Nuggets from JMBM’s Meet the Money 2011

Nuggets from JMBM’s Meet the Money 2011

Here are some sound bites — nuggets of insight, analysis and humor — from our recent Meet the Money 2011 event in Los Angeles.

What is happening now?

Jan Freitag, Smith Travel Research (STR): Transient room demand is back. But at what cost? It will take at least a year for group demand and ADR to come back.

Coastal markets fell off the cliff in the 2008 crash, but they have come back the fastest.

The top 5 “engines of the engine” are New York, Miami, Boston, Los Angeles and San Francisco. San Francisco and L.A. are rocking and rolling!

Luxury is setting the pace for the recovery. It is pulling up everything else as it goes.

We will finally see real rate growth in 2012. The upper end of the market will drive the market. Look for double-digit or close ADR growth.

New supply

Freitag: The pipeline of new supply is basically non-existent.

Mark Woodworth, PKF Hospitality Research: It will be at least a couple of years before there is meaningful new construction.

Kevin Colket, Starwood Capital Group: Construction will be limited to New York City and a few markets. It will not be widespread for at least a while.

When do we hit the peak?

Woodworth: Our forecast is for improvement as far as we can see — almost four years.

David Loeb, Robert W. Baird & Co. Inc.: We are still in the early stage of the recovery, and downside is fairly limited.

Mike Cahill, co-chairman of the Lodging Industry Investment Council (LIIC): In an investment sentiment survey of LIIC members controlling billions of dollars of hotel assets, 63% said they believe that hotel values will not peak until 2015 or later, 39% of respondents believe values will peak in 2015, 29% of respondents believe values will peak in 2014 and 24% of respondents believe values will not peak until 2016 or beyond.


Loeb: REITs have both a cost-of-capital and access-to-capital advantage.

Rick Kleeman, Wheelock Street Capital: Where capital has come back is the public markets. So it is not surprising that they are buying. REITs are trying to get to critical mass.

Who is financing? 

Jonathan Roth, Canyon Partners Inc.: We enjoy being able to play all throughout the capital stack with our different funds — ownership, mezz, debt … Our value mortgage funds provide senior bridge capital without geographic restriction, but we focus on major markets and on secondary markets where there are compelling reasons. We are now sitting on US$1.4 billion of capital, and maybe 25% of that will be in hospitality.

We like doing note acquisitions in concert with the borrower.

We have been spending time in the construction lending business, particularly for the three loans about to close. The owner has owned the land for a long time, there is no new supply and there is the ability to buy back existing debt at a discount. That lets us adjust the land basis. 

We are one of the few providers of construction financing right now. We have a dedicated team with experience in owning, operating, managing and financing hospitality assets.

Loeb: Debt is now available for high-quality assets in top markets.

Yields are now sub-9%.

Financing is not readily available outside the top 15 MSAs.

Construction financing is essentially unavailable.

Rick Frank, Behringer-Harvard Partners LLC: We are a seller at a 4% cap rate but not a buyer. We like to work with JV partners who put in sliver equity.

Rene Theriault, Goldman Sachs: Availability is growing for 5-10-year fixed-rate loans even in secondary and tertiary markets.

Good news: There is demand for CMBS paper backed by these loans. Now 70% LTV and 10% yield — full-service and limited-service. Most of this is 5- or 10-year paper. There will be a new push on floating rate debt soon.

There will be more value-driven loans in this area than cash-flow driven loans. This market was not there six months ago but is evolving very quickly.

Are market values running ahead of fundamentals?

Kleeman: Yes, generally speaking. But this is a case where asset prices are pulling fundamentals along with them.

I don’t think the market is massively over-valued as it was in 2006 and 2007. These prices are the logical consequence of the government flooding the market with trillions of dollars.

The Fed is managing asset prices because that improves the balance sheets of lenders and investors, and when people feel richer, they spend.

The market is a little bit ahead of itself, but there are pockets of opportunity.

Roth: The government has provided so much stimulus that bank balance sheets are starting to look pretty good. They have not been selling assets much to date, but they are starting to sell, and we will see more sales.

How do you price deals?

Colket: There is very limited downside today from this point.

A year or two ago there was no guide to value. Now there is a guide to value from REITs, but that is a false friend — the values have been high because the REITs have bought the premier assets. People looking for the same price will not find it without premier assets.

Over the next 12 months, we are looking for attractive, unlevered IRRs. People will be willing to do deals on value — not cash flow. You will have to drill down and get comfortable with what will happen to P&L for the next three or four years.

Frank: We look at 15-17% as the new 20% IRR when we underwrite in our shop.

Cap rates

Suzanne Mellen, HVS: Cap rates are down and prices are up.

Even though rates are down to historic lows, the spread over T bills is still healthy (250 bp). What will happen when T-bill rates go up? Unless spread decreases, hotel values will go down. This could be a significant impact on value.

What are you doing now?

Kleeman: We call ourselves a focused opportunity fund. We have in-house verticals with experts in each product type. They teach generalists like us a lot each day. We have bought and financed 10 hotels in the last few months. Early on we did a financing for a REIT — that worked then, but we’re not doing it now.

Now we are focused on transactions, including three in California. We just bought a Hyatt in Westlake. This was an asset that we might not have bought initially. There was a very low cap rate, but we bought it for about half of replacement. When we studied the market more carefully, we liked it more and more. While Countrywide was a big employer, it had not generated many room nights.