By Nicole Di Tomasso
TORONTO — Approximately 100 C-level hospitality executives gathered recently at the Omni King Edward Hotel in Toronto for the Hotel Capital Connection (HC²) summit. Presented by Big Picture Conferences, the HC² summit is a networking and educational event that matches Canadian hotel owners with top legal and financial advisors, with the aim of exploring current issues impacting the hotel-investment community and future opportunities.
Moderated by Alexis Levine, partner, Blake Cassels & Graydon LLP, the third panel of the afternoon explored important legal and finance considerations. Panellists included Christopher Alam, partner and lending practice group leader at Gowling WLG; Beverley Flynn, senior VP, general counsel and secretary at Morguard Corporation; and Phil Thompson, transaction lawyer and general counsel at Thompson Transaction Law.
“In our cases, we’re finding there’s a little more patience, especially when lenders see borrowers starting to re-invest in their properties,” said Flynn. “We’ve recently sold some properties. Even in the case with our pre-payment penalties, they’re willing to have a conversation and aren’t necessarily wanting to be quite so strict in some of those areas.”
Levine went on to highlight the new federal regulation related to the prohibition on foreign investments for residential property, but Alam raises the question of condos that are associated with hotels. The regulation and its impact will be monitored more closely in the coming months.
With regard to covenants, Thompson said, “The covenant that I’m intrigued by in 2023 is the covenant against secondary financing, which has been bidding hotel financing and was very big pre-COVID. I think if we’re going to be dealing with all of the issues we’ve heard about from the other panellists, then I hope the lenders will have a little more flexibility on secondary financing and will allow people to use some debt to come in and clean up their properties so they can get them ready to re-finance their mortgages or get them ready for sale.”
Finally, the fourth panel, moderated by Mark Kay, principal broker and president at CFO Capital, featured Sanjay Arora, managing director and regional market leader, business property finance, Central and Eastern Canada, BMO; Ihsain Chahim, VP, Financing and Consulting, BDC; and Cameron Woof, AVP, Hotels and Syndication, CWB Franchise Finance.
“What matters to us is a reasonable projected NOI, what the property has performed historically and whether it can service the debt,” said Woof. “The value at the other end is kind of the bookend that keeps everything in place. As lenders, we always take a more conservative approach, which is to underwrite it as if it’s opening today, at interest rates today, assuming that we’re at a peak. What’s uncertain is how quickly that’s going to come down, so I think that’s kind of a bet the credit department doesn’t necessarily want to take.”
Switching gears to construction, Kay asked the panellists about people entering the market with little to no experience building and operating hotels.
“What’s important is that these are operating assets, so experience is critical.” said Arora. “The other thing that’s critical for us to evaluate is who you’re partnering with and what level of liquidity can be brought to the table in case there’s a hiccup.”
Woof agrees. “If the experience is not there then we have to figure out a way to mitigate that through third-party management if it’s a first-time buyer, for example.”
Overall, Kay said that between 85 and 90 per cent of all institutions are back lending to markets across Canada, including urban, secondary and tertiary markets. Additionally, variable interest rates can be as high as nine per cent depending on geographic location.
Read more coverage of the Hotel Capital Connection here.
