Debt and Equity Journal. Erika Morphy is co-editor.
Is the hotel cycle peaking or, like the stock market, will it continue its long run? No one knows, including industry experts. "The hotel industry is a cyclical one, but whether or not it is peaking is anyone's guess," says Todd S. Jones, managing director, structured finance, for Scottsdale, AZ-based GE Capital Solutions' franchise finance division. "That's why our strategy is to be a consistently long-term player and look for the best financing opportunity with the best operators. That strategy is cycle proof." GE CS's recent fundings include a $42-million refi for three Florida properties--a Hilton Hotel and a Holiday Inn (both in St. Augustine) and a Jacksonville Wingate, all owned by Jalaram Hotels Inc. The deal also provides capital for the acquisition and re-branding of the Hampton Inn Casa del Mar in Vilano Beach, FL. We spoke with Jones about his division and his outlook for the hotel market.
DEJ: Your recent Florida deals. To what extent are they illustrative of current market conditions?
Jones: One of the deals was a brand repositioning. We are seeing a fair amount of this in the marketplace, as well as acquisitions and refinancing, which is what the other deals were. You might have some assets that are underperforming under one flag or brand, but an investor thinks he can bring in his own operating team and reposition the property with a stronger flag.
DEJ: Is that the only way to make margins in the hotel finance industry now?
Jones: I wouldn't say that. But it is extremely competitive out there. A number of folks are offering development finance. And markets do respond to a fresh look, an underperformer that has been renovated, for instance.
DEJ: What other trends are you seeing in the hotel refi market?
Jones: Typically, the refinance market gets most competitive when a property is stabilized--when it has had at least two years of consistent operating income and the lenders can see how that property has settled into the marketplace. But a number of lenders have shortened the time in which they consider a property stabilized to 12 to 18 months, which means the most competitive financing can be accessed much sooner. There is also a significant number of properties being financed at competitive rates in the CMBS market.
DEJ: Are the fundamentals as sound as everyone makes them out to be?
Jones: The major flags continue to expand with new development and also introduce new flags to keep up in the major markets. Also, we are seeing increases in RevPAR in both average daily rate and occupancy rates. Demand, in other words, has kept up with supply. It is a wonderful time to be developing.
DEJ: Can you give me an example of a deal you wouldn't finance?
Jones: I think you can solve any number of potential problems in a transaction through price, structure or other tools to make sure the risk adjusted return you are getting make sense for both the operator and the bank.
DEJ: What do you look for in a transaction?
Jones: As just a starting point, a strong operator, a strong local market and the location of the property.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
