As the U.S. hotel industry continues along its path to recovery, so does the hotel lending environment.
Though not as robust as before the COVID-19 pandemic, lending activity is increasing, as hotel lenders are pursuing both new issuances and refinancing. The level of debt distress among hotel owners has decreased from pandemic highs, as well, thanks to the flexibility of lenders and federal relief packages.
Though hotel industry and lending experts don’t expect a speedy return to pre-pandemic conditions, they do see a gradual path back to a more familiar environment.
New Lending
The worst of the pandemic-related performance is generally in the past, said Peter Berk, president of PMZ Realty Capital. Many leisure hotels, particularly those that are smaller and near the beach, have seen performance at or above 2019 levels. The hotels that will be the last to recover are the large group hotels in urban markets.
That is where much of the opportunity will likely be in both a debt and equity standpoint as people evaluate what the hotels are actually worth and whether travel will resemble what it did before the pandemic, Berk said. Hotel lenders have returned, and the benchmarks, like treasuries and Libor, are low thanks to government stimulus, he said.
“We’re doing 10-year, fixed rate loans at around 3.5%, which is as low as I’ve ever seen them in my 30-year career,” he said. “We’re doing floating-rate loans in the high 4s, all non-recourse. It’s a great opportunity if you’re a borrower to put on long-term debt.”
Everyone had a bad 2020, and as 2021 moves along, performance will generally improve, meaning lenders looking for trailing 12-month performance data will see better numbers each month, he said.
There are a lot of transactions in the works, Berk said, adding that 40% to 50% of the work his company is doing currently is for acquisition loans. There’s no shortage of debt — especially cheap debt — among all segments from economy to full-service hotels.
New-construction debt is the last leg to return as there are a few lenders cautiously active in this area, Berk said. PMZ Realty Capital is working on one construction loan for $30 million with bids at about 5.5% to 6%, but it’s in a secondary market, not an urban one.
The regional banks, which are typically the construction lenders, are waiting to see what happens within their existing portfolio before they commit to any new deal, he said.
“Unless you’re a top-tier borrower, you’re probably still going to have trouble,” Berk said. “My crystal ball says that by the middle of next year, most lenders, local banks will get more comfortable dipping their toes back into the construction area. They will see that their existing loans are stabilized and that they can move forward with new projects.”
Lenders are getting more comfortable with deals for leisure hotels, particularly those that show relatively strong performance numbers, said Eric Rothfeld, managing director, commercial mortgage, at Fitch Ratings. It’s not necessarily that the trailing 12-months level of performance matched anywhere near pre-pandemic levels, but strong year-over-year data and showing some months in 2021 beating 2019 levels are more persuasive with lenders. Still, many of these deals are market-dependent.
As for hotels and portfolios in central business districts, those are a different story, Rothfeld said. There haven’t been many new loans for these types of hotels as many have either negative cash flow or, if they have positive cash flow, they’re far off pre-pandemic levels.
“They haven't seen anywhere near the recovery the leisure hotels have, and there's still a lack of clarity on what the recovery is going to be and if there's going to be permanent change to business travel,” he said.
Commercial mortgage-backed securities lenders had a bigger exposure to hotels compared to historical levels shortly before the pandemic, perhaps because they had less exposure to retail, Rothfeld said. Typically, CMBS transactions involving multi-borrower deals were about 10% to 15% for hotels, but there were a number that exceeded 20%.
“I don’t think it’s going to happen in 2022, but maybe it’s 2023 you can start to see that normal historical level of 10% to 15% hotels,” he said. “It will probably be a while, if ever, before you see that as large as an exposure you had pre-pandemic, up to 25%.”
Distress Levels
Hotel delinquencies of CMBS loans have improved significantly since the start of the pandemic, said Melissa Che, senior director at Fitch Ratings. Delinquencies started to spike over the summer months in 2020 because the pandemic-related travel restrictions, hitting 18.4% in December 2020, but they have subsided since then. As of August 2021, hotel CMBS delinquencies were at 11.56%, down from 13.61% in July and nearly back to early pandemic delinquency levels.
Even at its peak in December, the delinquency rates during the Great Recession were higher, passing 21% in September 2010, she said.
The lowering of the delinquency rates is largely due to debt relief for borrowers, such as allowing them to use existing reserves to pay debt service or deferring payments, she said. The significant improvement in cash flow over the last several months thanks to pent-up travel demand over the spring and summer brought those rates even lower.
“That has basically allowed a lot of these borrowers to bring that service payment current,” she said.
Fitch expects hotel CMBS delinquency rates to continue to improve, but not necessarily at the same pace it has been over the last several months, Che said. Part of the delinquency calculations is new issuances, and as those pick up, that will help the denominator.
“Our corporate hotel team, we do expect 2021 [revenue per available room] to recover to 68% of the 2019 pre-pandemic levels, but I think the expectation is that the recovery will be gradual,” she said. “I don’t think delinquencies will spike the way they have in the past.”
In a survey of its membership this fall, the Hotel Asset Managers Association found that 11% of respondents handed back keys to lenders since the association’s spring survey, which was released in April. In looking at current conditions, 10% still expect to hand back keys or enter into a forced sale situation in the future, a decrease from almost 15% in the spring.
Lenders don’t want to own hotels, said Larry Trabulsi, executive vice president at hotel asset manager CHMWarnick. There’s no visibility on demand, no visibility on cash and they would need to write checks for operations on a weekly basis. Many lenders thought it would be better to extend the current loan terms while hoteliers figured things out. The fundamentals of the hotel industry have improved in time, particularly over the summer months.
“That helped hopefully right the ship, or at least create a path forward for owners and lenders to figure things out,” he said.
Refinancing
Hotel owners who are doing well are actively looking to refinance because rates are at historic lows, Berk said. A 3.5% rate fixed for 10 years is “incredible,” he said. Anyone with a good trailing 12 months of performance or trending close to 2019 levels is looking get a lower rate.
“We have a lot of ongoing discussions with people who are just waiting maybe for the end of the year for a good 2021 to refinance and hoping that rates stay low,” he said.
There is a lot of capital on the sides for both debt and equity, Trabulsi said. Quality assets, markets and sponsors have been able to attract capital at decent terms, he said, explaining that has been the case for a couple of hotels CHMWarnick has helped seek refinancing.
There are some caveats lenders want to protect themselves, however, he said. They might require the borrower to set aside portions of the loan to make sure that debt services are prepaid for 12 to 18 months.
“But the amount of capital down there is helping to create pretty favorable terms for quality assets, quality sponsors, quality markets, even if they’re still in distress,” Trabulsi said.