7/14/2021 – Checklists: Lender, Legal, Broker, Appraiser, Environmental, Engineer, AUP, Insurance, Investor. Some say keeping track of checklists is the most challenging part of the deal. At first all checklists start off the same and things seem smooth sailing. War rooms are set up. Docs are nicely organized. What can go wrong? Everything. Lawyers start to update drafts – does everyone have the latest version? Financials are tweaked with the latest T12, who has it. Appraiser used different sets of income statements – why and who provided. Insurance, we forgot about them, still need everything and the deal closes in three days. I think you see the point. The difference maker for all this is the Lender or third-party, such as Pearlstone, who are really responsible for gathering and updating due diligence for all said requests. Proper organization and efficiency will translate to a smooth checklist process.
7/13/2021 – Extended-stay, limited-service, select-service, boutique, semi-full-service, full-service, resort, destination, airport, conference, motel, all-suite, apart-hotel, hostel…and the list of hotel types goes on and on. Do underwriters care? They do. No really, the type of hotel can make a very big difference as the need to understand how said hotel fits in the market and performs compared to its peers. How the hotel is managed based on its hotel type is also important. Some lenders only finance specific types of hotels and a good hotel broker will steer folks to them. Having to convince a lender to lend on a hotel type they either have never done or heard of can be difficult to achieve.
7/12/2021 – This weekend I had the pleasure of catching up with Ari Schwartzbard. We talked about the need for #seasoning for hotels, especially #CMBS. So many hotels are finally getting back on track but are still half-a-year or more from having twelve months of consistent cash flow. And this makes CMBS financing, as well as balance sheet, a challenge. Lender and credit teams like to see at least twelve months of consistent cash flow when determining whether to make the loan or not. Of course it is still possible to make loans on hotels with less than twelve months, certainly if it is a new hotel or major renovation/upflagging. The key is that sooner than later many more hotels will have the twelve months behind their belt and financing will be more available and at hopefully better terms.
7/9/21 – Simple Friday message. Hotels are an operating business. Yes, real estate too. But many times this gets overlooked when folks are looking to acquire and manage.
7/8/2021 – Coke & Pepsi. Microsoft & Apple. Marriott & Hilton. Does being the duopoly of hotels make financing any other flag a challenge? The first question many lenders ask is – is the hotel flagged and by who? It’s easier to finance a flagged hotel and being the Coke/Pepsi of hotels, Marriott/Hilton are generally the preferred flags by many lenders. But in many cases other flags or even being an independent hotel can be just as good or better. Such as a boutique hotel in Manhattan or a resort hotel in Hawaii. While Marriott and Hilton may be the initial go-tos, don’t discount other flags that may fit that specific market/location as a better puzzle piece.
7/7/2021 – Occupancy or ADR? What comes first? That is the question. This topic can be discussed at length but we’ll save why for another day. Typically it’s harder to push rates than occupancy. But understanding the hotels business plan and how its rate and occupancy (and RevPAR) stacks up to the competition is really all it’s about. Also the consistency of either occupancy and/or rate plays a factor when underwriting the deal. Meaning, has any outside influence caused the rate or occupancy to fluctuate or has it been Steady Eddie. Again, strategies for increasing either or both is a full time job (revenue managers) and with technology this area will only get more automated and complex.
7/6/2021 – The hotel being financed doesn’t contribute to Smith Travel Research (STR). Disadvantage or not? Thousands of hotels contribute to STR and with good reason, the data they collect is priceless. The stats can be used to verify the occupancy and ADR of the hotel as well as show how the hotel compares to competitive hotels in same market. If the hotel does not contribute one cannot verify the occupancy and ADR of the hotel (will need to check bank statements to confirm revenue) but one can order STR’s Trend Report of competitive properties – assuming these properties contribute. It’s certainly more convenient if the property has a history of contributing to STR but disadvantage, not necessarily. If the competitive hotels also do not contribute, the argument can be made for the disadvantage.
7/1/2012 – An important piece of forensic diligence (AUP) is to make sure to find and explain any anomalies in the cash flow. Anomalies could be things like a spike in RevPAR due to the Super Bowl or a capital item like roof repairs that was expensed. The list goes on and on. The goal is to smooth out these anomalies and have a cash flow that is as close to “normal” as possible. The deep dive analysis and adjusted cash flow provides a level of confidence needed regardless of whether you are on the lender or borrower side. It is for this reason many banks and non-banks require an AUP for hotels, as the operating side of the business can have and ebbs and flows.
6/30/2021 – Nothing wrong with having a little fun on your site visit but…staying focused will make you more efficient and allow one to gain the best understanding of the hotel asset and market. During the due diligence period different parties conduct site visits for various reasons and end goals. As a third-party underwriter, we review the various site visit reports and sometimes its as if they inspected completely different hotels and/or markets. However, the fact that the parties had different observations isn’t necessarily a bad thing- it does require thoughtful justification though. (There was one deal that an appraiser went to the wrong hotel.)
6/29/2021 – Is financing a hotel through a broker the way to go? Unfortunately, I do not have the scientific answer to that. What I do know, for deals I’ve been a part of, “hotel” brokers have facilitated crossing the finish line in a big way. I quoted hotel because these brokers sole focus is on hotels and understanding the real estate and operating side is crucial. Many times, hotel specific operating issues pop up during financing (i.e., PIP requirements) and having someone on your side that has seen this many times will likely help the deal proceed along smoothly.
6/28/2021 – Destination hotels have been all the rage since the start of the pandemic. Folks have driven cross country to stay at a beach side resort. Does that mean financing and underwriting these hotels will be a breeze? Possibly. What was the performance prior to the pandemic? Consistency is key. If the spike is solely due to pandemic demand that may be an issue. Additionally, values for many of these hotel assets are inflated, similar to the cash flows, will the spike in value be temporary? While it’s great to be an owner of a popular destination hotel right now, the ease of financing and long term outlook isn’t quite as clear. There’s certainly good arguments for the continued demand of these hotels but a hotel that had consistency prior to the pandemic has a leg up.
