NEW YORK — Investing in boutique and lifestyle hotels can be a smart move, but working with lenders and underwriting deals in today’s environment requires some adjustment, according to speakers at this week's 2022 Boutique Hotel Investment Conference by the Boutique Lifestyle Leaders Association.
Atit Jariwala, CEO and founder of New York City-based boutique hotel development, investment and management company Bridgeton, said in the past analysts would do the underwriting, but the company realized the analysts were “completely off.”
Now, Bridgeton’s operations team is “very much involved in the underwriting of any property that we purchase,” he said.
Clark Hanrattie, partner at HEI Hotels & Resorts, a Connecticut-based privately held hotel investment and third-party management company for branded and lifestyle/independent properties, said lenders are becoming more accustomed to underwriting deals in the independent space.
That doesn’t mean it’s less work for independent hotel owners to get the deals done.
Jason Ourman, partner of New York-based private equity firm Apollo Global Management, said the key to talking with lenders is “taking time to tell the story.”
“Ultimately, this is a boutique hotel, it is not an office building where expenses tell the story,” he said. “As a lender, we are your partner in the business, and understanding how you’re going to execute both your revenue and your expense strategy when things are tough — that’s critical. But for the most part, this is exciting, [we’re] buying off of somebody’s expertise. You’re visionaries in many respects, and we’re not. Get us on board.”
HEI’s Hanrattie said about half of his portfolio is lifestyle and independent hotels, and he hasn’t found it to be particularly difficult to get financing.
“I do think what’s challenging is if you’ve got a branded hotel and now you’re in the business to convert to an independent hotel — that becomes more complicated for lenders to be able to wrap their heads around,” he said, adding it’s easier if the independent hotel is already operating and relatively stabilized.
He said lenders need to understand where the hotel’s channels of demand are coming from and how the property is positioned.
Bridgeton’s Jariwala said when his company was founded more than a decade ago, it was more difficult to get debt financing.
“Fifteen years ago, we started as a soft brand with a flag and we were able to make it an independent hotel, but the lender got comfortable that we were associated with a brand flag,” he said. “We proved when we were getting our next loan that this brand didn’t really do anything for us anyways, it was mostly us, and [the lender] started getting comfortable.”
Ben Leahy, partner at London-based property investment firm Cedar Capital Partners, said in the U.S. there’s been a correction in the markets, reflected by an increase in base rates over the past 60 to 90 days as well as widening spreads.
“I think that interest rate dynamic that’s been evolving, plus some lenders having concerns around recession, could generally cool the hotel financing market,” he said. “It’s not to say that it’s shut. There’s still banks that are lending; there are debt funds that are lending, but they’re [increasing] rates and [tightening] terms.”
Leahy said Cedar Capital Partners is being relatively conservative in its leverage profile.
“It’s generally 50% to 60%, all in leverage — we never go above 65%,” he said. “We’re not trying to financially engineer our deals, but I think that returns are going to get impacted, therefore pricing will get adjusted. We’re seeing it in other asset classes in real time, where people have entered into a due-diligence stage, and they’re 30, 45 days in and going to sellers saying ‘we just can’t pay what we’re previously underwriting.’ ”
Markets with Opportunities
Globally speaking, Eric Jafari, chief development officer at London-based aparthotels and lifestyle hotels group Edyn, said it's been a nightmare to get deals done in Germany.
"We wonder when things will stabilize," he said.
Within the U.S., Leahy noted the trend toward investing in the Sun Belt states will continue.
His team this week is closing on a property in Nashville.
"The number of corporate offices that are being relocated, new office buildings that are being built, a lot of it's driven by the tax and labor situation," he said. "That is a trend that I think will continue here in the states."
However, that shift is not isolated to the Sun Belt states, as a variety of resort locations are gaining steam, he said. His company has a ski resort in Utah called Sundance Resort, which is near Salt Lake City and has multiple demand generators.