Why SASB CMBS refinances are on the rise

Hotel Investment Today is writing a series featuring interviews with hospitality experts about the current state of the hotel refinance market. Today, we talk to Kevin Davis, Americas CEO for JLL Hotels & Hospitality. 

NATIONAL REPORT — 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.

Tishman Hotels & Realty and MetLife Investment Management recently secured a SASB CMBS refinance for the Swan & Dolphin Resort in Florida.

A recent high-profile example of this type of refinance is Tishman Hotels & Realty and MetLife Investment Management securing a $735 million, five-year, floating rate SASB CMBS term loan for the 2,619-key Swan & Dolphin Resort adjacent to the theme parks within Walt Disney World in Lake Buena Vista, Florida. JLL arranged the financing.

Another recent SASB CMBS example is New York City-based MCR and Stamford, Connecticut-based Building and Land Technology closing on a $632 million, three-year, fixed-rate refinance for a portfolio of 53 hotels across the U.S.

Davis said the SASB CMBS market is “as competitive as it’s ever been.” (He says the same about the current debt fund market.) He said for hotel assets greater than $200 million, there are few balance sheet options available for financing from a non-recourse perspective. Davis said there is still a significant share of loans that were financed pre-COVID and could be refinanced now.

“A lot of what is taking place today is loans being amended and extended. Some of these extensions will continue into next year and perhaps beyond,” he said. “But where there’s sufficient cash flow to refinance the existing debt, most of those borrowers are going to market today.”

Hotel Investment Today also talked to Davis about “opportunistic refinancing,” deal volume, and the kind of deals that aren’t penciling.

The SASB CMBS market is the most viable market for refinancing large hotel loans. When hotel operating performance is strong, and when credit spreads are low, that market tends to take off, which is the dynamic you’re seeing right now.

Kevin Davis

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Hotel Investment Today (HIT): What are the biggest drivers of the refinancing you are seeing?

Kevin Davis: The biggest drivers are refinancing pre-COVID loans that are maturing, and the second would be opportunistic refinancing where there isn’t an ability to take out some cash over the existing loan and/or lower the credit spread relative to the prior loan.

(Davis used an example of Brookfield Asset Management securing refinancing for the PGA National Resort in Palm Beach Gardens a year ago but now is back on the market for an SASB CMBS refinance.)

You’d have to speak to Brookfield around their motivations, but the fact that they’re in the market a year later to refinance an asset that they just refinanced speaks to the low cost of capital currently available in the SASB CMBS market. It also reinforces [the hotel’s] strong underlying performance, which would justify a larger financing today relative to what they did a year ago.

HIT: Do you expect more refinancing deals over the next year?

Davis: At this point, yes. The market feels strong. It’s hard to say over the next year, but certainly for the foreseeable future. Look, these deals beget deals. When owners see the SASB CMBS deals getting done at very tight levels, more come to market. There’s a cascading effect and that’s what you’re seeing in the market right now.

HIT: Is JLL doing more refinancing deals than a year ago?

Davis: We’re definitely doing more refinancing in 2024, in large measure, because we’re tremendously active in the SASB CMBS market, which is particularly robust. Look, there aren’t a lot of acquisitions taking place right now and, as a result, the bulk of what we’re working on would be refinancings.

HIT: What kind of loans are not penciling right now?

Davis: I’d say assets with low cash flow in markets with a protracted recovery… If the cash flow is low, you have low cash flow against a high cost of debt… Lenders are concerned about lending into those situations because the cost of debt is so high.

HIT: Are these SASB CMBS loans taking longer to underwrite?

Davis: They can be done in short order, but because most of these deals are refinancings, and the borrower has some flexibility on when they can finalize the loan, the deals generally take longer. When you have a market with more purchases and a short timeframe to close a deal, then there’s much more pressure to truncate the timeline… When most of the volume is refinancing, the borrower has more flexibility and a more protracted process.