Hotel Investment Today has talked to various hospitality lending experts
over the past month. Here’s what they’ve told us.
NATIONAL
REPORT — Over the past month, Hotel Investment Today has talked to eight hospitality lending experts about the current state of the refinance
market.
Their refinancing expertise ranges from SASB CMBS deals that are over $700 million
all the way down to SBA loans that are lower than $5 million, but some common
truths span the difference:
- Cash is king right now. If
borrowers want the best rate available or if there’s a large PIP necessary for
the property (maybe one that’s been delayed because of COVID), they will be
expected to bring equity to the closing.
- It goes without saying that
interest rates are a problem as inflation has forced the Federal Reserve to
delay the rate cuts that have been expected. But if you have a
strong-performing hotel in a strong market and you need to
refinance, chances are good that you find a crowded market of lenders who want
your business. The story will be different if you have a troubled asset in a
struggling market.
- Bank lending, from
institutional to local/regional, has changed. Bankers are pulling back from
traditional spaces they’ve lent in and deploying their capital differently.
That’s created space for private lending, debt funds and even alternative
lenders like insurance funds to fill the gap. But the credit is more expensive.
- For the most part, the
loan-to-value ratios are getting lower. Senior loans that used to be in the
70% to 85% space are now closer to 50%, which makes borrowers and lenders have to
get more creative to fill the rest of the capital stack.
- After a long post-COVID
period, lenders are getting increasingly anxious to get paid instead of
extending financing and kicking the can down the road. And there’s reason to
think that we are just at the beginning of a cycle where lenders who want their
money back are going to be forcing more transactions. That could mean acquisitions, which have been remarkably quiet, could be on the rise.
- Although many borrowers have
refinanced their pre-COVID debt, there is still a lot of debt on lenders’ books
that will need to be dealt with in the coming year. That means a lot more
refinances and transactions are coming our way.
Here is a summary of what the eight experts told Hotel Investment Today:
Kevin Davis, JLL
Hotels & Hospitality
The first half of 2024 has seen
a flurry of high-profile hotel refinances in the U.S., but one type of
transaction is fueling more work for JLL.
“The segment of the market that
is arguably the most active, relative to what it’s been in the recent past, is
in the large loan space, specifically executions doing SASB CMBS (single-asset,
single-borrower, commercial mortgage-backed securities),” said Kevin Davis,
Americas CEO for JLL Hotels & Hospitality.
Davis said while that market
has always been available, it didn’t always pencil for borrowers, especially
after the Federal Reserve started raising interest rates and credit spreads
“widened out” significantly.
That made it too expensive for
most borrowers in late 2022 and 2023, but Davis said things started to change
early this year, and credit spreads have started to come back significantly in
the SASB CMBS space. That made a refinance appealing for larger assets ($200
million or greater) that previously
financed in that space pre-COVID.
“This was one of the first
times that they had an opportunity to refinance. So, they’re taking
advantage of credit spreads,” Davis said.
Click here for more on this
story.
Jared Schlosser,
Peachtree Group
In the current hotel refinance
market, Jared Schlosser sees two types of players: the “haves” and the “have
nots.”
“If you have a good asset with
cash flow, there’s a bunch of lenders competing to refinance this project
projects,” said Schlosser, executive vice president of hotel
lending and head of CPACE, credit for Atlanta-based Peachtree Group. “If you
have an asset that is struggling, doesn’t have cash flow, or has other
challenges like a pretty big deferred PIP, your options are very slim.”
Schlosser said Peachtree, which
is a vertically integrated investment management firm that provides hospitality
funding for refinances, construction and acquisitions (it’s also a developer
and hospitality manager), did just under $500 million in hotel loans in 2023
and has already surpassed that number this year (with most of those being refinances).
He said the company would like to effectively double that number for the rest of
2024, but it’s hard to predict in this
market. With bid-ask spreads still out of whack, he said Peachtree isn’t seeing
as much acquisition activity right now.
Schlosser said Peachtree has
been working lately with borrowers who don’t generally work with private
lenders, but the lack of banking options sends owners their way. “The bulk of
these refis have to be filled by private lenders,” he said.
“When I look at the last 10 deals we’ve closed, the asset and borrower quality
is really strong.”
Click here for more on this
story.
Michael Weinberg,
Berkadia
For hotel refinancing right
now, one way or another, cash is king.
“Maybe 75% of the loans that
we’ve underwritten this year have either
had some sort of cash-in component to it, or
you need to bring some equity to the table if you want a really attractive
interest rate, or you’re going be dealing with a higher cost of capital,” said
Michael Weinberg, managing director of Berkadia’s Orlando office.
Weinberg used the example of a
two-asset deal in North Florida earlier this year. The borrower wanted the best
cost of capital, which meant bringing $2 million in cash to the closing.
“I’m delivering bad news,” Weinberg
said. “I’m telling borrowers to bring equity to the table to get a lower cost,
or if they want it to be cash neutral and don’t want to bring equity to the
table, the cost [of the loan] is much higher. They don’t like either of those
solutions because neither is great news when working with lenders.
Weinberg said equity
requirements are much higher because the credit standards are tighter. “That’s
where the new equity has to come in to fill that gap,” he said.
“More equity is definitely required, the underwriting standards are tighter,
and the leverage is lower, just across the board.”
Click here for more on this
story.
Michael Straw, CBRE
In today’s capital environment,
especially for refinances, hotel deals that are penciling generally
work on both sides.
“If the equity makes sense, and
the borrower can make it pencil, the lender typically can as well,” said
Michael Straw, executive vice president for capital markets for CBRE.
He said when the lender can’t
make a deal pencil, there is usually a “pioneering” strategy
behind the borrower’s underwriting.
“When the borrower’s
underwriting is possibly a bit too aggressive, that’s where lenders struggle,” Straw said.
What Straw means by pioneering
is that the investment has a visionary aspect that is difficult to quantify.
“Maybe it does work, and there’s a certain aspect of visionary investment that
would make that deal compelling to the equity,” he said. “But lenders are risk averse by nature,
and so when dealing with those pioneering fact patterns, it’s much more
difficult to buy into it.”
Click here for more on this
story.
Ryan Bosch, Arriba
Capital
Compared to companies who
broker larger hotel loans, Ryan Bosch said his company is “probably seeing
drastically different things.”
Bosch is principal
for Scottsdale, Arizona-based Arriba Capital, a debt equity
advisory firm which deals almost exclusively with hotels. He said Arriba typically does about $1 billion in
financing annually; traditionally, that’s been about half in new construction
loans, 25% in acquisitions and 25% in refinancing.
Bosch said Arriba is in the
middle market of the hotel deal space (below $100 million — its average deal
size is between $25 to $35 million). He said some of the rules and outcomes are
different in that space. So is the amount of activity.
“I’d say the sub-$20 million
check size, that’s where we’re seeing the most activity from lenders across the
board, but specifically, your bank/credit union lenders,” he said.
“It’s risk more than anything; lenders that historically might have done a $100
million check say they would rather spread that risk across three $30 million
deals today.”
Click here for more on this
story.
Carlos Rodriguez,
Driftwood Capital
Carlos Rodriguez is seeing a
difference in the role preferred equity and mezzanine financing are playing
in the capital stack for hotel refinancing.
Rodriguez, founder, chairman
and CEO of Miami-based Driftwood Capital, said preferred equity or mezzanine
was previously used to get the loan-to-value percentage (after the senior loan)
in the 70% to 85% loan-to-value space.
Now, Rodriguez says that financing is used to get loans
above 50%. “I’m seeing more borrowers
willing to do [preferred equity] than before,” he said. “[Borrowers] used just to be happy for a
senior loan that got up to 70%, and then it would be equity from there, but
since they’re now only getting to 50%, and they need to bridge the gap, that’s
when we’re seeing more mezz or preferred equity than we used to see.”
Driftwood is a vertically
integrated commercial real estate firm with investment, development, lending
and management platforms. For hotel refinance deals, it works primarily in the
mezzanine funding space (or preferred equity) and will also assist in finding a
senior lender when it does provide that financing.
Rodriguez said that because
financial institutions are offering fewer loans, there’s
“bigger room for us to come in with a
nice spread for ourselves and our investors.” He said Driftwood is working with a higher-quality
borrower now.
Click here for more on this
story.
Mark Owens, Colliers
While several high-profile
hotel refinances have occurred so far this year, one of the first half of
2024’s major characteristics is the lack of activity in the real estate
acquisition market. But Mark Owens is sensing a change.
“A number of the banking
institutions are now forcing their borrowers to sell, and that is starting to
happen more and more,” said Owens, vice chair and hospitality practice
group leader for Toronto-based Colliers.
Owens said the scenario is
common: Hotel assets were purchased before COVID with a business plan to
convert from one brand to another. Money intended for renovations was diverted
in the “extend and pretend” days. Now, in mid-2024, the hotel is still with the existing
brand and without the renovation. Now, lenders want their money back.
“The only way to effectuate the
business plan is to sell it or for the ownership to put more equity in, and the
lenders generally don’t necessarily want to be a part of that,” Owens
said. “That’s where we’re seeing most of that activity where the banking
institutions are working with their borrowers to try and get rid of the
asset... You’d much rather have something where someone else is going to
come in and fix the hotel with the brand and continue with the business plan
but with a new capital partner.
He sees that trend continuing
to grow over the coming year. “I think we’re at the very front end of that, and
we’ll continue to see that increase through the coming year, and we’ll probably
continue to see more of that into the first quarter of next year,” Owens said.
Click here for more on this
story.
Laurie Ivy, PMC
Commercial Trust
In today’s hospitality capital
market, an optimistic view of a floating-rate loan is that interest rates will
lower in the coming years, so now would be a good time to get one. However,
borrowers are still getting nervous, according to one SBA lender.
“I keep trying to tell people
that [rates are going to be coming down], but they still get nervous because
we’ve been thinking that for a while,” said Laurie Ivy, senior vice president of lending
for Dallas-based PMC Commercial Trust.
“We have had a hard time
convincing buyers and referral sources that now’s the time to get in where they
can get in front and at prime plus one,” she said. “As those rates go down, they’ll be at a
lower spread. It’s a 25-year fully amortizing loan.”
PMC, which has been in
hospitality lending for 30 years, is one of only 14 non-bank lenders that provide SBA
7(a) loans, which can be used for hospitality assets or other
owner-occupied commercial real estate. The 25-year, fully amortized loans can be used for
acquisitions, refinancing, or renovations and
can range from $750,000 to $5 million.
The loans have favorable terms
and can’t be called back for debt coverage, covenants, or loss in value as long
as the borrowers make their payments and pay taxes.
Ivy said spreads have been
depressed for SBA loans, but the variable rates still make borrowers nervous.
“Borrowers are hesitant to make those kinds of loans. They’re generally trying
to get into a lower fixed rate,” she said.
The SBA 7(a) loans are used
primarily for acquisitions, where borrowers purchase a property with poor
historical performance numbers in an
attempt to turn it around. Ivy said about a quarter of borrowers are first-time
hospitality owners, but many of them own other properties or have owned them in the past.
Click here for more on this
story.
HOTEL REFINANCE
SERIES
Hotel Investment Today has written a
series featuring interviews with hospitality experts about the current state of
the hotel refinance market.
- For Part 1 with JLL’s Kevin
Davis, click here.
- For Part 2 with Peachtree
Group’s Jared Schlosser, click here.
- For Part 3 with Berkadia’s
Michael Weinberg, click here.
- For Part 4 with CBRE’s Michael
Straw, click here.
- For Part 5 with Arriba
Capital’s Ryan Bosch, click here.
- For Part 6 with Driftwood
Capital’s Carlos Rodriguez, click here.
- For Part 7 with Colliers’ Mark
Owners, click here.
- For Part 8, with PMC Commercial Trust’s Laurie Ivy, click here.