along with the lodging cycle. And while their primary focus is to deliver positive financial results, the majority of third-party management companies have morphed along the lines of one-stop-shopping experiences, able to handle a variety of owners’ demands.
Understanding what will work to meet those requests also is key. Now in his third decade at Davidson Hotels & Resorts, President/CEO John Belden has executed strategies along any number of avenues for the company, including securing new acquisition, development and management opportunities, as well as wrangling asset management and disposition. Earlier this year, he helmed the launch of Pivot Hotels & Resorts, a new lifestyle division.
Hotel Business reached out to the CEO to get his perspective on a variety of topics.
There’s any number of challenges management companies are facing heading toward 2017. What are your key concerns? Expanding regulatory intervention, government-directed wage increases, union pressures and explosive healthcare-cost increases are all fundamental issues facing our industry. These all impact the largest line item—human capital—in our P&Ls. Operators need to be ever-vigilant about productivity and efficiency, yet not so zealous as to value-engineer the personality and culture out of a property. The key is working collaboratively with ownership to identify that perfect balance, which, in turn, creates long-term and sustainable asset value.
Minimum-wage rates and health benefits are spark points, but what are some other labor issues? Attracting and retaining the best talent remains the most important directive for our company. We sometimes can’t control external forces involving regulatory intervention or government-mandated wage initiatives, but through our culture, we can drive a positive, productive and engaged team-member environment that in turn can help develop solutions to offset those impairments. Creativity, collaboration, productivity, efficiency and innovation are all byproducts of a team that is energized by its culture and core values.
Beyond making money, what are the top three things owners are looking for from management companies? First, Owners want to know their management companies are aggressive and focused, yet open to new ideas and strategies. Leveraging great ideas, no matter where they come from, is truly the mark of a great relationship; second, owners need to know their operators care about the “way” in which they conduct business as, in many respects, they’re guardians of their owner’s reputation in the community; and third, communication is key. We have countless ways in which we are communicating with owners or their asset managers nearly every day. Owners want to hear good news and bad news so they can stay informed and make impactful and timely decisions. Open communication builds trust and allows the owner and operator to take more strategic risks together.
Aggressive brand introduction remains a strong dynamic. Is this beneficial for management companies? It is our belief that there are simply too many brands in our industry. While each certainly has purpose within a brand company’s spectrum of options, fewer and fewer actually stand for something and, therefore, have less “stickiness” in the hearts and minds of the guest. That’s why, in part, the OTAs and Airbnb have been able to leverage their “brands” more successfully than some of the traditional [hotel]brands and, therefore, have become more meaningful to consumers. As a management company facing this issue, we have tried to simplify our decision tree when selecting a brand (if that option exists in a deal), or in determining whether we even want to get involved in a deal if the brand decision already has been made (and it’s not one of our core brands). Engagement is an enormous issue and opportunity when selecting a brand. Does that brand resonate with the operator’s team members and allow them to express themselves in a positive and memorable way when facing the guest? Does the brand provide meaningful connections with our guests, either emotionally or functionally? Does the brand help the operator attain premium market share, thereby optimizing revenues? Any hard brand that can meet these simple goals, should merit strong consideration; otherwise, the risk of mediocrity rises considerably.
There continues to be consolidation among industry players. Are there pluses and minuses for management companies in these paradigm shifts? Our industry is highly fractured, so consolidation, to a degree, could be healthy. When considering the brands, bigger may be better in order to combat issues that impact our industry, whether that be OTAs, the reduction of corporate overhead and brand cost creep, or fighting regulatory or legislative intervention. From a management company perspective, consolidation is a very good thing. Scale can have tremendous benefits in relation to recruiting and bench strength, portfolio and geographic diversity, client diversity, cost management, enhanced portfolio support, and greater agility. Of course, everything in moderation; if you become too big or you don’t maintain scale in resources, all of the previously mentioned benefits can be easily lost. In reality, consolidation among management companies is easier said than done, with cultural compatibility being the single greatest barrier.
Where does cost control sit in relation to guest satisfaction? Can it be a win-win or does something have to give—or go? It depends upon whether cost control defines your culture or whether culture defines your cost controls. It’s easy to walk into a property and very quickly recognize which of those cultures prevail. A “cost-control culture” can very easily impair guest satisfaction and destroy property or brand loyalty. Apathetic team members, lines at the front desk, institutionalized F&B quality, cleanliness issues, lack of supplies for team members and an overall malaise in the energy of the operation, can all influence guest satisfaction as a consequence of deep cost cutting. A lot of operators in our industry practice this approach, but then can’t deliver on what the guest truly needs. It certainly can have a positive, short-term impact on cash flow, but its merits rarely create real and sustainable asset value.
What’s the most important thing a management company needs to consider when taking on a new hotel? Understanding an owner’s objectives and having the skills and resources to be able to attain or exceed those goals. By starting at the same place, trust is attained and a more healthy “strategic tension” and/or risk-taking environment can follow.
—Stefani C. O’Connor
Keith Cline
President & CEO, La Quinta Holdings Inc.
As a global industry, there are any number of factors that can affect the health of the hospitality industry—economic factors at home and abroad, governmental intervention, terrorism in travel spaces and supply and demand growth—are just a few influencers on the hospitality business. Hotel Business talked to Keith Cline, president & CEO, La Quinta Holdings Inc., for his perspective on the goings-on in the industry.
Named president & CEO of the company earlier this year after serving as the company’s interim executive in those roles since September 2015, Cline joined La Quinta in January of 2013 as its EVP and CFO, where he helped to lead the company through its initial public offering. Prior to La Quinta, Cline served in a number of executive roles at Charming Charlie Inc., Express Inc., The J.M. Smucker Company, FedEx Custom Critical and L Brands.
How would you assess the overall health of the industry right now? We are optimistic about the long-term growth attributes of lodging, specifically in the highly desired select-service segment, which is where La Quinta operates. This segment has proven to appeal to both guests and developers, resulting in it being a very attractive opportunity for investment. Guests appreciate the price value proposition and developers are attracted to the high cash-on-cash returns.
The La Quinta brand is strong and we have plenty of room to expand our footprint in markets where we are under-represented. As a company, we remain focused on increasing our domestic and international footprint with new franchise openings and moving forward with our key strategic priorities of driving consistency in our product, consistently delivering an outstanding guest experience and building engagement with our brand by investing in points of differentiation.
What are your thoughts on the current brand landscape in the hospitality industry? There is a reason a number of major hospitality companies are focused on growing their select-service brands. It is a testament to the strong, consistent momentum the segment has enjoyed compared to full-service hotels.
Today, business and leisure travelers are increasingly focused on value and that’s what select-service hotels offer—affordable prices combined with the basic amenities that most travelers want in a hotel stay. Strong developer and franchise interest is also driving the demand for select-service hotels, which are typically less costly and time consuming to build than full-service properties.
At La Quinta, we are in the process of advancing three strategic priorities: drive consistency in our product; consistently deliver an outstanding guest experience; and build engagement with our brand by investing in points of differentiation. By focusing on the brand and our guest, we are confident La Quinta will continue to grow and take market share.
Supply growth is a topic at every hotel conference. How worried are you about it? Are there markets where you’re particularly concerned or areas where you still see opportunity? Supply growth is not necessarily a concern for us at La Quinta. What differentiates La Quinta is our unique growth opportunity, given that our brand is not currently represented in one-third of STR market tracks, and still has room to grow in many of the market tracks where we already have a presence. In fact, our pipeline as of the end of the quarter would put us into 40 new STR market tracks.
As we grow our franchise locations, we are focused on complementing our existing footprint domestically and in Mexico, Central and South America, with an emphasis on attractive locations, particularly in high-barrier-to-entry urban and otherwise generally higher RevPAR markets.
Terrorism and violence are issues that have been prevalent both domestically and internationally. Is this a concern for travel and tourism? We pay particular attention to what’s going on in the world and in the industry as it relates to potential security threats. Providing a safe and enjoyable guest experience is our top priority, so we place great emphasis on preparation and planning to minimize potential security risks. This includes ensuring our employees are familiar with established protocols and training them how to be vigilant and respond to potential threats.
Unfortunately, terrorism and violence are not new to our industry. There’s always going to be some level of concern among travelers, but they can take comfort in knowing that hospitality companies like La Quinta have put in best practices to create safer environments. Business travel will still take place and people will also continue to travel for leisure, so we don’t expect major disruptions to our business.
This December, the Department of Labor’s new overtime rules will go into effect. How do you see this affecting the hospitality industry? From your perspective, is the industry prepared for these changes? This is an issue hospitality companies have paid very close attention to since it was announced earlier this year. We have spent a considerable amount of time analyzing the impact and planning for the change. I am sure others in our competitive set have done the same. In the end, companies need to implement a pay structure that both adheres to the law and balances the best interests of employees and shareholders.
As we approach a change in leadership in the U.S. following the presidential election in November, what does Washington need to understand about the hospitality industry? It’s no secret that the health of the hospitality industry is directly correlated to the health of the broader economy. Whoever is elected must continue to take steps to advance our nation’s economic recovery to fuel domestic and foreign travel and business investments. Looking forward, we remain confident in the strength of our brand and opportunity in business and leisure travel.
The industry has seen a lot of M&A activity in the past few years. What kind of effect has this had on hospitality as a whole? How do you see that evolving in the next few years? Scale is important to success in the hospitality industry for a variety of reasons, including achieving cost efficiencies and benefiting from increased brand exposure. Consolidation also helps grow the size of loyalty programs, which attract more guests. However, despite the high level of M&A activity over the past year and a half, the industry is still very fragmented. I wouldn’t be surprised if our industry saw continued consolidation over the next several years.
Brands and OTAs are vying more than ever for bookings, and there are different schools of thought on how to maximize value for owners. What do you see as the best approach? What contributing factors should the industry be thinking about? Continued collaboration and constructive dialogue between brands and OTAs is important to ensure a mutually beneficial relationship that ultimately provides consumers with the best options. However, it’s essential for hospitality companies to continue to innovate to provide guests with an enhanced experience from booking to departure.
We’ve invested in a number of exciting initiatives that should keep our most loyal guests coming back to our hotels and booking their stays through our direct channels. Enhancements to our loyalty program provide new ways for members to redeem points for everyday purchases and for free nights while on property. Furthermore, improvements to membership- tier benefits should result in even greater levels of engagement. We plan to roll out even more enhancements later this year.
What influencers do you see impacting the hotel industry as we head into Q4 and 2017? What do you have your eye on? We have our eye on the different issues impacting the nation’s economy and the domestic and internal markets where we operate.
As mentioned, we remain confident in the strength of our brand and opportunity in business and leisure travel. About 50% of our bookings come from business travelers; the other half is from leisure. Our focus for the rest of the year and beyond is advancing our key strategic priorities and initiatives, which are designed to drive consistency in our product, deliver an outstanding guest experience and build increased engagement with our brand.
We are set up for success by operating in the attractive select-service segment with a strong brand, a highly scalable and efficient business model and a development platform that has significant growth opportunity and support from a highly passionate and loyal community of franchise partners.
—Nicole Carlino
Teague Hunter
President, Hunter Hotel Advisors
As another quarter in the lodging cycle turns, how the growth in new hotel supply, brand introductions and market dynamics may affect the transactions arena vis-à-vis pricing and demand has been among the issues on industry players’ minds heading toward 2017.
To get a sense of the buy/sell landscape, Hotel Business asked Teague Hunter, president of family-founded and -run Hunter Hotel Advisors, for his perspective on the outlook for transactions activity heading into the new year.
A 20-year veteran in brokerage and advisory services to the hotel industry, Hunter is key in steering the Atlanta-headquartered company’s direction and focus. In collaboration with father and CEO Bob Hunter, brother and COO Lee Hunter, and a roster of seasoned hotel professionals, the executive has expanded the regional brokerage firm to include seven national offices that provide hotel-investment advisory services. He has closed more than a billion dollars in hotel transactions, leads the company’s portfolio sales and represents single assets for select clients.
In addition, he helped launch Hunter’s Capital Markets Group, a real estate investment banking group industry.
How would you describe the overall transactions market in the United States? The market is back on track after a brief slowdown earlier this year. There was a pause at the beginning of 2016 with transactions down in Q1. Activity increased in Q2 and [has been]poised to strengthen further in the third quarter. U.S. real estate is an attractive and safe place for international investors given uncertainty in the global economy. This trend will continue to put upward pressure on values.
The transactions market was expected to keep the energetic pace it set in 2015. From your perspective, has it? In the first half of 2016, deal activity was down 70% from 2015 and deal volume was down 55%. Q1 was a larger decline than Q2, which showed signs of the uptick just described. We are in a much better position heading into year’s end.
What have been the main forces affecting activity? The slowdown in portfolio transactions was a key factor. The year 2015 was the year of the mega-deal, skewing any 2016 comparisons. Q1 dealt with uncertainty in the stock market and debt markets, dampening institutional appetites for portfolio deals. Now, drivers are the inflow of international capital and the continued solid performance of the industry, even with slower growth.
What kind of inventory is Hunter moving right now, i.e., more midscale, more upper-upscale, and what sort of inquiries are you handling (e.g., for select-service)? A mix. We have closed on a number of upscale, full-service hotels in major markets like Atlanta, Phoenix and Baltimore. On the other hand, we are transacting for institutional groups who are pruning their portfolios of aging select-service assets.
Are current deals more about one-offs than portfolios? What’s the dynamic? Again, 2015 was the year of the mega-deal with more than 40% of overall transactions occurring in a portfolio sale. Although we are starting to see more demand again for select-service portfolio acquisitions, single-asset sales are the driving force of 2016 so far.
Which segments/brands are presenting the greatest challenges when it comes to buying and selling? Are there some locations—urban, secondary, tertiary—that are distinctly easier to broker? Interest in recent years has shifted to urban locales. Institutional entities and foreign investors typically prefer high RevPAR assets found in gateway cities and larger MSAs. That said, we have been pleasantly surprised with our success in secondary and tertiary markets. The value proposition is more attractive to the local and regional hotel owners who tend to be more MSA-agnostic.
How would you describe the bid-ask gap right now and whose market is it currently, buyers or sellers? Why? There is a lot of product on the market and a shift in deal volume and activity. Whenever that happens, the bid-ask spread is going to widen. Sellers expect to transact at lower cap rates and pricing off forecasts. Buyers are focused on trailing financials and have more options on the table.
How have values/pricing shifted since January and what’s the outlook? Cap rates have increased, but not as dramatically as they could have, especially considering the drop in deal activity that we experienced in Q1. The outlook is increasingly positive. Transaction activity is up and prices are stabilizing. RevPAR growth has slowed but is still on a positive trajectory.
What kind of popularity are you seeing in regard to pricing? The demand will always be there for new select-service, branded product, in the top 25 markets. This type of deal can range from $15-$40 million and up. On the other hand, there are compelling value-add deals from $5 to $15 million happening every day.
Overall, are there deals to be had (e.g., below replacement cost)? Absolutely. With REITs less active than they were earlier in the cycle, plenty of deals are attractive on a cap-rate basis and price per key. The net buyers of 2014 and 2015 became net sellers in the first half of 2016.
What influencers do you see impacting the transactions market as we segue from Q4 to 2017? (1) Interest rates: The Fed is talking about raising rates again, which will affect the cost of debt; (2) Brands: Recently, all the brands have been driving a lot of decision making with the roll out of new prototypes and new room designs, leading to extensive PIPs; (3) International capital: With the slowdown and instability in China and other global economies, we will continue to see international investors acquiring hotels in the U.S.; and (4) More and more of the supply pipeline will come online and begin to compete. We will find out which markets have enough demand to absorb it and how that affects performance and price.
—Stefani C. O’Connor
James T. Merkel
CEO, Rockbridge
Like anybody looking for a good deal, hotel owners consistently have their fingers on the pulse of the transactions market, figuring—to paraphrase Kenny Rogers—when to hold ’em and when to fold ’em. But in between saying hello or goodbye to a property, there’s the relationship—the daily attention to detail via contracted managers, the big-picture strategizing by investors and the pop-up-out-of-sleep concerns of the actual deed holder of the asset.
So, when every day in business basically mimics yield management, a good grasp of industry dynamics would appear a wise thing for hotel owners to have, be they single- or multi-unit, REITs, pension funds, institutional investors or any number of asset grabbers now crowding the hotel space.
To bring some perspective to the current environment for owners, Hotel Business caught up with James (Jim) T. Merkel, CEO of Rockbridge, who has two decades of experience investing in real estate and operating companies. He created and leads hospitality-investment platform Rockbridge Holdings, which has raised six hotel funds and done more than 200 hotel investments in transactions worth approximately $5 billion. The company is ranked as the eighth largest hotel owner and developer in the U.S., according to Hotel Business’ 2016 survey.
What do you see as the key challenges for owners heading toward Q4 and into 2017? There has been a lot of change in the industry, especially with brands emerging. With the presidential election, we are being cautiously optimistic that the industry still has growth ahead. Our experience has been that there are great opportunities in the hotel market at all times. You have to know what you are looking for and stay disciplined regarding the opportunities you pursue. Rockbridge likes disruption, and in disruption, there are opportunities. A key to pursuing those opportunities is conviction, which is built through experience.
How robust is the investment paradigm? We have seen a “fear of peak” in the industry from an investment standpoint. We have been through these cycles before. We know these times of disruption and uncertainty can create opportunity. The key to success for investors wanting to act on these opportunities is to know their strengths and to act decisively.
In terms of growth for owners/investors, portfolio grabs seem to have waned, with one-offs seeing the most activity. Why do you think this is? Has it affected Rockbridge’s pace? The pace of revenue growth on a macro basis has slowed and caused many investors to be more cautious toward the sector. Rockbridge tends to do very well during these periods of time and has always focused on each individual opportunity and how we are going to create value on a one-off basis. The dynamics in the market have not changed our investment philosophy. The key is to look at a lot and do a little. When you focus on the individual investment details, you position yourself to be less impacted by cycles. We look at the cycle as wind. In the last five years, we have had wind at our back. Now that the wind has calmed down a little bit, we have to think that if we start to face headwinds, is our deal going to be strong enough to withstand it? We look at each of our investments in that way. There are good investments in all points of the cycle. Above all, be thoughtful.
How difficult is it to bring a property out of the ground now? Bringing a property out of the ground is always difficult. We are seeing increases in construction costs, too. However, it depends where you are building. If you are building in urban markets that are active, those are more challenging than if you were in a suburban location.
We’re continuing to see consolidation, e.g., chains, management companies, brokerages. How does all this affect the hotel owner? What keeps the hotel industry interesting is that there continues to be consolidation and change. We have learned over the years that this change/disruption creates as many opportunities as it does challenges. Rockbridge adjusts accordingly and takes advantage of opportunities that are presented as a result. The market never rests so neither can Rockbridge.
From your perspective, is it better for owners/investors to be more opportunistic or strategic at this point in acquiring or divesting? It’s important that investors are focused on what they are good at, and that they put the right business plan together for the opportunity for which they are investing. At this point in the cycle, many hotels are mature and stabilized. If you are buying a stabilized asset and you have an expectation for great growth, that’s not realistic. If you are buying a value-added opportunity, and you have the right business plan, those opportunities exist. Rockbridge is active in both. We continue to see good value-add opportunities where we can leverage our expertise and our capital base to create value for our investors.
There’s consistent concern about meeting the needs of consumers, which seem constantly in flux, with many hotels becoming almost diner-esque in their offerings around design, technology and “experiential” services. Is it time for hotel owners to take a step back for a reality check? There is no question that today’s consumer is changing, and the Millennials are driving that change and influencing the market. Brands, owners and developers are all trying to create hotels that appeal to this demographic, but not all will be successful. This is no different than any other point in time in our industry. We try to innovate, lead and stay ahead of the curve while investing in areas where the consumer finds value.
We feel the influence of Millennials has been real and positive for the industry. Millennials seek and are willing to pay for an experience that is local, authentic and thoughtful. Although that’s just one segment of the market, it now represents over half of the demand in the market. It’s a growing and influential segment.
—Stefani C. O’Connor
Jon Wright
President/CEO, Access Point Financial
With the hospitality industry focused on slowing-but-still-positive KPIs, as well as a continued increase in new supply, talk of peak and potential downturns has been a natural progression. Coming out of the last economic recession, the prevailing refrain from the hospitality industry was that a disciplined approach to deal making was a must for future success—but that this was also an industry that tends to have a short memory. As such, Hotel Business caught up with Jon Wright, president and CEO of Access Point Financial (APF), for his take on the current lending community landscape.
Wright has over 25 years of experience in hotel lending. Before forming APF in 2011 with members of the APF Management team and Stone Point Capital LLC, a private equity investment firm, he served as the former president and managing director of Specialty Finance Group, founded the Asset Backed Lending Group for GMAC Commercial Mortgage and managed the captive finance division for InterContinental Hotels Group. APF has a full-service hospitality lending and advisory platform, focused on offering financing to qualified franchisees of major hotel brands and independent boutique hotels throughout the U.S. and Canada.
How conservative is the lending community right now? Would you say hospitality is being disciplined? From what we are seeing, the lending community is maintaining reasonable underwriting standards by looking at projected future cash flows of the property, accounting for supply growth in the market, appropriate LTV metrics and adequate equity.
At Access Point, personal guarantees, although a hallmark of our risk management, is at times not applicable to a specific applicant and therefore we look at risk profile via management company or other ownership belt-and-suspenders collateral availability. We structure our loan products with a 12- to 18-month interest-only period to allow the property to ramp up and stabilize with a strong emphasis on LTC at inception of application and LTV based on stabilization.
Given the current climate, is now a time to refinance, sell, buy? Why? What type of pricing expectations should owners have? Depending on a variety of variables, each owner/operator is or has already refinanced eligible assets. APF tends to hear prevailing and bullish opinions that the timing is ripe to sell with cap rates starting to rise; many owners are looking to cash out on increased values from over the last few years. An increase in supply in some markets may have an impact on performance, which could have an owner looking to exit. With historically low interest rates and the CMBS market continuing to stabilize, refinancing is a possible option for many borrowers.
How would you evaluate the quality of deals you’re currently seeing? Our pipeline continues to be robust and consistent volume/number of application (25 applications per month at $100-million average volume with our closing rate at roughly 50% at current levels). APF provides a niche product to bridge the hotel performance a full 24 months out during a PIP/renovation or repositioning, which provides funding credit based on debt service coverage post stabilization. The quality depends on several factors, including history and wherewithal of the sponsor, and the health of the property’s particular market, as well as the hotel’s brand and scale class that help APF assess the viability of the transaction. We are looking to finance properties that will receive an uptick in value based on the loan structure being provided.
Typically, what kind of underwriting are you seeing? What factors are you looking at when you’re underwriting? The specific market, brand/independent and other location variables—past, present and future—are all important factors to consider during the evaluation. The sponsor of a given project is historically the top-weighted input for our credit decision with repeat clients making up the bulk of our roughly 600 loans currently under management. Most every asset we finance happens to be initially underperforming, as the sponsor desires to reposition in the market via renovation and possibly a brand change. The sponsor and corresponding history in the industry is a critical part of whether the property can be successfully transformed. The sponsors underwrite the inherent value proposition of utilizing APF to quickly take control, acquire the asset (closing capabilities of 10 business days, renovate and/or convert with a significant increase in cash flow post stabilization).
Are there any markets or regions you’re focused on, or markets you’re staying away from? Why? At APF, we lend throughout the 50 states and Canada. We also focus on markets with multiple demand generators. For instance, if the market is reliant solely on the oil and gas industry, we will pass on the transaction. Demand generators necessary to make for a successful hotel typically include local businesses, government demand, group and leisure demands in the area. We also want the hotel we finance to have close proximity to these segments so that guests have easy access to what the market has to offer and can easily find the hotel.
Supply growth is much talked about in the industry today. How worried are you about it? Following the downturn in the economy, many new-build projects were postponed or tabled altogether. Today, franchisors are looking to quickly add to supply via conversions rather than new construction (less bank interest/delayed revenue impact) while the U.S. hotel industry is projected to experience continued growth through the next year. Supply growth in high-barrier-to-entry markets will not have a significant impact on values as cap rates should remain low in those markets. In low-barrier-to-entry markets where supply growth is high, we will see a gradual increase to cap rates and tempered RevPAR growth as compared to more robust RevPAR growth in prior years.
Is there more or less competition amongst lenders right now? We are seeing competition between community regional banks along with CMBS or SBA lenders all competing to refinance stabilized hotels, and, to a lesser extent, new construction lenders are competing for new-build hotels if a uniquely qualified risk candidate. However, at APF, our focus is ‘value add’ bridge loan whereby the borrower is repositioning an asset that currently underperforms the market. Typically, our applicants seek acquisition and renovation debt, coupled with the rebranding of an existing asset, or separately a standalone renovation /PIP short-term loan to facilitate brand mandates.
In some instances, we can also assist in the overall capital stack for a new construction project whereby a sub-debt tranche satisfies funding for FF&E (which is generally about 20% of the total project costs). This allows the first mortgage lender to limit their overall exposure risk and allows the developer to reduce their overall cash equity requirement in the project. APF still requires the borrower inject a minimum of 15-20% equity into the project and have a Pro Forma 1.25x debt service coverage ratio at stabilization (typically 24-36 months forward). The sub-debt provides interest only for up to 18 months followed by a fully amortized period to coincide with the useful life of the FF&E. Senior debt lenders view the sub-debt as a disciplined approach with the right to cure or assume APF sub-debt if/when appropriate.
The industry has seen a lot of merger and acquisition activity in the past two years. What kind of effect has this had? How do you see that evolving in the future? There has been market volatility this year, but despite the uncertainty, it is a busy year for merger and acquisition activity for many companies. In spite of the uncertainty seen in the markets due to China’s slowdown and other global economic pressures, low interest rates and cheap financing will continue to create an interest in M&A deal making. At APF, we have been on the lending side of quite a few hotel acquisitions of late. Our clients are opportunistic in sourcing underperforming or undervalued properties. They use APF’s reliable capital to acquire the property, renovate, reposition and possibly rebrand the hotel, thereby creating value for investors via the future refinance takeout which provides tighter spread, wider amortization, less recourse, all resulting in exploited proceeds.
Are there any other trends or influences you’re keeping an eye on as you look toward the future? Many believe 2015 may have been the peak in the hospitality industry recovery; we are still seeing RevPAR growth in many markets. That said, there are some headwinds: The possibility of rising interest rates are frequently being discussed by the Federal Reserve; tighter loan underwriting policies from banks; the coming CMBS loan maturities in late 2016 through 2018; the volatility of overseas economies and the effect it has on U.S. tourism; and the threat of Airbnb supply in different markets as well as the difficulty tracking these figures.
We are also cognizant of the U.S. experiencing the slowest economic recovery in the post-World War II era. While the current unemployment numbers are decent, the nation’s real unemployment rate was 10.1% in July 2016. While these concerns exist, APF relies on proven underwriting metrics that allow knowledgeable and experienced sponsors to access capital needed to grow and improve their hotel portfolio. HB
— Nicole Carlino
