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My thoughts on the 24th Annual Hunter Hotel Investment Conference

I recently had the opportunity to attend the 24th Annual Hunter Hotel Investment Conference in Atlanta, a National Hotel Investment Conference whose theme this year was Take Charge/Move Forward. I wanted to share my thoughts from the conference with you.

2012 Economy and Beyond, Statistically Speaking

You can feel the confidence coming back! This was the largest attendance ever. The glass is now more than half full. The word cautious has now been removed from cautiously optimistic. The smart money is buying now. The very mild winter has kept heat bills low as a result the consumer has not minded putting more money in their gas tank. The tax cut on payroll will be extended. Both Smith Travel and PKF are very optimistic about the future with PKF being the most optimistic predicting an unprecedented six years of occupancy growth.

Ever since the first quarter of 2010, growth in lodging demand has greatly exceeded the supply increase. The hotel industry keeps getting healthier and investors want in on the upsurge. Pricing for leisure is much more sensitive than corporate. The economy market is just now running a 50% occupancy rate. Luxury, Upscale and Upper Midscale have led the way in occupancy growth. Profit per available room is the most important metric.

Leadership and Experience Panel, Buying & Selling Hotels

Stop focusing on the World’s Doom & Gloom, focus on your individual market and property and the things you can influence. Lack of new supply is helping drive rate. There are 240 U.S. Based Brands. A Brand has to have 200 properties or more to be successful. Focus on rate potential. The next eighteen months are a great opportunity. Be a leader in rate, if you have the right staff, their enthusiasm will help drive rate. Buyers are looking for cash flow, youth in the property, brand and market. Sell your property either before six years or twelve years. Need to have an exit strategy at the time you buy. Timing is important when you sell. Value add is the new thing. The time to buy is now. If you find an opportunity, buy it. The right market is everything. This time period is similar to the early nineties, it will be a slow steady climb for a long time. It will be a great decade for our industry.

Financing Panel

Financing for acquisition is much easier to secure than new construction. For a stabilized hotel with a good sponsor a 65% to70% loan to value, an interest rate of 5.5 to 6.5%, amortization period of 20 – 25 years and a full balloon payment in 5 years is the norm. SBA 7A and 504 can lend up to $5.0M. The participating Bank will normally go up to 50% of the loan amount. The SBA 504 interest rate is currently 4.58% fixed for 20 years. For the right deal SBA will lend up to 85% of value. If you build or upgrade an energy efficient hotel there is no limit on the number SBA loans you can have. It is hard to get a deal done that is not branded. The flag is very important. It used to be location, location, location, now it’s sponsorship, sponsorship, sponsorship. It used to be 85% loan to value, non-recourse, no longer, now they require a personal guarantee.

Presidents Panel

There will be no significant inventory increase until late 2014 or early 2015. New construction is down by 80%. Group Business is coming back. Gas prices will not stop travelers as long as the consumer is confident about job security, unless gas prices reach $5.00 per gallon. The unexpected is now the expected. Google and Apple are entering the OTA Business the Brands are countering the OTA’s with Room Key. The brands did not do a very good job of monitoring the OTA’s. If you have a loan coming due start searching 9 months in advance for alternative financing.

Kiplinger Letter Editor

This year women will make up the majority of the work force, they are better educated. Significant tax reform in 2013 or 2014 regardless of who is in the White House. Obama Health Care will probably be upheld by the Supreme Court. Coal is the hottest commodity in the U.S. we will export 100 tons of coal this year. The U.S. Economy is headed up slowly, consumers are spending more. Consumer spending makes up 60-70% of growth. The U.S. will have a 2.3% economic growth rate in 2012. We will see record high gasoline prices this summer. In 2008 we hit a record high of $4.11 per gallon, this year it will hit $4.50 per gallon. If Israel attacks Iran gas prices could go to $5.00 per gallon. This could put us in another recession. The probability of Israel attacking Iran is very low. Europe is headed into a recession because of their debt woes. This will not put us in a recession. Iraq is the fastest growing Country with a 12% growth rate this year. Republicans will maintain control of the House, the Senate will remain equally divided. We will have 4 more years of President Obama. Higher gas prices will not hurt the hotel business. Room Rates will go up by 5% this year.

Respectfully,

Terry Baltes