INVESTMENT
How higher interest rates
IMPACT DEALMAKING
HOTELS ASKS MULTIPLE INDUSTRY LEADERS FOR THEIR TAKE ON HOW MORE EXPENSIVE DEBT IS AFFECTING PLAYER ’ S APPETITES FOR M & A , DEALMAKING AND DEVELOPMENT .
by JEFF WEINSTEIN , EDITOR IN CHIEF
Access to historically cheap money is waning as interest rates spike in global markets . Debt is available , but it is definitely more expensive .
Where rates will settle and when they will eventually slide back down again remains unclear . What is clear , however , is that higher rates appear to be somewhat of an impediment to a growing number of hotel buyers , especially those requiring higher leverage . Couple that with accelerating performance and it creates a recipe for bigger bid-ask spreads and a more challenging environment for acquisitions .
All-in borrowing costs are in the 5.5 % to 8 % range ( depending on leverage ), wrote R . W . Baird analyst Michael Bellisario in June . “ Simply put , the math doesn ’ t pencil well for buyers ; all-cash and / or unlevered buyers ( e . g ., Hotel REITs ) have a relative advantage today , but they do not appear overly motivated to ‘ lean in ’ just yet ,” he said .
That said , veteran developer and dealmaker Flip Maritz , Broadreach Capital Partners and Maritz , Wolff & Co ., told HOTELS it is tempting and easy to draw broad conclusions about the impact of higher rates on deals , but he believes they are just one material component of a complicated ‘ stew ’ affecting the hotel business broadly right now . “ Inflation , inventory , COVID ( probably not over yet ), politics ( local and global ), social unrest , labor availability and cost , technology all combine to create about the most complicated and confounding investment environment I have ever experienced ,” Maritz said . “ Are interest rates the ‘ cart or the horse ’? I would argue they are a symptom , not a cause .”
HOTELS reached out to brokers , owner / developers , analysts and consultants in early July to ask a series of questions about the potential impact of the higher interest rate environment on dealmaking . Among our sources for this story are Kevin Davis , JLL Hotels & Hospitality Group ; C . Patrick Scholes , Truist Securities ; Flip Maritz , Broadreach Capital Partners and Maritz , Wolff & Co ., Brandon Tarpey of M Development ; Carlos Rodriguez Sr ., CEO of Driftwood Capital ; and John Fareed , global chairman , Horwath HTL . HOTELS : What is your broader take on higher interest rate ’ s impact on M & A ? KEVIN DAVIS , JLL : The high cost of debt has a significant adverse impact on M & A activity , and most large deals for that matter . Given where hotel cap rates are , we ’ re now seeing situations where buyers will incur negative leverage – debt costs are higher than cap rates - which makes it harder to buy . Also , hotel CMBS spreads
36 hotelsmag . com September 2022