Outlook for securitized lodging loans

Approximately $5 billion of securitized lodging loans mature in 2023, with borrowers facing increased financing costs in nearly every scenario. While the debt market presents a headwind, lodging fundamentals simultaneously remain strong with the asset class proving to be inflation resilient.

As a result, we anticipate a healthy mix of sales, refinancings, workouts and extensions as debt comes due. Investor demand remains high, therefore quality assets in good markets will make attractive sale candidates.

Underperforming assets, particularly those with cash-out financing at origination, are the most likely distressed sale candidates.

Currently, we expect servicers will keep busy papering short-term and bespoke extensions for assets that are less attractive from a sale or financing standpoint. Those extensions, meant as bridges to a more favorable market, will likely involve principal reduction, fees, modified terms, or a combination thereof. 

Underlying securitized loan metrics

Using a debt yield greater than 10% as a threshold, roughly 57% of securitized lodging loans maturing in 2023 appear to be healthy candidates for refinance--despite a tougher capital markets environment. More than 61% report a debt service coverage ratio (DSCR) greater than 1.20x. Stressing these ratios to account for the movement in benchmark rates inverts the ratio, with roughly 40% above a 1.20x DSCR assuming interest rates derived from spread at the time of origination added to the current index value.

Approximately 60% of the $4 billion in loans maturing in 2023 with property-level NOI reporting have a DSCR below that (1.20x) at the time of securitization. We anticipate many of these properties are just returning to pre-Covid performance and may need more time to stabilize.

Distressed Opportunities

On a trailing 12-month basis, only 2.35% of the roughly $1.75 billion in securitized hotel loans that matured did not pay off, with another 9% in monetary default at the time of maturity. Still, a portion of the roughly $5.25 billion, $9.45 billion, and $5.08 billion of securitized lodging loans maturing in 2023, 2024 and 2025, respectively, will default due to changing demand drivers that make these assets difficult to sell or refinance. In particular, we anticipate problems for assets in oversupplied urban markets with high expense burdens, as well as properties located in markets facing fundamental shifts due to remote work trends.

Thus far, the distress has largely been market-based in places like Houston, which underperformed prior to the pandemic, the Upper Midwest (Cleveland, Chicago, Minneapolis, Milwaukee), and the Pacific Northwest (Portland, Oregon, San Francisco). We continue to advise on loan, receivership and REO sales on behalf of CMBS special servicers in cases where property performance was significantly impacted prior to or by the pandemic. Given the inherent distress with these assets, pricing reflects wider cap rates relative to the broader industry.

Despite transaction volume being down relative to historical levels, impending maturities are expected to bring any uptick in sale and financing activity.