August 02, 2021

Conroe, Texas, banks on business rebound with convention hotel bonds

Conroe, Texas, plans to issue $77 million of tax-exempt revenue bonds for a convention center hotel that is part of a major residential development, raising some concerns about doing such a project as the pandemic rages on.

The $98 million project has been under consideration since 2015, but bonds were not approved until May 26.

Despite a steep 47% decline in occupancy for similar hotels in 2020, a market study by Dallas-based CBRE forecast a steady recovery through 2024. The hotel operated by the Hyatt chain is expected to open in 2023.

“This development is a natural fit in the city’s growth process,” Conroe Chief Financial Officer Steve Williams said in a statement. “Conroe’s strategic location and connectivity to Houston make the project a perfect fit here.”

However, a city council workshop May 26 brought some concerns about ongoing threats to the hotel industry.

“I worry about it going south, with the COVID situation, who knew that was coming?” council member Marsha Porter said, per the local Community Impact website.

In July, the COVID-19 infection rate for Montgomery County rose instead of falling. The increase in infections came as precautions were dropped by state and local officials.

As the county seat of booming Montgomery County north of Houston, Conroe’s hotel will be just nine miles north of The Woodlands, an affluent suburban powerhouse that offers competing facilities.

The hotel will be an anchor in Grand Central Park, a housing subdivision that will include retailers and offices. The Houston area continues to experience strong demand for residential properties.

The hotel will include a 15,000-square-foot ballroom, a convention center, lounge and bar, outdoor dining, a restaurant, a pool and a fitness center.

Bonds are coming in three tranches ranked in priority for payments from hotel revenues under separate liens.

Series A will be $28.8 million of first-lien bonds with preliminary ratings of BBB-minus by S&P Global Ratings. The $27 million of Series B under a second-lien are below investment-grade at BB-minus by S&P. The project’s third-lien bonds await a rating from Moody’s Investors Service.

A separate upfront contribution of about $30 million is coming from the City of Conroe, which S&P rates AA-plus with a stable outlook. The city plans to issue certificates of obligation for city-owned infrastructure related to the hotel.

The hotel bonds, maturing through 2050, are scheduled to price Aug. 12 with Citigroup Global Markets Inc. as senior manager.

Garfield Pubic/Private LLC is the project developer, with BOKA Powell Architects as architect, and DPR Construction as the design builder.

S&P analyst Diego Weisvein emphasized construction risk, noting that finding a replacement builder would not fall within the project’s budget.

“We typically see hotels as an asset class with lower construction complexity than other project finance assets like power plants,” Weisvein said. “This will be a seven-story hotel and convention center with 250 rooms (relatively small) for which an experienced construction firm will be the design-builder under a guaranteed maximum price contract.”

Upon completion, S&P expects 260% debt-service coverage on first-lien bonds.

S&P’s 62% occupancy forecast is about 10% lower than the case made by the operator and sponsor, “given the uncertainties we have about the location in Conroe and its ability to compete with comparable hotels located in the Woodlands area,” Weisvein said.

“Our base case also assumes a ramp-up to stabilized occupancy levels by 2026, one year later than the issuer case.”

The Woodlands hotels that will compete with the Conroe Hotel and Convention Center include Marriott The Woodlands Waterway, Westin The Woodlands, and the three-year-old Houston CityPlace Marriott in Springwoods Village, 13 miles south.

The established competitors had about 70%-75% occupancy from 2016 to 2019, before the COVID-19 pandemic, Weisvein said. In 2020, those levels dropped to near 40%.

“To factor these uncertainties and the ability to catch-up with the Woodlands market, we assign a negative one-notch comparable analysis adjustment to the first lien bonds, which we could remove if when the hotel opens, we see a strong operational track record that remove our uncertainties on the Conroe hotel market,” he said.

Despite a recent uptick in leisure travel, a July report by the American Hotel & Lodging Association reveals that the road to recovery for the hotel industry is far from complete, with 21 of the top 25 U.S. hotel markets remaining in a depression or recession.

“The new data shows urban hotels are still in a ‘depression’ cycle while the overall U.S. hotel industry remains in a ‘recession,’” the association said Urban markets, which rely heavily on business from events and group meetings, continue to face a severe financial crisis as they have been disproportionately impacted by the pandemic, per the report.

Urban hotels were down 52% in room revenue in May compared to May 2019. For example, New York City has seen one-third of its hotel rooms (42,030 rooms) wiped out by the COVID-19 pandemic, with nearly 200 hotels closing in the city.

The U.S. Travel Association said domestic and international business travelers spent more than $300 billion in 2019. The group estimates that the figure fell to about $95 billion last year and will not fully recover to 2019 levels until 2024. For the Conroe hotel, that timing would be opportune.

U.S. airlines said business travel has increased in recent weeks but is still down more than half from this time in 2019.

With an estimated population of 642,633, Montgomery County has seen growth of 2.82% in the past year and 39% growth in the past decade. Conroe, 30 miles north of downtown Houston, is one of the nation’s fastest-growing cities with a population of 98,081, according to the most recent census estimate.

Conroe has grown 75% in a decade. The average household income is $87,043 with a poverty rate of 12.22%. The median rental costs in recent years has been $1,085 per month, and the median house value is $187,300.

In the Grand Central Park development, housing prices start around $270,000.