Streamlined solutions to entitlement

The entitlement process can be rife with headwinds, from zoning issues to lengthy wait times for inspections, the panelists noted.

“You used to be able to receive entitlements in six to nine months. Now we're looking closer to 12, 15 or 18 months, depending on the municipalities,” said  Rencurrell. “And if you are looking for a rezone, you definitely need a local land-use attorney who understands all of the politics and dynamics within that municipality.”

At the pace Gulf Coast Hotel Management develops, McClure said his company looks for speed and certainty within the entitlement process. “We'd rather not go into a market where we to have to rezone something because it's just an exorbitant amount of time,” he said. “That can be especially frustrating for first-time developers, who might wait for years.”

Rencurrell suggested developers step in to help guide the municipality through the entitlement process. “Some cities may not be familiar what they do and don't allow; they may not know exactly what your product is. There is a lot of hand-holding and education that goes along [with the process].”

Hiring a project manager(s) is another solution to sorting out obstacles when trying to get extended-stay properties in the ground, said Burgett.

How to get lender buy-in

The panelists stressed that forging strong relationships with local lenders is often key to getting extended-stay projects financed. However, for first-timers, these experts agreed it’s imperative to show the brand’s track record, as well as the borrower’s own credentials.

For new investors coming into this space, it is important to have experience on your side, either a professional management company or someone who can put their résumé [to the task], according to Walker.

Added McClure, “The biggest [selling point] to a lender is going to be: this works, it's recurrable, [sic] it's durable and 12 months out of the year it operates wonderfully if you operate it correctly. At the end of the day what a lender wants to know  is: 'Am I going to get repaid?’ If it's extended stay, they're far more favorable to underwriting a project than if it's just a regular transient hotel.”

While lenders historically look at the top line, said Burgett, with extended stay the bottom line is “the most important thing you’re going to talk to a lender about.” Rencurrell agreed.

Jacquie Rencurrell on why she's not waiting on interest rate drops to do deals

“What you're seeing in your margins and your bottom line is something that these banks get excited about and that they feel secure and safe lending on. And, extended-stay hotels have on average performed well even through recessions,” she said.

Although decreasing benchmark interest rates are encouraging for the financing outlook, Rencurrell stressed her company is not sitting on deals.

“We continue to entitle and develop because we understand that entitlements can take 12, 18 months and interest rates will be in a different place by then,” she said.

Walker said lower rates “take a little bit of pressure off our overall investment thesis. Lowering interest rates helps our IRR a tad and certainly helps our overall ability to raise capital for some of these projects. We probably have an additional four or five projects in the pipeline that we didn't have before the Fed eased off.”

The cost of money matters in terms of pipeline, but it’s just one factor. In the current environment, said Burgett, “You have to look at where you could put the product, at what’s the right place where you can push RevPAR now. These projects need to pencil at current market conditions because we don't see construction costs dropping a lot.”

Why this segment will stay hot

The panelists concurred over the next three to five years the segment will continue to generate investor interest. “It has been  a stable investment,” said Rencurrell, noting there could be some slight oversaturation “in very specific markets” due to the influx of new brands into the space, which will likely smooth out over time.

Ian McClure on where ROI is headed

“We're bullish,” said Walker. “We've got quite a bit in the pipeline already in the extended-stay space. We very much want to add to that and feel very strongly that we will find a lot more sites that fit our thesis.”

And, more deals are likely as product comes to market. “There are a lot of older boxes out there that are 20-, 25-year-old economy-extended-stay assets. They have been in the market forever and they're tired. These new WoodSpring and Everhome brands [two of Choice’s four extend-stay franchise offers, which also include MainStay Suites and Suburban Studios], they're fresh. You may get a little higher ADR, maybe a little better part of town, new-development-type areas. If it’s a strong market with a strong brand, put us there all day long,” said Walker.

McClure shared that optimism. “The next three to five years look fabulous for us,” said McClure. “We obviously wouldn't be building as many assets and acquiring and converting as much as we're doing right now if we didn’t see such a positive outlook.”

He acknowledged the new competition coming in but felt very little is in Gulf Coast’s space.

“They'll call themselves extended-stay and they think they're going to be extended-stay, but I know many of the developers that are doing it and they're really transient operators. So, unless they really change the ethos in their companies, they're going to end up being an extended-stay hotel that operates as a transient hotel. And that ROI is likely very different than the ROI that Aaron, Jacquie or I have for our assets. We think the future is really bright,” said McClure.

Investors who share that view have put 400 hotels into Choice’s extended-stay pipeline. Burgett said Choice’s extended-stay arm is opening a hotel approximately every 20 days, and. “It's going to get to be a faster clip in the next few years. With new construction, we have seen on average steady GOPs …. So, it’s a big runway for us and a big runway for our developers and our investors.”