RobertDouglas Exec: Lenders Are Approaching Hotel Market With ‘Confident Caution’

LOS ANGELES—While the industry is embracing another year of growth, many hotel executives are expecting there to be somewhat of a slowdown in the next couple of years or so. Despite this outlook, there’s still plenty of capital available for properties in strong markets—at least for now.

Hotel Business sat down with Evan Hurd, principal and managing director of RobertDouglas, a hospitality investment firm headquartered in New York, at Americas Lodging Investment Summit (ALIS) to get a sense of how the lending landscape for hotels is going to pan out, the type of equity expected to get a lot of play and what RobertDouglas has in store for the hotel industry in 2019.

What advice would you give to newcomers to help them navigate the hotel investment world?
This is a challenging class of real estate due to hotels being a complex hybrid of property and operating business, which is often reflected in the premiums that lenders and investors can command. Our advice would be to work with best-in-class brands, and property and asset managers, and solid financial and legal advisors.

How is the lending landscape for hotels looking for 2019?
Lenders are approaching the market with what we would call “confident caution,” influenced by a feeling that some hotel valuations are reaching their peaks considering how far we are into the hospitality industry and overall economic cycles.

That said, most lenders expect loan volume to stay consistent with 2018, with some adjustments in terms, likely a widening of spreads and more scrutiny on loan to value. Regardless, capital is available for excellent properties in strong markets, including innovative platforms appealing to sophisticated consumers.

Which kinds of lending terms can owners and developers expect?
For non-recourse development loans, we are seeing leverage top out around 65-75% loan-to-cost, with rates clustering around 600-800 over LIBOR. For recourse loans, leverage is around 60%, with pricing around 250-400 over LIBOR.

Generally, for either, lenders will offer a three-year initial term with one or two one-year extensions and flexible pre-payment provisions.

There is some liquidity in this market—some of the most we’ve seen in this cycle—driven by new entrants into the non-recourse mezzanine lender space. Some of these are equity players that are transitioning to debt given the attractive returns and the last dollar exposure.

Which type of equity is going to get a lot of play in 2019?
Longer-term capital is advantaged in today’s market by the ability to invest through any coming slowdown and hold well into a follow-on recovery. This capital, more focused on yield, will find opportunities as any slowdown pushes out shorter-term private equity investors.

What types of projects is RobertDouglas looking to finance in 2019?
We will continue to focus on arranging capital solutions across the capital stack—both debt and equity. On the debt side, we expect the refinance market to remain highly liquid for both fixed and floating rate loans, affording owners a tax-efficient alternative to an asset sale should the transactions market slow. We will continue to arrange construction financing on a very selective basis. The recourse market is relatively deep and local, while the non-recourse market is thin and more national gateway focused.