Lender Insights: Roundtable edition

Featured in CoStar:

PHOENIX—Hotel News Now recently gathered a roundtable of hotel industry lenders at Best Western Hotels & Resorts corporate headquarters to share their opinions on the state of hotel financing and the industry in general.

While the bulk of that conversation is slated to appear in a special online and printed collection next week, here are some early highlights on what the lenders had to say.

On expectations for the next 18 months
Matt Mitchell, VP of Hall Structured Finance, said he is approaching things as if the cycle is nearing its peak, but that doesn’t mean it’s time for either lenders or hoteliers to sit on the sidelines.

“We’re trying to get a feel for what’s going on in the market on a long-term basis,” he said. “Some markets are extremely hot right now and are at or near peak levels. So, we’re underwriting a bit more conservatively.

“But we’re still lending into the contraction of the market that some might foresee. If we underwrite appropriately and account for some markets being at peak levels, we can optimistically lend into a cycle that is entering a phase of less robust growth or even contraction.”

On the availability of capital
Michael Watson, director and head of U.S. lending for BMO Harris Bank’s Hotel Finance Group, said his company is enjoying the current lending environment—particularly for refinancing—in large part because there is less competition in the marketplace, but that doesn’t mean he expects hoteliers to feel the same way.

“We’re getting interest from everyone because there are few lenders in the space,” he said. “We’re seeing a huge volume of requests.

While fear has led many to the sidelines, Rick Rogovin, VP of Wells Fargo Bank’s Hospitality Finance Group, said lenders have to be reasonable and careful in the current environment of uncertainty while still being active.

“It all comes down to understanding the risk and pricing the risk,” he said.

On supply concerns
Mike Muir, EVP of hotel lending at Live Oak Bank, said many people are worrying about supply growth, but the numbers don’t yet warrant the hand-wringing seen by many, as supply growth remains around 2% overall.

“And if you take the top five big markets out of the equation, (supply growth) is even more reasonable,” he said. “At its height, it was at 3% to 3.5%. And I think (the deceleration of supply growth) is due to responsible lending.”

Aries Capital Chairman and CEO Neil Freeman said the prudent lending and muted supply growth seen today are noticeable improvements compared with how things played out at the end of the previous cycle.

“The two things that got the market in trouble are excess supply and excess leverage,” he said.

On key metrics
Members of the roundtable were split on whether revenue-per-available-room index or net operating income should be the be-all, end-all metrics while looking at hotels, but all acknowledged both metrics are important.

Rogovin said he primarily looks at NOI.

“There are a bunch of reasons to look at both,” he said. “But NOI is what really pays the bills.”

On what makes an asset appealing
Freeman said there are a few things he looks at in an asset before committing to a project, although the roundtable unanimously agreed that faith in the sponsor is the No. 1 criteria.

“Valuation and cash flow are hand in hand things you need to look at,” Freeman said “If it’s an interim loan, you have to see what’s the exit plan.”

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