LOS ANGELES, CA— With a sizeable influx of investment dollars already finding its way back into the lodging market, and considerably more capital poised to follow suit, two questions beg to be answered on behalf of the hotel community: Where exactly is all this money coming from, and where might much of it be going? Accordingly, HOTEL BUSINESS® was able to go right to the source for responses to these— and a host of other— investment- and lending-related queries during the course of a special Starwood Hotels & Resorts Worldwide-sponsored, by-invitation-only Executive Roundtable On Public Funds, convened just prior to the official opening of this year’s Americas Lodging Investment Summit here. With the select discussion group moderated by HOTEL BUSINESS®’ Hospitality Group Publisher Stacy Silver, the 90-minute session elicited pertinent input as well as numerous “capital” ideas from the likes of HEI Hospitality Chairman/CEO Gary Mendell, The Carlyle Group Managing Director Mark Schoenfeld, Watermark Capital Partners LLC Chairman/Managing Partner Michael Medzigian, and Morgan Stanley VP Michael Quinn. Also on hand— to provide the public hotel company take on the current financial scene as well as to counter-balance remarks that would prove to be heavily financier-oriented— were Starwood Real Estate Group President Ted Darnall and VP/Marketing & Brand Alignment Bill Linehan. Clearly defining the present-day scenario, Morgan Stanley’s Quinn maintained: “Right now, there’s a tremendous amount of capital looking for deals— stabilized as well as unstabilized— in the hotel marketplace.” As to why the current times seem to be so right for investment in this sector, Quinn noted: “Hotel fundamentals are definitely improving… better and faster than in just about any other [area of commercial]real estate.” With the scene thus set, the first topic addressed by the group was that of interest rates and their ultimate relationship to cap rates. As Schoenfeld of The Carlyle Group pointed out: “Not only are interest rates at historical lows, but they’ll probably never be this low again.” Accordingly, he said the more cogent question might well be: “Which can be expected to rise faster [going forward], debt service or net operating income [NOI]?” Putting a more time-sensitive spin on the situation, Watermark Capital’s Medzigian suggested: “Lots of people [throughout the industry]are convinced interest rates are already moving… but the uncertainty involves how much [they will increase].” In line with these observations, Quinn contended cap rates are now at a low point as well. As such, he specifically advised: “Watch for cap rates to [quite possibly]go up on the back end.” Offering up the necessary linkage in this arena, Mendell of HEI explained: “It’s actually fairly easy to hinge the cap rate to the trailing cash flow.” This, in turn, prompted Schoenfeld to note: “With a low cap rate going in, you’re ultimately betting on a strong NOI gain.” Perhaps summing up this line of reasoning best, Mendell emphasized: “Every deal is different; in the long run, it’s all just math. The real matter to be concerned with should be that of [one’s] yield expectation over the course of the [contemplated]hold period.” Next up on the group’s agenda was the subject of equity; in particular, what effect it has on the formulation and finalization of the deal. By way of response, Quinn claimed Morgan Stanley is certainly not averse to aggressively financing deals… even if asset value is on the low side.” Seizing this opportunity to jump into the mix, Starwood’s Darnall offered: “Private capital currently enjoys a big advantage [especially on the debt side]. However, it seems the market is looking at things more from an earnings-per-share perspective lately. In this sense, REITs certainly have a good structure to be an active player in the marketplace at this time, while ‘C’ Corps [are now more likely to test the market]via joint ventures.” Stepping
