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Report , STR ’ s global update as of November 11 , 2023 , showed 79 % of markets with growth in RevPAR compared to 2019 . However , for 2024 , STR forecasts industry growth of 1.0 % in occupancy and 3.0 % in ADR for 4.1 % growth in RevPAR , compared to its 2023 forecast of 4.8 % growth in RevPAR .
Forging a loan maturity strategy starts with a comprehensive , realistic look at a prospective 12 months of performance . Consider how your market and comp set are doing , the physical state of your property and potential , attendant CapEx requirements , expected top-line performance and current debt balance . Do you have strong cash flow and profitable operations ? If you think you can continue to hit those numbers , you may be able to stay the course and reassess in the future .
If cash flow and profitability are flat or deteriorating , it may be time to speak with lenders , keep them in the loop and discuss refinancing options ; or , prepare for a sale , even if only to test the market waters . Also ,
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having the right advisor on your side to continuously review your hotel portfolio and provide current market feedback is extremely helpful in today ’ s market situation . The earlier a property can be assessed , the better .
Hazard warning : In a strong market with excellent profitability , sellers were often able to command higher buy prices based on future prospects , although some would suggest leaving something on the table for the next owner , even in flush times . Right now , we are seeing fewer buyers willing to “ contribute ” to the perceived upside potential of a property .
ENTER THE CAPEX KICKER As if interest rates weren ’ t enough of a pre-flight hurdle , when hotel owners are looking to refinance , many lenders will ask about the existing franchise term and pending brand PIP and CapEx requirements . Any refinancing or change of ownership may be contingent on concluding a new franchise agreement and committing to executing a property improvement plan . At the present time , the major brands are working with vigor to enforce the property improvement and other brand standards that were relaxed during the pandemic .
Adding a mandatory CapEx expenditure to the existing debt balance can change the transaction equation markedly .
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For example , a $ 14-million property with net operating income of $ 1.8 million results in a 12.8 % debt yield . Add a $ 3-million PIP per brand requirements and the debt yield is now 10.6 %, which is inside the debt yields we are seeing drive the most efficient loan terms . Though still important , these factors are increasingly pushing the traditional “ basis-per-key ” selling point down the list of important factors .
We are advising owners with less than five years left on the franchise agreement to at least request and price-out the PIP as any transaction ( investment sale or license extension ) will require it . As the owner , you will have an opportunity to negotiate the PIP , as well as establish relationships with designers , contractors and building materials suppliers . In doing so , you will be better prepared to work with a lender or potential buyer . It ’ s time to price that PIP .
ON RATES We cannot — and will not — try to be interest rate prognosticators as to “ how high or how long .” However , as with wildfires , just because inflation looks like it is under control , it doesn ’ t mean we are in the clear and can start cutting interest rates — we need to know the fire is truly out . If we learned anything from the turbulent 1970s , inflation at one point appeared to be tapped out , but came raging back . However , once the financial marketplace feels that the Fed isn ’ t moving
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rates any longer , we don ’ t expect lending rates to come down ( quickly , anyway ), but we do anticipate terms to improve .
So , it is important to recognize that rate is just one component of the cost of capital . In many respects , terms and with whom you do business are equally — or more — important . Theoretically , excellent cash flow and low-rate debt implies more options , while poor cash flow portends less attractive options , but there is always more to the story .
Regardless , whatever the financial markets hold in store , now is the time to be flight aware . Take full advantage of the runway ahead to optimize existing operations , survey the transaction marketplace more closely and establish or reestablish brand and investment banking relationships , maximizing your options as your loans mature .
Andrew Broad ( left ) is a managing director of RobertDouglas , alongside SVP Andrew Heilmann . RobertDouglas is a real estate investment banking firm .
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