Consideration of the subject of hotel investment during the COVID-19 pandemic is as murky as any being considered in these extraordinary circumstances, but investment firms urge a long view. After all, the lenders breathlessly point out, hotel investment had been booming before the crisis began. The dozen or so years since the market bottomed out have been boom times and hotels have performed strongly and the markets have enjoyed healthy liquidity.
Such glory days, says Ed Khediguian, senior vice-president at CWB Franchise Finance, set off a spike in interest across the entire investment platform — equity, debt, junior debt, et cetera — and “quite an expansion of appetite to pursue investment in the hotel space.”
For example, Canadian banks, which might have historically been a little wary of hotels for their inconsistent revenue streams, have noticed impressive occupancy rates over the last while and expanded their hotel programs or increased their commercial-asset lending programs to include this asset class. “Seeing that performance has given them comfort,” says Michel Durand, CEO of Toronto-based Mortgage Alliance Commercial, “so they’ve tended to lend more generously than before.”
True, says Mark Kay, president of CFO Capital, a Markham, Ont.-based commercial brokerage that specializes in hospitality. Recently, there have been more options than ever for well-managed hotels in non-oil regions looking to borrow money. Trust companies, insurance companies, credit unions, mortgage-investment corporations and private institutions have all been holding out fistfuls of cash for anyone looking to get into the hotel trade. Then there were the Canadian banks — and the European and U.S. banks who’d positioned themselves alongside them — all lending barrels of money to parties keen to invest in hotel properties.
“We haven’t been more liquid in the debt market since 1985,” says Kay.
This busy reality produced an extremely competitive market: more lenders with more solutions and a competitive debt nature for them for all categories — construction, term and repositioning/rebranding/refinancing. More than that, lenders have been feeling increasingly comfortable about upping their loan-to-value transactions in this climate. If they loaned 65 per cent five years ago, they’re maybe loaning 70 or 75 per cent today, he says. A new wave of hoteliers are sniffing out acquisitions and construction (a paucity of options in the former means those who want to participate in the hotel space are focusing on the latter) and, says Kay, refinancing’s another sizzling arm of the hotel-investment space, as hotel owners lock in longer-term money at low interest rates.
It’s a robust reality that, until this tremendous recent development, has been liquid as anything and drenched with choice. Which brings us to the Coronavirus’ encroaching presence and the drying-out effect it’s having on the scene.
This global pandemic is fluid and its influence on the hotel industry was swift and considerable. Looking forward, predictions on the full scope of its affects are mostly speculative. No one can say for sure what its full impact on either hotel operations or hotel investments will be when the dust has cleared, but, says Durand, it will be serious. “It’s all about to come to a grinding halt. I suspect any purchase that was being negotiated or ongoing has now been taken off the table. Anyone who was looking at purchasing a hotel or planning on expanding or renovating, that’s going to come to a grinding halt. COVID-19 is part of the narrative in conversations with lenders now. We were cruising down the highway and all of a sudden everybody has both feet on the brake.”
But, Khediguian cautions that a general economic slowdown was already settling in before COVID-19 even showed up. Unlike the downturn of 2008, this one is not a function of structural issues in our economy — apart from an overvaluation of assets. “It’s just going to be a normal downcycle exacerbated over a short period because of the Coronavirus. There will be a recovery, relative to the virus, in the short term, but in the longer-term cycle, this is the general slowing of the economy.”
Investors’ focus in the months ahead, he believes, needs to be on the biggest risk to the hotel space — the disconnect between investment and supply. The time spanning a decision to invest in a hotel and its fruition is vast and characterized by unknowns, especially in this developing climate. If a decision to buy, reposition, build or stabilize a hotel property made in boom times takes between 12 and 24 months to see through, we might consider ourselves in the murky trough between launch and execution for lots of deals.
As for new investment, Khediguian isn’t so sure. The Coronavirus has and will continue to impact hotel performance, occupancy rates and values. “At this point, people are going to be stepping back and thinking: what’s my return expectations given the uncertainty in these markets? It’ll be a bit of a struggle until the markets stabilize and there will definitely be a pause on investment, a reduction of activity, fewer transactions.”
These extraordinary times call for extraordinary attention, says Steve Giagkou, president of Aligned Financing Inc. He recommends that hotels be proactive with their debt by examining expiries sooner than normal. The earlier they launch discussion with a lender, the more time they have to review their debt and look at their strategic options so they can make a prudent decision that hasn’t been forced, he says. “If there is a bounce in rates, there’s no way the borrower will have sufficient time to put together a loan proposal, do all the required third-party reports, get the vendor to approve the loan and benefit from the rates. He may miss an opportunity.”
At the same time, Giagkou cautions, borrowers need to understand that lenders are still reeling, trying to carve a new reality in a dark space. “Lenders’ risk appetites are being reassessed and updated and borrowers should expect more questions in the short term,” he says. “But I believe things will eventually normalize.”
The upside to the Coronavirus outbreak? There’s still a lot of capital out there to invest in the hotel space, says Khediguian, and the better-capitalized owner-operators have an opportunity to wait for better deals to be had when activity retriggers at lower valuations. If you’re well capitalized and can invest in renovations or repositions in your asset, he says, trades will be cheaper than last year and “your capital-investment activity will yield a better product at a lower price and improve your assets.” More than that, he’s bearish on the country and its efforts to keep the lid on a bad scene. “I think Canada’s a safe haven for immigration and capital and I think that will support a certain amount of maintained activity.”
Lenders could be more conservative in response to the virus, Kay concedes, but points out that they lend to hoteliers, not real estate, meaning they extend money on their faith that a hotel can weather storms. Hoteliers understand that ups culminate with downs and the industry’s experience with SARS taught lots of operators the importance of creating reserves for rainy days. “That’s the counter-argument,” Kay says.
