WORLDWIDE The mood of the hotel industry debt market can fairly be described as enthusiastic and slightly overwhelmed, as the pool of lenders that was actively underwriting hotel loans in 2010 has begun to gain some breadth and depth, driven primarily by the resurgence of CMBS lenders and their impact on the larger lending environment.
The pricing on early 2011 securitizations has come in much better than expected, according to a Jones Lang LaSalle Hotels report, assuaging CMBS doubters and incentivizing lenders to underwrite product more aggressively. The result is increased compression of lending into the hotel space, including transitional hotels and construction deals, and a dramatic increase in the number of borrowers seeking to take advantage of low rates.
There are approximately 25 securitization shops in operation, roughly three times the number from one year ago. According to Commercial Mortgage Alert, there has been US$6.8 billion of CMBS issuance year to date, compared with US$100 million in the prior-year period, while 10-year AAA spreads over swaps have compressed by over 200 basis points over the past year.
“This means that there are more lenders in the market, with more pressure on them to originate loans, and they are being given more ‘leash’ to compete for deals on spread and leverage,” says Mathew Comfort, executive vice president for Jones Lang LaSalle Hotels. “Borrowers have taken note and are actively testing the financing markets, creating a situation that one veteran lender deemed ‘the most deal flow I’ve ever seen.’ Given that hotels are an opportunity for lenders to get compelling spreads on an asset class that is clearly returning from trough performance, hospitality lending is a hot ticket right now.”
While there have been some justifiable concerns that CMBS is on the fast-track to returning to its overly heady heydays, underwriting on hotels has by and large remained appropriately conservative. CMBS lenders are targeting leverage levels around 55% to 65% based on values that reflect the impaired cash flows still impacting hotels, and have tightened up their covenants and representations and warranties. Furthermore, CMBS lenders are constrained both by skeleton crews overwhelmed by the number of deals coming across their desks and by the hotel exposure level in their securitization pools—generally pegged at 10%—and consequently are focusing on deals with cash flow and proceeds of at least US$15 million. That said, the benefit of CMBS lending is its flexibility to target a wider range of markets and sponsors than most insurance companies and foreign banks, while remaining non-recourse and competitive on pricing.
The return of CMBS lending impacts hotel owners in several ways. It creates a deeper pool of lenders that are actively looking for opportunities, it puts pricing and leverage pressure on non-CMBS lenders and generally improves terms, and it pushes lenders that cannot compete on cash flowing deals to find their yield on deals that do not check the CMBS boxes,” says Jeffrey Davis, executive vice president of Jones Lang LaSalle Hotels. “Consequently, in addition to creating greater liquidity and better terms for borrowers, the acceleration of CMBS lending has also helped spur the reemergence of construction and deep transition lending,” he says.
Jones Lang LaSalle Hotels is currently marketing several transactions that appeal to CMBS lenders, and the competition is pushing interest rates to the low-to-mid-5% range, with leverage capped at 65% to 70%. Assuming that global political and economic environments remain reasonably stable, the firm expects hotel lending to continue the positive trend and stabilize in 2011.