From construction costs to key money: CDOs at ALIS

LOS ANGELES – There was a fair amount of optimism at ALIS last month about U.S. hotel performance, but development was another story with some shoulder shrugging when the conversation turned to getting new deals done.

As a result, the first question asked during a chief development officer panel at ALIS was about the biggest opportunities and challenges for growth. Throughout the session, leaders from Remington Hospitality, Aimbridge Hospitality, Accor, Wyndham Hotels & Resorts and Extended Stay America addressed questions related to financing, development costs, key money and other key topics of the day. Here is a summary of the panelists’ perspectives.

Q: Biggest opportunities and challenges?

Eric Jacobs, chief global growth officer, Aimbridge Hospitality: Interest rates and valuations right now are in a tough place... The way most of us in the third-party management space grow is through transaction volume, and with the market being relatively flat right now and not a whole lot of hotels trading hands, growth here in North America is probably a little more stymied than what I might be able to achieve in other markets... Europe is in a similar situation to the U.S...

We launched an all-inclusive platform and are doing quite well finding a lot of new opportunities in the Caribbean, Dominican Republic, and in Mexico.

The real opportunity, with all of the challenges that we’ve talked about, is meeting owners where they are. No two assets are the same. No two assets underwrite the same. So, think about the asset versus applying a one-size-fits-all approach.

Amit Sripathi

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Our biggest challenge here in North America is within the ask and the valuation of the assets today. Interest rates dropping could help for a period of time, but we have so many headwinds... At the same time, we see a lot of good green shoots for our U.S. portfolio, particularly on the group side and we’re staying focused on developing that.

Amit Sripathi, EVP and chief development officer, Wyndham Hotels & Resorts: The real opportunity, with all of the challenges that we’ve talked about, is meeting owners where they are. No two assets are the same. No two assets underwrite the same. So, think about the asset versus applying a one-size-fits-all approach... Make sure that anything we put in front of the owners is with owner ROI in mind, while making sure that guest expectations are met.

Extended-stay is a great segment. There's definitely challenges, but there’s also pockets of opportunities, as well as maintaining owner flexibility.

Q: How do you divide growth between management, development and franchising?

Mark Williams, managing director, Franchise Development, Extended Stay America: Given that interest rates are still not moving much, and the cost of construction is high, conversion opportunities are going to be good for us. This year, we have a lot of interest from both owners of extended-stay properties as well as from transient hotels. Within the last three years, we have converted 10 transient hotels into extended-stays, adding kitchens and reconfiguring the public space to accommodate the needs for long-term stays.

On the management side, we own and operate. So, we do enough and that’s about buying properties.

Right now, our focus this year is going to be mostly conversions. However, we still have a lot in the construction pipeline. It’s just a matter of getting the correct financing and working the construction costs.

Q: What is happening with construction costs?

Williams: They continue to go up, like everything else does, but we just have to work through it. If you delay it, you’re just delaying the inevitable. Build when you’re ready to go; don’t wait around.

They [construction costs] continue to go up, like everything else does, but we just have to work through it. If you delay it, you’re just delaying the inevitable. Build when you’re ready to go; don’t wait around.

Mark Williams

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Sripathi: With our Echo brand and some of the bids that have come in, I’ve seen some of the subs [subcontractors] costs come down. Not everything else, but some of the subs. There are definitely pockets as multifamily construction has slowed down.

Q: Is it easier to develop right now in other countries?

Keith Oltchick, chief development officer, Remington Hospitality: In the Caribbean, Latin America, there are a lot of opportunities.

It’s also a different landscape as far as competition for institutional, third-party management companies. Historically, the brands, as they grew down there, they looked to manage everything. Now they’re much more comfortable with third-party management. So, it’s opened up a lot of different opportunities.

Our growth down there is substantial compared to other places in the States, and so I think there’s more interest. Some of the projects are much easier to get financed because they are so important to some of these markets. The government – they’re willing to finance deals.

So, when I look at our development pipeline, there’s probably more under construction outside the U.S. than we have in the United States.

The majority of our projects in the Caribbean, Latin America, have branded residential components, and it’s very interesting to see now what brands we are allowed to do new residences with... Historically, they were mostly with luxury products. Now you’re doing them with soft brands.

Q: What is the profile of the easiest deal to get financed today? And what's the profile the hardest deal?

Williams: The easiest deal to get finance is somebody who has a lot to put down in secondary markets. If you can get your loans locally, it’s a lot easier than having to go national... And California is extremely tough.

Sripathi: We have seen new construction openings on the select-service side and extended-stay side...

When rates are higher, you go back to the fundamental. It’s about multiple demand generators; you’re not hoping on compression business.

You want to make it easy for the lenders to understand what it is about a that project so that they can check their boxes about the risk. You show them what it is; here’s the analysis.

We’re working on a project that on paper is $700,000 a key, but to the owner, after all the incentives, it’s roughly $350,000 a key for a full-service hotel. So, if you can find that right market, find that right community that will support you, or government agency through incentives, with the exception of not having to put branded residential on it, you can find your way to getting a deal done.

Eric Jacobs

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We’ve had for Echo hotels first-time hoteliers, maybe a second-time hotelier building new construction. But they went with a very credible GC. They had their plans, completed it in 10 and a half months and got financing at 7%, 7.5% for 65% loan to cost... You just have to adapt to the current lending environment, the restriction and help the lender make it a little bit easier.

Jacobs: If you’re a smart developer today looking for adaptive reuse, leveraging tax credits, is a really good way to help finance your project. And then you have to lean in on the community... We’re working on a project that on paper is $700,000 a key, but to the owner, after all the incentives, it’s roughly $350,000 a key for a full-service hotel. So, if you can find that right market, find that right community that will support you, or government agency through incentives, with the exception of not having to put branded residential on it, you can find your way to getting a deal done.

Q: Are brands or management companies also investing in deals?

Jacobs: The brands are certainly more aggressive today with incentives, key money, deal structuring. They need to find ways to grow.

We, Aimbridge, have capital, and we will look at the right opportunities to put some sliver equity in – a little bit of key money – with the right partner. The fundamentals have to be there. We need to make sure we’re protecting our investment much like a typical investor would. We have additional underwriting that we do to protect that, but we will be smart with the right partner, right project, where we can see the same kind of returns that they’re looking for, making sure that we can help them grow.

Oltchick: We’re looking at things very much the same way. To the point about the brands being more aggressive, it’s created an environment where developers just expect the manager to give them money, as well, as an instrument because they’re getting it from the brand. So, it’s become a little bit more competitive.

We’ve looked at creating financing structures where we could help, maybe finalize a cap stack to get something done, maybe through a loan or some other sort of financing. But again, we always are very transparent with our development partners to say that the money that we’re going to put out is not cheap.

There’s a different analysis and underwriting that’s required for us to make that investment. As a management company, we’re not really tasked or chartered with owning real estate. So, again, we use it to help get a deal done, but at the end of the day, we’re not really going to own anything, and we try to mitigate the risk as best we can.

Sripathi. We look at every deal on a case-by-case basis. It’s certainly not a one-size-fits-all approach. Some deals have it, many deals don’t. So, it really just depends on that specific market, specific asset and how there’s ways we can help the deal.