Originally seen HERE.

Hotel owners and developers on the lookout for the next deal ultimately need a lender to believe the deal will succeed.

Lenders on the “State of the debt market” panel at the 2019 ALIS Summer Update conference in Boston shared their perspective of what’s happening on their side of these deals.

The current environment
Mark Lanspa, EVP of the hospitality finance group at Wells Fargo, said his company handles a lot of acquisitions that involve changing management companies.

“Changing managers is more disruptive than you realize, even today,” he said. “Because of the labor situation, we really focus on that.”

His company also spends a great deal of time understanding how markets will respond to different flags, he said. In one instance, a client switched a Kimpton Hotels & Restaurants property over to a Marriott International brand, he said. It was interesting to see how strong the property performed as a Kimpton while as a Marriott, the property’s performance was choppier, he said.

Dilip Petigara, COO at Access Point Financial, said much of what his company does is focused on the value-add propositions and how the developers and owners are able to execute on those plans. But his company also sees a fair amount of new-build opportunities, he said.

“It’s still about the ability to execute on a plan,” he said.

Looking at the big picture on the credit side, Eastern Bank SVP and senior credit officer John Farmer said his company is already starting to hear from regulators about stress testing tied to concerns about the economy. The Federal Reserve “is flip flopping” on where it wants to be from six months ago, and that’s creating confusion in the market place, he said.

There is some kind of downturn coming, large or small, and it will affect the credit and quality of what his company has for collateral, said Jim O’Shaughnessy, managing director at Barings Real Estate.

“We’re extremely picky about the quality in the market, in terms of the location, and the sponsorship is extremely important,” he said.

New construction
O’Shaughnessy said his company has done some new-construction projects, citing an Edition Hotel in West Hollywood as part of a mixed-use development. It just completed a mezzanine piece for a ground-up project in Central City in Philadelphia, he said.

Though his company is selective in choosing new-construction projects, when it does participate, it’s mainly in large metro areas, likely a central business district location with sponsorship, he said.

Lanspa said Wells Fargo has been active in new construction, which is sponsor- and project-driven and has come in “a lot of flavors.” One recent project was a 50-50 joint-venture project involving a major shopping center owner who partnered with a developer to build a Marriott-branded hotel.

His bank likes recourse a lot, he said, adding that it’s fairly rare not to get recourse. That recourse usually burns off in the performance of the property over three to four years, he said.

Wells Fargo has done some deals with some mezzanine debt behind them, but mezz-debt lenders who provide construction loans are fairly rare, he said. The company views mezz debt as another line of defense, as the mezz-debt providers the bank interacts with are its customers, such as Blackstone and KSL Capital debt funds.

Sponsors and brands
Branding is important for Access Point Financial, Petigara said. The company favors lifestyle and boutique brands and soft-brands affiliated with the largest brand companies because they are attractive to guests and have the benefit of a wide distribution system.

“We like those projects,” he said. “We see a lot more of that. It’s helping the best of both worlds.”

Sponsorship decisions are based on understanding the business plan and seeing the budget and contingency plans, he said.

Private equity comes in many varieties, Farmer said. Private equity investors knoe how to hire the best consultants, which is important when developing a new hotel or turning a property around, he said.

Having a flag for a hotel has lost some value, he said. However, the distribution and power of loyalty programs is attractive. The loyalty programs are a demand driver, especially among road warriors, he said, and loyalty helps fill hotels Monday through Thursday nights.

O’Shaughnessy said his company has worked with independent hotels and some emerging brands. The company’s first emerging brand client was Yotel, and he believes that’s an interesting and compelling brand though it does carry risk.

“In our view, some emerging brands on the microhotel and the hostel space are worth looking at,” he said.

While his company would be interested in Yotel or CitizenM, it would need to learn more about some of the smaller hostel brands before committing to them, he said.