Lenders turn the light on for hotel deals

From: The Crittenden Report

Count on more hospitality loans in 2011 as the industry returns and more trades bring better pricing, especially on well-located properties that have already rebounded. New hotel supply is not expected to pick up for another two to three years, so existing properties should recover, although many are still valued below replacement costs.

This loosening of the strings should translate into more acquisition and refinance loans and possibly even some new construction money. Expect CMBS lenders to be some of the busiest in the space. Currently there are about 16 active CMBS originators with more planning to enter the market in 2011. Also, look for big national banks such as Wells Fargo, Chase and Bank of America, as well as a few private players, to keep business humming.

CMBS lenders have a strong appetite for hotel lending this year and target stabilized cash flow assets, although these loans take a bit longer to get done, at least 60 to 90 days. CMBS was completely out of the game early in 2010, but slowly crept back onto the scene in November. Bet on CMBS originations gradually increasing and coming out to about $35B by years end, up from approximately $15B last year. These lenders usually look for $10M to $15M loan minimums and by default will only work with larger select-service and full-service hotels. Upper-end resorts could also be on the radar this year as they have made it through the worst part of the cycle and have locked in protection from new supply. As CMBS comes back to the lending scene, competition for capital will also increase and should keep spreads where they are. This marks a great time for borrowers to take advantage of the low 10-year treasury (which should be around 3.3%), good pricing and available liquidity.

Look for commercial banks such as Wells Fargo, Chase and BofA to dip their toes back into the hospitality pool and most likely go for transitional properties. However, many banks will be cautious since they still have hotel loans on the books, and until that pipeline is clear most will not add too many new loans in 2011. Rumor has it that Wells Fargo will become active in the CMBS market this year with a $2M small loan program expected to launch in February. Chase is forecasted to pick up on all commercial lending types in 2011 and become more aggressive on loan-to-value.

Private lenders, foreign banks and a few life companies might also work on hotel loans this year. Private lenders look for yields and will get in on deals where the hotel is rebounding. Life companies got burned on hotel loans in the 90s and have since been very conservative on these deals and will only target major flags with an appealing track record. But, some outfits will start to entertain more hotel loans as a natural function and progression of their lending program.

Count on aggressive underwriting from all lenders in terms of debt yield and coverage and how they underwrite NOI, which has been tight over the last couple years. Typical hotel loans have DSC above 1.40x. The first thing lenders want to see is that the hotel has recovered or shown improvement over the last 12 to 24 months. Properties with continued declining RevPAR or NOI will not get lenders attention.

Lending institutions are also attracted to major flags such as Hyatt, Hilton, Marriott or Starwood and most will primarily focus on the branded hotels. Properties with a solid location in high barrier-to-entry markets such as New York City, Boston, Los Angeles, Washington, D.C., and San Francisco should get a lot of lender interest. Hotels with good demand generators, strong cash flow, experienced operators and excellent sponsors should also have no problem obtaining financing. Dont expect lenders to work on lower-end franchises such as Best Western or Sleep Inn, and boutique hotels will also be difficult to finance. They will also keep their distance from high-leverage hotels in secondary and tertiary markets that have not yet bounced back. Smaller 100-room roadside or budget hotels will also not be on the radar this year since the loans are too small and there is no protection from new supply.