Hoteliers and would-be hoteliers take note: the time is ripe for you to push your mitts deeply into pockets other than your own — and not withdraw them until they’re clutching wads of cash.
“The financing is excellent today,” asserts Rob O’Neill, CEO of American Hotel Income Properties (AHIP) — a Vancouver-based REIT that owns 115 hotels, for which ONE Lodging Management is the exclusive hotel manager. “It’s a very positive, buoyant time.” This is the case, say hotel investors, because the sector is performing relatively strongly, the Canadian hotel industry is mature and disciplined, the economy’s good and tourism is growing — particularly in Toronto and Vancouver, the two strongest accommodation-sector cities in the country.
“It’s an easier proposition for a hotel to get a loan now than it was 10 or 15 years ago, full stop,” says Angus Wilkinson, who has specialized in hotel brokerage for 25 years and is president of Vancouver real-estate agency, Tyne Hospitality Services Limited. Indeed, agrees Bill Fortier, SVP of Development, Americas, Hilton Worldwide. “It’s a borrower’s market if you have an existing hotel in an urban setting or a strong suburban location. There’s a lot of money chasing existing cash flow.”
Mostly, the hotel-financing scene bustles with the business of acquisition loans to help purchase properties — in the form of both senior and mezzanine financing — and continued loans on stabilized properties. Construction financing and new development bring up the rear. Lots of hoteliers in the U.S., says O’Neill, are capitalizing on hiked values and profits by refinancing new mortgages against valuations instead of selling their assets. “So transactions are slowing, but financing is growing.”
The going loan-to-value ratio has crept up to between 50 and 60 per cent, with equity making up the rest. That’s a dramatic difference from a decade ago, when the ceiling was 50 per cent, or even less. The typical amortization is 15 to 20 years. For borrowers who aren’t over-leveraging, there’s abundant lending available at rates that should be under five per cent.
Still, for all the money that exists, there are a couple of significant caveats wrapped up with its attainability. Lenders will only be generous with borrowers who demonstrate a certain level of experience and preparedness; whose projects have sound financial foundations, reasonable loan-to-value limits and management teams with established track records.
After all, as much as there’s financing available for commercial projects — every surveyed lender in CBRE Limited’s Canadian lending survey, released in December, wanted to either maintain (40 per cent) or grow their book (60 per cent wanted to increase it by 10 to 30 per cent) — the hotel sector isn’t the darling to financiers that other sectors are. Apartment buildings, with their lower-than-one-per-cent vacancy rates, are a no brainer, says Wilkinson. Condos are, too. “Hotels are still considered the most volatile real-estate sector.”
That’s because, if you’re buying a shopping centre, your lease is 10 or 15 years long. [It’s the] same with office and industrial buildings. But hotels can be empty one day and full the next. For lenders, who are valuing properties according to their income streams, this distinction is meaningful.
“With shopping centres, tenants pay rent and that’s how the asset makes money,” says Michel Durand, president and CEO of Toronto-based broker, Mortgage Alliance Commercial. “But with hotels, you’re running a health club, a food-and-beverage service — along with a hotel.” Over time, the capital markets figured out a hotel is an operating business, like a nursing home. It’s why lenders will extend as much as 90 per cent to finance apartment buildings, but not more than 60 per cent to hotels.
That’s where the value of relationships comes to the fore. “Being relationship-oriented, not only with your financier, but also your advisors, is critical,” says Bill Stone, EVP of CBRE Hotels. “The lenders that are prepared to lend into the space do so because they understand the risks that are embedded in hotels and their fluctuating daily rates.”
CHOOSING A LENDER
First up for hotel players looking for funds to finance their projects is to identify those financial institutions that are somewhat specialized in the sector and will realistically be in the space through its next inevitable downturn. If an owner’s hitched its wagon to a lender that’s new to the hotel base, there’s a risk they’ll exit when the cycle is down. Ideally, they establish relationships with specialized lenders who’ve been to this sector rodeo before, and so are likely to remain intact through the next cycle. Beyond that, as with most things financial, diversifying is important in hotel-investment security. By spreading financial arrangements across multiple lenders, you avoid concentrations of exposure with single financial institutions and knots of maturity all happening at the same time.
Most important, though, says Ed Khediguian, SVP at CWB Franchise Finance — a division within the Canadian Western Bank specializing in hotel and restaurant financing — borrowers shouldn’t become so caught up in the tides of the market’s current liquidity that they get themselves overleveraged. Better to lock in at a rate that they can tap into over the medium-to-long term, just in case the cycle turns — because it will (remember Fort McMurray?).
Similarly, if there’s a gap between a hotelier’s planning and funding, they must make sure that they’re underwriting the investment on a higher-cost base, because interest rates are moving up. In other words, approach the competition period with ROI decisions that are based on a more conservative perspective of where interest rates will end up over the investment period.
THE BROKER PIECE
Most hotel operators, says Durand, aren’t fans of the arduous demands of loan shopping that require them to trot out the same detailed information packets to multiple lenders. That’s where the value of a broker who understands the asset class kicks in. Here, aspiring borrowers tell their story just once, to a broker who then approaches those lenders who are most amenable to hearing it.
In interviewing a broker, Durand recommends hoteliers ask a few questions, including how many hotels they’ve financed. “Find someone who’s done a dozen in the last year, and they’ll have a good read on the market.”
“Borrowers need to understand that just because they can approach a lender directly doesn’t mean they should,” says Steve Giagkou, VP of the Toronto-based Commercial Mortgage Corporation Ltd. “Just as you have a lawyer advocating and negotiating for you, you should have a qualified mortgage broker doing the same for you with lenders.”
WHAT LENDERS WANT
Lenders are interested in assets supported by industry and management experience, and at least three years of increasing cash flow, says Wilkinson. “The first thing they look at is the operator,” says Durand. “Who’s the borrower, what’s his track record in running these types of assets?”
Operators also have to be ready to present their story, complete with notes on the senior-management members’ experience. Giagkou adds, “If a hotel’s a little tired and you’re buying it to take it from point A to point B, then you need to convince the lender that you’re capable of doing that.”
Next, financiers want full financial details about a property, including not only its historical operating numbers — RevPARs, ADRs, occupancy rates and, ideally, STR reports that show the property’s performance against other hotels in their competitive set — but projections for future performance.
“The biggest mistake borrowers make is not properly presenting the information,” says Jay Hanspiker, president of Toronto-based Commercial Mortgage Corporation. “You have one shot to make your request for financing. Think of it as a job interview.”
Written by Laura Pratt