NEW YORK—A deal that might not sound attractive to one bank or investor in this market might be highly desirable to another, according to a panel of lenders and developers at the HOTELSnyc conference held earlier this month in New York.
Raphael Fishbach, principal at Mesa West Capital, said his company’s focus is on assets that are not stabilized and have low cash flow. They are looking to invest in assets with business plans in which the borrower is looking to bring a hotel back to the market and capitalize on its performance.
Approximately 20% to 25% of the Mesa West Capital’s portfolio consists of hospitality-related deals.
Traditionally, the lender has focused on branded hotels. “There’s safety in the reservations systems. For us, that makes the most sense,” Fishbach said. “We are looking for full-service, select-service deals.”
Jason Lipiec, group VP and senior group manager at M&T Bank, said his team is open to making deals in the boutique sector but only in major markets.
“In Manhattan, I think boutique hotels are as successful if not more successful than (branded properties). There’s more flexibility to do certain things when you’re a boutique,” he said.
In secondary and tertiary markets, however, M&T Bank executives prefer to work with branded products. “The level of demand here in New York City is a little different,” Lipiec said.
Tyler Morse, CEO and managing partner of MCR Development, is not as bullish on investing in the top U.S. markets. MCR Development owns and manages 30 hotels in 11 states.
“Because hotels are so volatile, we try to mitigate that volatility by using brands to flatten the demand curve,” Morse said. “We invest in secondary and tertiary markets where we can invest at replacement costs or below.”
MCR Development tends to invest in Hilton Worldwide and Marriott International select-service products, he said.
“We’re low leverage. That’s the other way we mitigate the volatility of hotels. We borrow at very low interest rates because we’re low leverage,” Morse said.
In December, the company purchased a portfolio of 10 hotels in Maryland—six Marriott products and four Hilton products. “We bought it on a 9% (capitalization rate), and it turns out our year-one cap rate is going to be about 10.5%,” Morse said. “We’re low leverage, so we put 50% to 60% debt on it and we are borrowing at about 3% interest.”
Selling F&B concepts to investors
Dionis Rodriguez, executive VP of acquisitions and development for GB Lodging, said all of his company’s properties have a successful food-and-beverage concept, which is somewhat of a challenge with investors.
“One of the things we tell investors is that we actually lead with food and beverage. It’s not just a rooms business,” Rodriguez said.
GB Lodging is flexible with its F&B operations as some restaurants are leased and some are partnerships, he said.
Obtaining financing is a longer process given that these hotels are specialty products, he said. “It takes a lot of time to get our lenders and our equity partners comfortable with that,” Rodriguez said.
Because the concept of leading with F&B is still at an early stage, there is some pushback from investors, he said. “What we can do is sit down and walk them through an extensive analysis. At the end of the day, it may result in a lower (loan-to-value ratio) and you may not accept that.”
Other panelists expressed doubt that GB Lodging’s F&B strategy will be sustainable in the long term.
“I think it’s a terrible business,” Morse said. “Hotel rooms are the way you make money.”
“We are always focused on the rooms first because the margins are better than in F&B,” M&T Bank’s Lipiec said.
“You really have to know what you are doing,” he said. “What people consider ‘cool’ changes quickly, and it could be that an F&B operation brings in $2 million to $3 million in profit the first year and not much the following year. After that, there’s no choice but to revamp the concept.”
The risk is hard to underwrite, Lipiec said.