Layers of levers raised the comfort level of LCP Group, Safanad to approve a $33.3 million senior mortgage loan for this lifestyle brand’s West Coast flagship.
NEW YORK CITY – With $23 billion in CMBS lodging loans maturing before the close of 2023, lenders who play in the refinancing and recapitalization markets can afford to be highly opportunistic and even more highly selective. The loan applications that make this competitive cut are likely to look a lot like the package that earned the 178-key Dream Hollywood a $33.3 million senior mortgage loan from the LCP Group, in a joint venture with Safanad, in a deal announced April 11.
“Overall, we see attractive opportunities for recapitalizing existing assets and financing new development in growth markets and with strong sponsors,” said Francis Lively, president and CEO, LCP. “Where we see value and upside, we will aggressively provide higher-leverage loan solutions and work with sponsors open to creative financing. Each market and each asset is unique, and we approach each opportunity with that perspective.”
In an interview with Hotel Investment Today, Lively talked about how Dream Hollywood ticked these boxes and which pages other applicants can take from this playbook to best a broad field of contenders for part of the finite pool of refinancing and recap money.
Hotel Investment Today (HIT): With so many hotels faced with debt maturities, what justified refinancing Dream Hollywood?
Francis Lively (FL): Compared to those on maturing debts, increased interest rates and volatility require lenders and borrowers to be more creative with financing terms. We saw tremendous upside in the Dream Hotel through the power of the Hyatt merger [Hyatt Hotels Corp. completed its acquisition of Dream Hotel Group in February 2023].
Coupled with a great product in an irreplaceable location, we felt very comfortable with the business plan and loan. Being a newer build with COVID affecting occupancy for two years, the hotel did not need any major capital support from the lender. We feel good about our going-in yields and management, so not much of our underwriting relies on market trends.
HIT: Was the Hyatt connection essential to the loan approval?
FL: The Hyatt merger was not a condition to our making the loan, but it is undoubtedly a positive for value creation. Hyatt’s reservation system and synergies with its other lifestyle brands will ultimately benefit the Dream brand and this flagship hotel, creating value for all parties involved. We feel good about our going-in yields and management, so not much of our underwriting relies on local market trends.
HIT: What were the most innovative aspects of this loan?
FL: The key differentiator here was replacing a traditional senior or “A” lender, which had largely exited the market even before the recent banking turmoil, with PACE financing provided by Nuveen. That long-term, low-cost financing benefited the entire capital stack and enabled us to execute efficiently. LCP has almost 50 years of experience utilizing alternative forms of capital—be it through structured finance or statutory programs like PACE and EB-5.
HIT: What attracted Safanad’s participation?
FL: Real estate is one of Safanad’s core platforms, and alongside partners like LCP, it was looking to use its significant internal investment expertise to unlock strong risk-adjusted returns for its balance sheet and investment partners. Given the current volatility in the debt capital markets, Safanad saw a potentially scalable opportunity to provide hospitality financing solutions to strong sponsors that can deliver attractive risk-adjusted returns at a protected basis. As Andrew Trickett, partner and head of investments at Safanad, said when the loan approval was announced, Dream Hollywood fits squarely within that strategy.
HIT: How does that creativity play out in this loan and how does it serve the borrower?
FL: Creativity is necessitated by the challenges created by increased interest rates and volatility in today’s capital markets. Given our hotel ownership and underwriting expertise, we can really understand the operational needs of our borrowers. Where it makes sense, we structure loans with accrual and participation features that relieve current cash flow pressures and enable value creation. We can also quickly pivot terms and structure when needed, as was the case here when the Hyatt-Dream merger was announced and completed.
We structure loans with accrual and participation features that relieve current cash flow pressures and enable value creation.
HIT: How did you factor in the unknowns of the interest rate environment, inflation and possible recession when defining the terms of this loan? What is the maturity?
FL: We provide both fixed and floating rate loans with three- to five-year terms, which gives our portfolio a nice balance and hedge against any shift in rates in either direction for the medium term. Although history has shown us that hospitality’s daily leases are a strong hedge against inflation, we endeavor to structure our loans with sufficient reserves and runway capital to bridge hotel operations through this higher cost and interest rate environment.
HIT: What’s the biggest risk in a deal like this? What’s the greatest reward?
FL: We believe the biggest risk is staying relevant in a competitive market. This hotel is very well located and has some first-class venues in Tao and the Highlight Room that make people want to stay here. The hotel's operations team is also tremendous, providing a competitive advantage.
HIT: What has you excited for the rest of 2023?
FL: Overall, we see attractive opportunities for recapitalizing existing assets and financing new development in growth markets and with strong sponsors. Where we see value and upside, we will aggressively provide higher-leverage loan solutions and work with sponsors open to creative financing.
Today’s market is creating interesting financing opportunities for value-add and opportunistic capital. That said, there are always markets and hotel types where that potential will be limited, and more core or distressed players will fill the void, as applicable.
HIT: What if the tables were turned and you were an owner, what are the good, better, best terms you’d be seeking in refinancing or recap?
FL: We think the ability to fix your rate, accrue at least some portion of your debt service and lock in terms greater than three years are all important to owners at this point in the market cycle. All of this takes some of the short-term volatility of today’s market out of the equation.