ATLANTA—Jon S. Wright, CEO of Access Point Financial,Inc. (APF), recently discussed the types of issues the hospitality industry is facing in the current lending climate. In the second part of that interview, he shared concerns about supply and competition, talk of recession, and trends in hospitality lending in the future.
GlobeSt.com: Are there any markets or regions you’re focused on, or markets you’re staying away from? Why?
Jon Wright: At APF we lend throughout the 50 states and Canada, and we focus on markets with multiple demand generators. For instance, if the market is reliant solely on the oil and gas industry, we will pass on the transaction. Demand generators to make for a successful hotel operation typically include verifiable and recurring locally entrenched businesses, along with government group and leisure demands prominent in the area. Assets we finance should close proximity to these segments so that guests have easy access to what the market has to offer.
GlobeSt.com: Supply growth is much talked about in the industry today. How worried are you about it?
Wright: Following the downturn in the economy, many new build projects were postponed or tabled altogether. Today, franchisors are looking to quickly add to supply via conversions rather than new construction loans which have perceived operating risk and delayed revenue impact, although the US hotel industry is projected to experience continued growth through the foreseeable future. Supply growth in high barrier-to-entry markets will not have a significant impact on values as cap rates should remain low in those markets. In low barrier-to-entry markets, where supply growth is high, we will see a gradual increase to cap rates and tempered RevPAR growth as compared to more robust RevPAR growth in prior years.
GlobeSt.com: Is there more or less competition among lenders right now? How so?
Wright: We are sustaining competition between community, regional banks, CMBS and SBA lenders all competing to refinance stabilized assets and to a lesser extent, new construction lenders are competing for ground up construction if a uniquely qualified risk candidate. However, at APF, our primary focus is value add in 25-year bridge loans whereby the borrower is repositioning an asset which currently underperforms the market. Typically, our applicants seek acquisition and renovation debt, in concert with the rebranding of an existing asset, or separately as a standalone renovation/PIP 36-month short term with 25 year amortization loan to facilitate brand mandates.
In some instances, we can also assist in the overall capital stack for a new construction project whereby a sub-debt tranche satisfies funding for FF&E (which is generally about 20% of the total project costs). This allows the first mortgage lender to limit their overall exposure risk and the developer to reduce the overall cash equity requirement in the project. Access Point Financial still requires the borrower inject a minimum of 20-30% equity validate pro forma results of 1.25x debt-service coverage ratio at stabilization (typically 24 to 36 months forward in our underwriting model). The sub debt tranche provides interest only for up to 18 months, followed by a fully amortized period to coincide with the useful life of the FF&E. Senior debt lenders view the sub debt as a disciplined approach with a contractual “right to cure” or assumption of the sub debt.
GlobeSt.com: The industry has seen a lot of M&A activity in the past two years. What kind of effect has this had? How do you see that evolving in the future?
Wright: We have seen tempered exuberance this year, and yet despite political and economic uncertainty, it has obviously been a busy time for M&A activity for many companies. In spite of China’s slowdown and other global economic pressures, low interest rates/cheap financing will continue to create an interest in M&A deal making. At APF, we have been on the debt side for quite a few hotel acquisitions of late. Our clients are opportunistic in sourcing underperforming or undervalued assets. M&A activity to acquire, renovate, reposition and possibly rebrand the asset, thereby creating value for investors via the future refinance takeout, typically 18-24 months out. This provides tighter spread, wider amortization, less recourse, all resulting in exploited proceeds.
GlobeSt.com: Are there any other trends or influences you’re keeping an eye on as you look toward the future?
Wright: Many believe 2015, may have been the high water mark in the hospitality industry recovery, yet we are still seeing RevPAR growth in many markets. That said, there are some headwinds: the possibility of rising interest rates are frequently being discussed by the Federal Reserve; tighter loan underwriting policies from banks; the coming CMBS loan maturities in late 2016 through 2018; the volatility of overseas economies and the effect it has on US tourism; the threat of Airbnb supply in different markets as well as the difficulty tracking these figures. We are also cognizant of the US experiencing the slowest economic recovery in the post-World War II era. While the current unemployment numbers are decent, the nation’s real unemployment rate was 10.1% in July 2016. While these concerns exist, APF relies on time proven underwriting metrics that allow knowledgeable and experienced sponsors to access capital needed to grow and improve hotel portfolio investment returns. Our underwriting risk model accounts for stress simulations of up to 250 BPS, along with amortization compression to likewise simulate stressed cash flow due to uncertainty currently baked into our analysis. We have closed roughly 600 transactions in the prior 48 months with capital commitments of $1.5 Billion and book value (on loan to cost basis) of almost $3 Billion (or 50% LTV), and LTC of our average debt placed being 65%. Our corporate officers all have deeply embedded cash invested in the company, alongside our private equity partners, which now totals North of $200 Million and each transaction is supported and also leveraged debt of brand name partners’ such as Key Bank, East West Bank, JP Morgan and others. This accounts for low bad debt over time and we do not own or operate hotels and never have, making us a true capital partner vs a predatory “loan to own” model.