Bill Blackham, President and CEO of Condor Hospitality Trust, speaks to Bob Braun, senior member of JMBM’s Global Hospitality Group® at JMBM’s 2016 Meet the Money® – the national hotel finance and investment conference. They discuss Condor’s transition from economy chain scale into select service, extended stay and limited service hotels, RevPAR, and opportunities in the select service sector.

A transcript follows the video. See other videos in this series on the Jeffer Mangels YouTube channel.

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Bob Braun: I’m with Bill Blackham of Condor Hospitality Trust. Bill, thanks very much for taking out the time to talk to us today. What are you currently working on? What’s Condor focused on these days?

Bill Blackham: Condor has been involved over the last year in a lot of different initiatives that involve the transition of the company from once being an economy chain scale-focused entity into a select service, extended stay and limited service hotel company, with a platform that is growing in that new investment strategy at the same time that we are divesting the old investment strategy hotels. Therefore, you have multiple things going on at the same time. Combined with a recent private placement of equity into the company with a new investor, it’s been a very busy time.

Bob Braun: So, what drove this shift from the economy (sector), up the ladder a little bit to the limited and select service?

Bill Blackham: I think that the potential for stock growth was far greater in the space that we’re now pursuing. One of the problems with the sector that the company had previously been in is that the average size hotel was very small. And in order to get to a very meaningful scale to justify being a public company, one would have to own four-, five-, six-hundred of those hotels, which is unwieldy from the standpoint of managing that platform.

I think that the platform that we’re going into also affords us the opportunity to have greater investor interest because it is a sector that continues to have above-industry growth in terms of demand, while at the same time is a space that has much higher margins than we are, as a company, traditionally in. So the higher margins combined with sort of a void in the space, the public company space of people that we’re going specifically after, the geographic markets that we’re pursuing, and the type of products that we’re pursuing really left an opportunity open to get highly accretive acquisitions.

Bob Braun: So this is an open space for you. Do you see yourself moving further? Do you see yourself ever developing into the full service area?

Bill Blackham: I don’t believe so. As I sit here today, I believe that we will remain squarely inside the box that we’ve defined. And maybe it makes sense for me to spend a few moments to articulate what that investment strategy is. We’re generally looking to acquire hotels that are in the top 100 MSAs. And we believe that our greatest concentration of assets will end up being in the 20th through about the 60th MSA; but that is not to say that we’re not going to do very much on either end of that – we will – but we’re looking for assets that are generally less than ten years old unless they have been significantly renovated in the past three years. And the reason for that has a lot to do with the changing initiatives in the various brands in order to keep those brands relevant by the franchise companies. I do not at this young stage of our life want to be saddled with properties that are becoming generationally obsolete, nor do I want to take and allocate capital towards non-revenue producing investments in the hotels. Rather, the greatest potential lift for our share price comes from direct cause and effects investment, if you will, in capital investment that is producing income.

Bob Braun: Where are we in the hotel cycle?

Bill Blackham: I think that it’s interesting because the answer from my perspective is almost evasive, in that I would say it depends. It depends on so many factors and a recognition of something that’s very important and – one always has to remember that the statistician drowned walking across a pond with an average depth of 4 feet. So to say that an entire industry is here or there is to ignore really the depth of the fact that the industry is comprised of so many different markets, so many different chain scales, so many different demand generators that when you start to lump it into one bucket, you’re not necessarily doing justice to all of those factors.

So it depends – are you talking about a luxury hotel in Manhattan? Are you talking about a limited service hotel in a suburb of St. Louis? I mean, it depends, with that as sort of a qualification. Generally, one thing is very clear, and that is across all of the chain scales, across all of the sectors, RevPAR is slowing. But that has to be taken into the context that we are at record levels in so many of the markets and so therefore, how much longer would one expect for there to be very strong RevPAR increases when you’re getting close to the top of what I would call historical demand for rooms and – in many, many markets – historical ADR. So yeah, things are slowing, but from an industry perspective there is still very strong demand on an historical basis.

Bob Braun: So, let’s drill down a little bit. Your area is within a more narrow margin than the entire lodging industry. You’re looking at a more specific group of MSAs. Are your decisions at all driven, or are they at all informed, by where you think we are in a cycle for those properties?

Bill Blackham: It’s less of where we are in the cycle from an investment evaluation perspective and much more focused on what is happening to the rate of demand by the generators in a particular geographic location. What are the upcoming new supply issues in relationship to the rate of growth in demand and the amount of existing competitive set in that geographic market? “Cycle” is the way that people characterize it, but it is really one of drilling down to all of the metrics in that market to evaluate the runway still left in that particular market.

Bob Braun: I see, so given that information, what kind of initiatives or what kind of direction do you think you’ll be going in over the next couple of years? Are you going to pivot into other areas or other chain scales?

Bill Blackham: No, I think we’re going to stay squarely where we have positioned ourselves. With the confluence of factors that are happening today, it is a fairly opportunistic time to buy – and I don’t mean that in a deep discount context. I mean that there are fewer players in the space that we find ourselves bidding against. Many of the publicly-traded hotel REITs that are investors in select service assets are on the sidelines. They’re choosing to use their currency or their cash and their resources to buy back their stock. They believe that that’s more accretive to their shareholders, which is understandable.

There has been, as has been discussed at this conference, a change in the underwriting parameters for debt. The net effect of that is lower loan to values, which I think is actually a good thing from the standpoint of perhaps giving us more longevity in the cycle. So, if we’re in a marketplace where cap rates are rising, there are less players and less capital available and there’s less competition – and we’re buying in marketplaces that still seem to have runway ahead of them for growth – that’s a very positive thing and I see that continuing for the next several years in the space that we’re looking at.

Bob Braun: So another factor that’s going to play in – whether it’s in the lending market or financing – is that there’s going to be a lot of CMBS loans coming due over the next few years. Do you think that’s going to create any opportunities for you?

Bill Blackham: I think it will because, particularly the assets that were underwritten 10 years ago would have been underwritten at very aggressive assumptions, and therefore the loan balances were very high. Arguably – for many of the last 10 years – perhaps underwater in terms of then current underwriting standards. But there’s going to be a lot of competition for loan dollars with probably more conservative underwriting parameters than existed at the time the loans were underwritten. So some sellers will need to sell and there probably will be fewer buyers on the sideline, so that could present some interesting opportunities. There could also, by the way, be some note purchase opportunities.

Bob Braun: And is that something you’d be interested in pursuing, or are you going to stick with the owning assets?

Bill Blackham: Well, I think ultimately the goal is to own the assets, but to acquire the note can be a mechanism by which one enters the ownership.

Bob Braun: The old loan-to-own concept; very good. So, you’ve come to this conference a number of times and every year we always like to look in our crystal ball to see what’s going to be happening next year. What do you think we’re going to see next year?

Bill Blackham: Well, I think that clearly for some of the big questions, perhaps we’ll have more clarity on them. For example, where are interest rates going? And next year we’ll talk about whether or not those interest rates met our expectations. I think there will continue to be more discussion about what is happening to the status of international travel and the effect that that has, particularly on the gateway markets. That is something that is still to be written because, as you know, many currencies are very low in relationship to the U.S. dollar and that’s having a profound effect in certain cities like Miami and New York, as well as the west coast.

Clearly we will be talking about the increased effect of the Airbnb situation on the gateway cities. By that point in time presumably the Marriott/Starwood merger will be closed and we’ll be having discussions about the effect of that, the noticeable changes, if any, post-merger. Certainly we’ll be talking about a whether or not we are now beyond peak and we’re starting to see declines in RevPAR. I doubt that but that could be a topic of conversation. And I think generally speaking at that point in time, if the other public real estate investment trusts have not reentered the market place, there’ll be discussion on when do they reenter.

Bob Braun: So a lot of good things for us to talk about. I hope we got all those down so we can click them off one by one next year. Bill, I appreciate your taking the time, thanks very much.

Bill Blackham: It’s my pleasure. Thanks for having us.