TORONTO — Hotel Capital Connection was held recently at The Ritz-Carlton, Toronto, bringing together Canadian hotel owners and top legal and financial advisors. The half-day event consisted to two panel discussions focused on finance and legal topics respectively.
To kick off the event, opening remarks were made by Mark Kay, principal broker/president of CFO Capital and Monique Rosszell, senior managing partner at HVS.
Kay noted the high liquidity of today’s market. “The last time we were this liquid in the debt market was in the mid-1980s. We’re now in a time where hoteliers do not have to worry about getting approved,” he explained. “We’re also sitting at a time where there’s a surge of new entrants and first-time hoteliers looking to build their first hotel or even enter a new acquisition — be it primary or secondary markets.”
“We’ve never been in a more profitable operating environment,” he summed up, adding “Borrowers are more sophisticated compared to last time we saw this level of liquidity, when deals were primarily tax structured.”
Rosszell provided an overview of the Canadian hotel industry, highlighting the opportunity for new supply within the market. “The population has outgrown the number of rooms per capita,” she said. “This [reflects] the fact there’s no question in our bigger cities like Toronto, cost of land is a huge hurdle to hotel development, but it does mean in secondary and tertiary markets there’s opportunity for hotel development.”
She also pointed out that 58 per cent of Canada’s room supply is greater than 30 years old (chronological age, not accounting for renovations and repositions), while only 6.1 per cent of the supply is less than five years old, which she said showcases the opportunity for new supply.
However, Canada is set to see an increase in supply over the next three years. “We’re looking at 8.8-per-cent new supply in the course of 2019 to 2022,” she explained. “So that’s going to have impact, no question, on overall occupancy in most markets.”
With 2018 marking the highest national occupancy rate the country has ever seen at 67 per cent, 2019 is expected to be down slightly at 66 per cent and 2020 occupancy is forecast at 65 per cent. “A lot of this has to do with absorbing the new supply coming in,” Rosszell explained. “And, part of the reason this amount of new supply is out there is a lot of people want to get into the hotel industry, but there’s nothing for sale out there.”
The finance panel was led by Charles Suddaby, VP of Cushman & Wakefield ULC, featuring panellists Roy Dias, SVP & head, Specialized Industries, Canadian Commercial Bank, BMO Bank of Montreal; Ed Khediguian, SVP, Franchise Finance, CWB Franchise Finance; Alexis Levine, partner, Blake, Cassels & Graydon LLP; and CFO Capital’s Kay.
The panel identified key trends in hotel financing. “We’re seeing a movement right now to start hedging and financing the portfolios — locking in five-year rates. We’re also seeing demand for seven- and 10-year rates for at least a portion of the portfolio,” said Kay. “We’re not quite sure if we’re going to see these types of rates again and, economically, it makes sense to lock in all [or] part [of a portfolio] depending on what the hotelier is looking for.”
“Second, is a demand for repositioning/rebranding assets,” Kay added. “There’s still a demand, due to the high cost of construction, which we’re seeing in urban markets, secondary markets and tertiary markets.”
Khediguian also noted “difficulty of sourcing deals at reasonable prices forced people to move towards new construction,” leading to a rise in new-construction financing activity.
“As we’re getting to the tail-end of the cycle, as the economy is softening a little bit…a lot of [people] are focusing on building up capacity for the next down cycle,” Khediguian added. “So, not only locking in on existing debt structures at lower cost points, but also building up structure that would allow them to tap into the value that they have in their assets.”
“There’s nervousness from what happened in Alberta, there’s nervousness about what might happen globally. And, the result is we’re seeing the tension, right now, between the folks on the origination side, who are competing to get that capital deployed, and the folks on the credit side, who are looking to manage that risk,” Levine said. “And the way that’s manifesting itself, primarily, is there continues to be a little bit of pressure on pricing on the [people] trying to get the capital out the door and then some of the backend requirements may be more rigorous than they have been historically.”
The afternoon’s legal panel discussion, led by David Larone, senior managing director, CBRE, featured Jason Arbuck, partner & chair, Hospitality Group, Cassels Brock & Blackwell LLP; commercial real-estate finance specialist, Harley Gold; Christie McNeill, real-estate lawyer and partner, Aird & Berlis LLP; and Andy Mittra, AVP, Development Banker, Business Development Bank of Canada (BDC).
The panel discussed the legal issues associated with hotel ownership, operation and financing and the associated agreements. “One of the overarching issues today in the industry comes down to six letters: KYC and AML — know your client and anti-money laundering,” said Larone.
McNeill pointed out this can be a very time-consuming process, which clients may find insulting or uncomfortable.
“Going back probably five or six years ago, there were many lenders that didn’t even have AML forms,” Gold added, noting the process is new to a lot of borrowers. “Now it’s become the practice of everyone in the industry — for all asset classes.”
Gold also highlighted the difference between demand loans and term loans, stating: “Bank loans tend to be demand loans and lenders like life-insurance companies or credit unions — or maybe even some alternative lenders — will tend to be term loans and, in the term loan, they have less rights to call your loan,” he explained. “I would always try to do term loans because they’re safer — you have less restrictions, less monitoring of those loans.”