The Rise of Select-Service Hotels


Select-service hotels—once mainly the focus of small, regional owners and operators—have become a target for some of the largest REITs and private equity firms and a growing sweet spot for lenders, according to a report from JLL (JLL) provided exclusively to Mortgage Observer.

The hybrid lodging class, which stands between full-service and limited-service hotels, has increasingly attracted the attention of large national banks and life insurance companies in addition to the usual local and regional banks, fueling increased lending competition, according to the report.

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Bill Grice.
Bill Grice.

“As institutional investors continue to increase their focus on acquiring select-service hotel portfolios, everything about this lodging industry segment has gotten bigger, including transaction size and commensurately, lenders’ appetite for financing these assets,” Bill Grice, executive vice president with JLL’s hotel investment banking team, said in the report.

In September, JLL secured $150 million in acquisition financing from J.P. Morgan on behalf of a joint venture between BlueMountain Capital and Aimbridge Hospitality for a 16-property select-service hotel portfolio with assets in Kentucky and Ohio. The firm projects a total origination volume of $9 billion in U.S. select-service hotel financing for 2014.

“The rise of ‘premium’ select-service brands such as Hilton Garden Inn, Courtyard by Marriott and Hyatt Place, to name a few, have presented guests with high-quality hotels that increasingly provide room amenities more in-line with traditional full-service hotels,” according to Mr. Grice.

For investors, one of the main appeals of select-service hotels, as compared to full-service, is the segment’s lower operating costs, which are also typically easier to control, he noted. Smaller food and beverage operations, fitness centers and meeting rooms all allow for leaner operating budgets and the ability to generate relatively high net income.

“Select-service hotels often achieve net operating income margins north of 30 percent, a level that is attractive to almost any real estate investor,” Mr. Grice stated in the report.

For banks and insurance companies, the ability to lend on multiple select-service hotel assets with strong net income margins provides net income stability, he said, noting that select-service portfolios are “typically diversified across multiple lodging submarkets, helping investors and lenders mitigate geographic risk that a single large hotel asset cannot.”

Source: JLL
Source: JLL

Likewise, the size of numerous select-service portfolio sales this year has allowed lenders to provide stand-alone securitizations of large loans.

It can take “a significant amount of time and effort to uncover the best execution for the borrower,” according Mr. Grice. “We have successfully secured a number of large select-service portfolio loans on behalf of our clients this year, many in excess of $500 million of funded loan proceeds; however, it is not necessarily the same group of lenders bidding on each new opportunity, so you have to throw a wide net to achieve the best results.”

The majority of new portfolio loan executions are reaching leverage of 75 percent, according to the JLL report. With the right sponsorship, some lenders have provided leverage upwards of 80 percent in the past year, Mr. Grice noted.

The higher the leverage, the more likely such transactions are to be structured as floating-rate loans with five-year terms, while more modestly leveraged financings may feature fixed-rate executions with loan term varying between five and 10 years, he said.

“In particular, floating-rate CMBS debt is taking a larger slice of total lending volume this year and is playing a key role in facilitating the purchase of large blockbuster portfolios on behalf of many institutional investors,” according to Mr. Grice.