I recently had the pleasure of attending the 25th Annual Hunter Conference in Atlanta, Georgia whose theme was “Moving Forward With Confidence”. I wanted to share with you some of my thoughts from the conference.
Leadership And Experience
This was their largest attendance ever with 30% of the attendees being first timers. There were 46 lenders. Fifty percent of the attendees plan to build a new hotel in 2013. Buyers are back and paying fair prices. Lenders are back. Interest rates are at historic lows. Interest rates are going to rise, we just don’t know when or by how much. It is a Goldilocks environment. CMBS loans are back, although not as booming as 2005 and 2006. Don’t ever bet against the U.S. our willpower and technology will lead the recovery. Pools are no longer a brand standard for Days Inn, because of the cost and liability but a fitness center is required. The new mandated pool lifts are a magnet for an accident. Due to the sequester Apple REIT is now leery of hotels located near military bases and National Parks. There are over 250 hotel brands in the United States and still more coming. Capital reserves need to be 7% to 8% instead of the old 4% rule. Brands react to customer needs. Every Brand has a redemption program. Hilton’s Home 2 Suites has 16 open, 20 under construction and 90 in planning. Despite what is happening in Washington the economy continues to improve. Every REIT is buying. Private equity is buying. Follow the oil and gas as places to buy. Now is a good time to sell the gap between Buyers and Sellers expectations has diminished. Hotel rates are coming back. Group business is coming back. The guests are requiring the amenity creep. We are at a very early stage of recovery on a scale of 1 to 10 we are at a 3 to 4 in the hotel industry.
Equity return requirements used to be 20% now it is in the mid to high teens. A 30% reduction in revenue results in a 60% reduction in the net operating income. In a low barrier to entry market only about 6 to 7% of existing hotels warrant being built today based upon their net operating income. The novelty of being Green is becoming a real economic factor because of savings. Cap Rates are 9% to 10%. Lenders require prior hotel management experience. Obama Care is going to affect the value of hotels in a negative way because of the cost. It is a healthy market to buy or sell. Fixed rate financing is in the low 4’s. If your property is 10 years or older the value declines dramatically. The highest value is when your property is 3 to 6 years old. Even though there is limited supply nationwide there are certain submarkets that are overbuilt with new supply. Lot of foreign interest in investing in the United States. A one percent bump in interest rates equates to a needed 14% increase in Rev PAR. Assuming debt of 70% to value if interest rates increase by 1% the value declines by .7%. The sequester will last all year long. With the low interest rates a double digit return on cash flow is very realistic.
2013 Economy And Beyond
Every 2 months there will be another deadline in Washington due to the stop-and-go politics. GDP will be weak in 2013 as a result of the sequester. It will be better in 2014 and 2015. Demand is still growing just not at the same high rate. Transient is driving the recovery, group demand still has not come back. Supply is slowly but surely growing. Demand growth is healthy despite everything. The group outlook for the rest of 2013 has been weakening. The transient outlook for occupancy and ADR is consistent with where we were this time last year for both business and leisure. The rate of growth has dissipated. Supply growth will remain below average through 2016. Demand growth will be above average through 2015. Occupancy will be above the average level through 2016. ADR growth will be 2 times the average through 2015. Rev PAR growth will be 2.5 times the average through 2015. The fundamentals are solid. Outlined below is a summary of the outlook from Smith Travel Research and PKF Consulting.
Supply: 2013 – STR: 1.0% PKF: .8% 2014 – STR: 1.5% PKF: 1.7%
Demand: 2013 – STR: 1.8% PKF: 1.8% 2014 – STR: 2.8% PKF: 3.9%
Occupancy: 2013 – STR: 8% PKF: .6% 2014 – STR: 1.3% PKF: 1.4%
ADR: 2013 – STR: 4.9% PKF: 5.0% 2014 – STR: 4.6% PKF: 6.2%
Rev PAR: 2013 – STR: 5.7% PKF: 6.1% 2014 – STR: 6.0% PKF: 8.4%
This will be a 9 to 10 year recovery cycle. We are somewhere between years 3 and 4. Financing is coming back, delinquencies are down, CMB lenders have become more aggressive and there are more. Hedge Funds are lending. New construction loans still harder to secure than acquisition loans. Community Banks are the best source for new construction lending. They will lend at a 60 to 65% loan to value. The rate is prime plus. The amount of the plus depends upon the quality of the deal. The operator, brand and metrics of the local market determines who gets the loan. Lenders prefer the Branded properties. Non-branded properties are much harder to finance. Banks are willing to work with good operators that are over-leveraged instead of foreclosing. Lenders are being very disciplined. “Debt yield” is the new hot word, Net Operating Income divided by loan value. Lenders like owner/operators better than third party management. Recourse is difficult to enforce from the lenders perspective. Permanent long term rates are in the 4% range, 20-25 year amortization with a full balloon payment in 10 years.