LOS ANGELES—Hotel financing is evolving into a complex beast, a development that could throw yet another wrench into the transactions market, members of the Industry Real Estate Financing Advisory Council said during the closing general session of the Americas Lodging Investment Summit on Wednesday.
“The traditional providers of debt to the hotel industry aren’t there anymore … There’s already a lack of traditional financing from the banks and insurance companies,” said Charles Henry, president of Hotel Capital Advisors, who co-moderated the panel with Strategic Hotels & Resorts’ President and CEO Laurence Geller.
Hotel deals likely are to become a lot more complicated, said Mit Shah, CEO of Noble Investment Group.
“There are deals; there will be deals,” he said. “But they won’t be as readily apparent or quick.”
Highlighting that point, Mark W. Elliott, senior managing director of Hodges Ward Elliott, said deals that usually would take 90 to 100 days to close will now take upward of six months to close. He added that transaction velocity likely is to increase throughout 2012 as the stock prices of public companies recover.
Divided over financing
The IREFAC panelists appeared split when debating the financing outlook for the industry.
Monty Bennett, CEO of Ashford Hospitality Trust, said there are not many loans being made. “It looks like this is going to be the case for some time,” he said. “I don’t see any catalyst for change.”
Jackson Hsieh, vice chairman, global head of the Real Estate Group at UBS, said the first half of 2012 will be favorable to those seeking leverage.
UBS also is seeing an active securitization market. The company a year ago originated US$400 million of hotel loans that were sent into securitization, Hsieh said. So far this year the company already has committed US$700 million of hotel loans for securitization.
The loans often are purchased by such buyers as mutual funds and bond buyers, he said. “It’s really come back,” he said of the securitizations market.
Having a brand behind you is one key to attracting capital, the panelists said.
“It’s vital,” Michael Murphy, head of lodging and leisure capital at First Fidelity Companies, said. “If you can buy a property and upflag it or get a major brand, it’s big. The brand can attract capital that would otherwise not be created.”
“I talked to one lender who said he was taking a lot of criticism for extend-and-pretend, but it’s working for him,” he said.
Approximately US$14 billion of commercial, mortgage-backed securities will mature this year, he said. “A lot of that will roll over and extend,” Elliott said.
Still, refinancing all the debt scheduled to come due this year is a big issue, he said.
“The risk this year is the lack of debt capital to match the debt coming due,” Elliott said.
Transactions outlook
Neil H. Shah, president and COO of Hersha Hospitality Trust, was asked how active the real-estate investment trust will be this year. “Not very active, probably,” he said. “There’s still a gap between public and private market financing.” He said the deal market is likely to remain challenging throughout the year.
REITs will get into the buying game if the companies are able to raise equity, Bennett said.
“Until pricing comes back for the REITs, it will be hard to issue capital,” Neil H. Shah said.
As public company stocks recover, though, transactions will become more frequent, Elliott said.
Hotel values
Hotel values could see a bump, but it won’t be a big bump. “I think 25% is probably stout,” Mit Shah said.
Murphy said a 25% increase could be “doable in some markets.”
“I think you have to take the statistics with a bit of salt,” said Majid Mangalji, founder and president of Westmont Hospitality Group. “How much did the values go down, and how much did they come back?”
Bennett said hotels will nevertheless benefit from a macroeconomic recovery. Hotels enter a recession first, he said, but also are usually the first to exit a recession because of how easy it is for the industry to reprice its inventory.
“Maybe we’ll see some upside here,” he said.
Lenders could continue the practice of extend-and-pretend, Elliott said.