NEW YORK—It seems it’s a mixed bag for franchisees and franchisors at this stage of the game. All around, positive attitudes abound about the industry’s recovery and its growth opportunities heading into 2014. But dig a little deeper and concerns rise to the surface, chief among them trying to get a bead on lenders, many of whom are still cautious about financing projects, notably new construction.
on the bones of a former competitor via conversions, although this tactic has helped fuel growth for owners.
Still, as with multiple aspects of the industry—cost per key, for example—how projects play out (or don’t) depends on a variety of circumstances: market, flag (or lack of), experience and successes.
And the issues aren’t new; several were brought to the fore during the recent NYU International Hospitality Investment Conference, held here. In discussing new-construction, Bill Fortier, SVP/development for Hilton Worldwide, indicated his company saw the needle starting to move a bit last year on new-builds, and in a positive direction.
“We were getting calls from our franchisees saying: ‘Remember that property we were talking about three, four years ago? Well, the bank finally got back with us and it looks like we’re getting some financing.’ It was slow back then but it’s accelerated quite rapidly in the past three, four months. Our new-construction pipeline is up 30% year to date,” he said.
Money is “out there,” according to Fortier; however, he added it’s experienced owners and operators who have been through a few cycles that the banks are willing to go back to. “We’re not seeing a lot of newbies, folks who have never been in the business before, especially for new construction,” said Fortier. “The newbies are kind of coming in, buying an existing hotel and getting started that way, which is really the right way to go.”
Many in the industry can remember a time when the so-called newbies, as well as owners of tiny portfolios, were being enticed left and right by the major chains, which offered a variety of incentives, including help with financing, largely competing with each other to see who could reel in the most licensees.
The page on such broad offerings, however, appears to have turned. “Occasionally, we come up with some things we do on a special project. We don’t have the ability to do credit enhancement; there’s not a lot we can do in that regard, but creatively, we can come up with something if the project is something we really want to back,” said Fortier.
“Our company focuses on development; we love to create our own problem,” chuckled Mehul Patel, principal at NewcrestImage, which focuses on new construction. “The lender wants to [have]a comfort level: ‘Are you the right developer?’ ‘Do you have the right general contractor?’”
He said he sees lending available, even for first-timers, but it’s more about getting “comfortable” with the lender. “Sometimes, we offer a 12-month interest reserve,” he said. “But more has to do with experience: ‘Can you really get this project off the ground?’ Many times you get a general contractor who cannot finish. So that’s a challenge,” said Patel.
He noted the company’s “sweet spot” is properties that run from 80 to 100 rooms. That said, Patel said NewcrestImage is building an 800-room project in Grapevine, TX: a Courtyard by Marriott and a TownPlace Suites by Marriott.
“We’re a vertically integrated company. We have our own construction company, we manage our own deals, we finance our own deals, so we don’t have the kind of restrictions on any brands, so we do Hilton, Marriott, IHG, Choice, Carlson. We’ll look at anything that makes sense for us,” said Patel.
Joel Eisemann, chief investment officer at IHG, said it was important for franchisees seeking financing to share with their franchisors what they’re experiencing as they try to get funding and see what can be worked out. “Prior to last fall, we had 10-year franchise agreements. That was a challenge in terms of new-construction projects with the SBA (Small Business Administration). We had a lot of franchisees who were having difficulty getting the SBA financing and as a result we changed our franchise agreements to a 20-year term to get over that hurdle and help those franchisees get the SBA financing,” said Eisemann.
Naveen Kakarla, president/CEO of HHM, which is a major manager of urban, select-service properties, among other segments, said his company has been successful pursuing new construction projects in Miami and New York, getting limited recourse construction loans. “The big trend that changed there is that it went from everything being full recourse to partial recourse—and that’s a meaningful shift,” he said.
Kakarla added HHM also has done “a lot” of repositioning. “While it’s technically not new development, it’s very relevant. For three or four years we talked about stable, cash-flowing assets getting great loans and, occasionally, a development project. But now, there is a very competitive market for bridge loans and it’s making us look more carefully at turnaround and repositioning stories that we wouldn’t have been able to fund before,” he said. “We’re looking at a project in Philadelphia right now and we’re being quoted 70% LTD, non-recourse, 6% money and that’s something that would bridge the gap between where we think we can reposition and turn operations around across 12 or 18 months. That’s money we didn’t have available to us before; it was either double-digit mezz for going in all cash and that shift, I think, will get a few deals done across the next year.”
Eisemann noted another trend having impact on franchising is the supply/demand balance, with focused service product making up a large portion of the supply that is coming on.
“It’s really predominant in the top 25 markets,” he said.
Craig Aniszewski, EVP/COO of Summit Hotel Properties, Inc., a REIT that went public in February 2011, said his company plays in the select-service field and partners largely with Marriott, IHG, Hilton and Hyatt. “Ninety-five percent of all our properties are with those four [chains],” he said, adding the REIT likes to concentrate on “beltway” cities and recently closed on $170 million worth of assets, including a Holiday Inn Express and a Hilton Garden Inn. “We’ve been busy and our pipeline is pretty robust,” he said.
He described some of the supply coming on as a “brand cleansing” for some of the players, noting they are looking to replace existing assets whose terms may be up or that may no longer be relevant to a particular market with new brand assets. “They’re taking the old out and putting the new in. We’re seeing more of that,” sand Aniszewski.
“New is generally better in the focused-service space,” added Kakarla. “Even without new brands you have a lot of franchise licenses that are coming up on expiration and I think a prudent plan approach is in the mind of some brands in terms of key markets that may not be top 25, but may be top 75.”
Kakarla said beyond the top 25 there are still markets “working their way back up to where they once were, and the financing markets have loosened to the extent that they would look outside the top 25 and we think there’s going to be great opportunity.”
Still, Fortier said the top 25 MSAs remain a focus for many franchisees. “That’s where the money’s going today. It’s great; we want to be there, too. What’s going to be tough is it’s pushing prices way up, and now, in a lot of cases, it’s cheaper to build than it is to buy. And we don’t see that trend changing.”