BOSTON—The relevance of hotel brands, the current underwriting environment, the increasing popularity of crowdfunding and transaction activity were among the topics discussed in depth during the fourth annual HELP (Hotel Equity and Lender Perspectives) Conference last month.
Held at the Seaport Boston Hotel here, keynote speaker Lee Pillsbury, chairman and CEO, Thayer Lodging Group, got the crowd’s attention quickly. “Brands are becoming less and less valuable and relevant. They are less important to consumers and to owners,” he said, noting, “My view of brand relevance is not favorable.” Pillsbury added the costs associated with being affiliated with brands are not coming down, and their marketing efficiency is declining.
But, in the following session entitled “Perspectives From 30,000 Feet,” Warren Marr, managing director, PwC, offered a slightly different perspective. “I think the value of brands will come back and you’ll see a resurgence, but the brands have a lot of work to do,” he said.
During the same session, Anne Lloyd-Jones, managing director, HVS, reinforced the value of the brands. “We work on hotels that lose their brands, and we see a dramatic reduction in revenue coming through. There is a deliverable,” she said.
Pillsbury also touched on a number of macroeconomic factors, such as interest rates, which have been widely expected to increase. “The increase in interest rates isn’t going to happen,” he proclaimed. He added that the primary responsibilities of the federal government are to control inflation and promote job growth. “What is going to prompt rate increases?” Pillsbury asked rhetorically.
David Loeb, senior research analyst, RW Baird, agreed but offered a slight caveat. “Interest rates are likely to stay low for a long time, but a long time isn’t forever,” he said.
Pillsbury also noted that hotels are currently among the most favorable of all asset classes. “This is the business to be in. We’re in the right place at the right time,” he said, later adding, “It’s a great time to buy hotels. It’s very hard to make a mistake right now.”
Lloyd-Jones reinforced the notion of a frothy market, but also pointed out that it’s a good time to be a seller as well. “Values are back and are what they were at the peak in 2007. Hotel cap rates remain among the highest of any asset classes, and there is an increasingly active development market. We see a lot of activity during the next couple of years. It’s a good time to buy and sell,” she said.
Doug Vicari, EVP, CFO, Chesapeake Lodging Trust, noted that his company is doing just that. “We’ve been a buyer and a seller for the last six months. Where we’re buying is markets where we feel like they’re outpacing the macro market,” he said during the session entitled, “REITs: Rising Tides Float All Boats, Can We Dive Deeper?”
During the same session, DiamondRock Hospitality Company President and CEO Mark Brugger noted, “2015 continues to be a good time to buy,” adding, “We’re in midcycle.”
The panel was asked about the potential for consolidation within the REIT sector. According to Brugger, “The advantages to being a larger REIT are during the downturn. There’s no hurry to merge, I don’t know of any CEO that feels the downturn is around the corner,” he said.
Vicari, however, added, “The possibility of a public-to-public merger is probably greater than in other cycles.”
The practice of crowdfunding has been gaining momentum in the market, and it was discussed at length during a panel entitled “Crowdfunding vs. Private Equity: A Sea Change for Equity Raises?”
Jonathan Martin, VP, AEW Capital Management, took issue with the title of the panel. “I’m not sure it [crowdfunding]needs to be vs. private equity, they can work together. It has taken the next step into real estate. Is crowdfunding the Airbnb for the real estate investment side? I’m not sure,” he said.
Jonathan Jaegar, managing director, LWH Advisors, offered a unique perspective on why it’s gained favor. “The rise in popularity of Shark Tank has led to a shift and a rise in crowdfunding,” he said.
Of course, since raising funds this way requires some time, certain types of projects are more conducive to crowdfunding. “With our experience, we’re not afraid to underwrite a new-construction deal. However, if I’m competing for an acquisition, that will not be able to give me the four months I need to raise the money. The type of deal that works is one where there’s a reasonable amount of time.” said Tim Edgar, president, Innvestor.
“Logic will tell you select-service would work best since you have unsophisticated investors,” said Jaeger, who added that the Hard Rock Palm Springs gained plenty of attention for raising $1.5 million, as did recent higher-end projects in New York City. He added, “To me, it’s counterintuitive that these projects are getting funded.”
Finally, a session entitled “EB5, CMBS & Traditional Lending: Fair Winds or Cross Currents?” provided an assessment of current market conditions, which seem to be favorable.
Scott Schory, EVP, Wells Fargo, commented on his firm’s outlook: “As we do underwriting, we feel really good about the next two to three years.”
Keith Wentzel, managing director, Fantini & Gorga, measured current conditions against the previous cycle. “Lenders have been more disciplined than in ’04 and ’05. We’re not seeing 80% loan-to-value ratios, we’re seeing 60% to 65%. There are more lenders coming into the marketplace. Over time, we might start to see loan-to-value costs coming up a bit,” he stated.
For his part, John Murray, president and COO, Hospitality Properties Trust, thinks that the increase is already occurring. “Loan-to-values are starting to get pretty high again. I’m starting to feel a little bit of craziness coming on,” he said.
Meanwhile, lenders talked about the challenges of underwriting projects in smaller markets.
According to Adrienne Kautzman, VP, originator, GE Capital, “Candidly, a tertiary new-construction deal is tough. You have to determine if the demand is there. We get to play in secondary markets,” she said.
Schory added, “If one of our good sponsors goes to a small market, we will follow. The risk to small markets is the barriers to entry are low, so our underwriting is a little more stringent,” he said.
Robert Roskind, founder, The LCP Group, meanwhile, talked about markets from the perspective of EB-5 financing. “Boston, Washington, New York,and Seattle are places that will appeal to Chinese investors. It’s hard to sell Peoria [IL],” he said. HB