Hotel credit markets start to shake after a long sleep – Commercial Observer


Hotels, in the eyes of the market, have started to make a comeback in the fourth quarter of 2020.

There was an overall 79% year-over-year decline in dollar volume of hotel property loans in 2020. closing last year, according to data collected from the Mortgage Bankers Association. Debt funds are leading the way in providing the liquidity that supports the market, but more institutional and conservative stores are now considering a leap back.

The hospitality industry has of course been one of the hardest hit during the COVID-19 pandemic. “The lenders stopped wanting to enter into these transactions, and the borrowers weren’t asking; they were just trying to hang on [last year]Said Gary Otten, head of real estate debt strategies for MetLife.

Still, good news on vaccination and the coming economic fronts in 2021 meant that a significant portion of commercial real estate lenders set a goal of rolling out more than $ 1 billion in the hotel space this year, according to a recent survey of lenders published by the research and investment bank RobertDouglas.

“With so much demand for hotel products, spreads will tighten,” said Jason Lipiec, senior vice president of M&T Bank, which oversees much of the bank’s hotel production across its territory.

About 67% of various lenders polled by RobertDouglas expect hotel valuations to rise this year, and 78% expect values ​​to peak again in the next two to four years. Around 72% also expect their hotel loan volumes to increase this year.

As such, lenders of all stripes are keen to look into hotels that are less dependent on business or group travel. assets such as leisure destinations and “drive” resorts, as well as certain luxury or trophy assets; and, finally, extended stay, limited and select service hotels. Recent large-scale moves in the market, such as Starwood Capital Group and Blackstone’s $ 6 billion purchase of Extended Stay America, have helped build confidence.

Most lenders are also looking to states that have been less strict on COVID-19 guidelines, like Florida, which “is on fire right now, from an occupation perspective,” Otten said. “From a business standpoint, Florida hotels are some of the best deals in the country. We will take a favorable look at it.

The biggest question among lenders who spoke to Commercial Observer is how to secure the future after such a strange and abnormal year? “This is where people’s views separate,” said Otten.

Lenders currently need six to 12 months of interest reserves, regardless of the cash flow presented by a given asset, depending on recent JLL analysis, who said those requirements are “unchanged” from last year. Lenders also require reserves for operating deficits that span “several months or more” than six to 12 months. And, if the amount of debt of lenders ready to grant on hotel loans still remains fairly low, debt service guarantees and operating cost deficits are essential, depending on the profile of the lender and its specific constraints. .

JLL said he expects these structural features of hospitality loans to remain until the operating fundamentals of the hospitality industry begin to fully rebound.

A return on debt north of 10% is a “good number.” We would like it to be higher than that, but in hotels, 10 is the entry ticket for the asset class; it would be a minimum, ”said Lipiec. He added that M&T has always been a recourse lender on hotels as it is a running business with a daily inventory that must be sold.

Bank lenders are particularly selective, preferring to refinance an existing asset with a history of strong performance, according to a recent analysis by JLL. Lipiec said it was “safe to assume” that the spreads on the bank lending front are between 300 and 400 over LIBOR for non-recourse finance.

“Projections are a problem,” Lipiec said. “Where we normally go out at 65% [loan-to-cost], we are currently in our fifties, with higher reserves. We would project a slower stabilization, so some operating reserves may be needed to get you to that stabilized base. ”

Lipiec said the bank, which mainly focuses on working with existing clients, is studying the performance before and after COVID, but also vaccinations and the speed at which they are done, as well as arrivals at the airport, so the bank can get an idea of ​​“who’s traveling and where”.

MetLife put a lot of burden not only on pre and post pandemic performance in its underwriting, but also “years before that, and if available, we will look at performance after the global financial crisis. This allows us to guarantee future occupations and [average daily rates]. It’s a combination of looking for a return to normal over three or four years in hotels, ”said Otten. The company, which is a leading lender and investor in the life industry, continued to cite and fund home loans through COVID-19.

According to JLL’s findings, life insurance companies value loans 400 to 400 against LIBOR with a leverage that does not eclipse 60%. However, Otten said his experience on the life insurance business lending front over the past 12 months would put spreads at a “starting point” of 500, but “generally they are in 400s, maybe even 500s ”. He also said the company was exploring strategies to provide more leverage in hotel deals, although he couldn’t go into more detail.

In the universe of Commercial Mortgage Backed Securities (CMBS), historically a leading source of funding for hotel assets, a number of large investment banks have started offering CMBS fixed rate loans at 5%. and 10 years on hotels – with very strict pricing – at rates ranging from 4.25% to 5%, according to a JLL report released last month. This sentiment is a sign that the market is starting to warm towards the asset class and that it is increasingly confident of a recovery.

According to JLL’s analysis, CMBS lenders are lending at around 60% leverage today and going up to 65% for acquisitions. They also estimate debt yields as high as 10-12% based on 2019 cash flows that have been discounted by more than 10%. Borrowers can also expect these lenders to require 12-18 month debt service or hold reserves as an additional safety net against business interruption.

The Single Asset, Single Borrower CMBS (SASB) space is open to variable and fixed rate borrowing north of $ 200 million and supported by long and limited-service portfolios and resorts. stay, JLL said. There have been several SASB hosting deals that hit the market towards the end of 2020. Despite the increase in interest, existing hosting loans in CMBS are still on the march, according to March service data from. Trepp; just over 24 percent of all existing home loans are currently subject to a special service.

There is also wide availability for financing the construction of hotels at “reasonable prices” for “the best assets and the best sponsors,” according to JLL. Pricing for construction loans, however, remains “very personalized” with most lenders offering less than 60% leverage. Senior mortgages are also typically between 40% and 50% of the loan-to-cost ratio.

A lack of selling activity and wide bid-ask spreads always make lenders uncertain when the floodgates are fully open.

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