Loans for existing hotels are readily available as fundamentals remain steady, according to bankers. However, new-construction loans are a different story.
LOS ANGELES—It’s a great time for hotel borrowers looking to acquire or refinance a property. For those wishing to build? Well, not so much.
Lenders speaking earlier this month at the Meet the Money conference were bullish about lending on existing hotels.
“It’s time, if I’m a borrower, (to) back up the truck and you borrow all you can borrow right now,” said Troy Miller, SVP at Starwood Property Trust. “Last year there was a little more (uncertainty) with hospitality. … I can tell you anecdotally, spreads from 12 months ago on trophy hotel product have compressed a full 100+ basis points. …. Leverage levels are higher and more guys are back in the market.”
Jerad Slagle, managing director for Prime Finance, said now is a great time to be a borrower.
“Overall, though, rates are ticking up,” he said. “You’re starting to see taking that into account in the analysis, making sure there are refinance options out there. So you’re going to see a slight uptick in the long term, but spreads are going to continue to come in as the market digests all the competition in the marketplace.”
The trends in spreads were addressed throughout the panel. Michael Watson, director & head of U.S. lending-hotel finance group, U.S. commercial real estate at BMO Harris Bank, said tighter spreads are indicative of the financial times.
“We’ve been trying to hold our spread constant,” he said. “Obviously for better deals and better cash flows, those spreads are going to be tighter than for complicated deals where there’s maybe a little more risk. For the most part, our platform and our approach, we’re really not looking for pricing above 350 (basis points).”
“For the all-in (interest) rate, most customers are landing in the high fives right now, and I expect that will continue for the rest of the year,” Watson said, adding that the bank prefers non-recourse loans.
Alice Gao, SVP and head of commercial banking for Industrial and Commercial Bank of China, said 2018 is strong for existing hotel financing because of the strength of the U.S. economy.
“For the traditional banker, we are aggressive in the beginning of the year, just because we do have a target to fill and we need to bring more business into the bank,” she said. “What I’m seeing for the traditional bank, hospitality lending for (loan-to-value) side, normally we do up to 65%. Alternatively, borrowers can go to (commercial mortgage-backed securities), they can probably get LTV up to 70%, a little high rate on the bank. For the floating CMBS loans, probably they can go LTV up to 80% for the highest rate.”
Watson said BMO Harris’ hotel loans generally go at about 60% LTV—rarely do they go higher than 65%.
Slagle said his company’s deals are coming in at the 70% to 75% LTV range.
“We’re trying to see more of the core markets that you’re stabilizing a 10 debt yield, into the more secondary markets for the smaller brands, are more 12,” Slagle said. “Our pricing in that range is anywhere from the low fours up to, it could be up to 600 if it’s a heavier lift, and that’s floating rate over (London Interbank Offered Rate). And that’s non-recourse level.”
Miller said his company is in the 60% to 65% LTV camp, while Gao said ICBC’s LTV comfort zone is approximately 60%.
“Looking at stabilized debt yield metrics, ideally a 10—I’ve done some in nine, some a little bit wider, maybe 11,” Miller said.
IHG’s Mark Gerstein makes a point about hotel financing as Alice Gao of ICBC looks on during the recent Meet the Money conference. (Photo: Jeff Higley)
“If you’re looking to refinance a hotel, there’s probably not a better time than right now when interest rates are still competitive. You can get a 10-year CMBS deal in the 5% area interest rate per year, 65-70% LTV, so it’s a great time,” he said. “There’s a lot more debt funds in the market right now. There’s a lot of capital for refinancing.”
The lenders said they are keeping quite busy because of the interest from borrowers looking to acquire or refinance.
Watson said his office closes about one of every 35 deals it is presented.
“We see a lot of requests,” Slagle said. “Our bucket of capital is pretty wide, and various projects we can finance, so we see a broad spectrum. But really at the end of the day what we’re actually funding is probably a 3%-type hit rate. We’re probably quoting on 10 to 20% of the deals that we really like, and ultimately it’s probably somewhere in the 2% to 5% range.”
Starwood focuses on larger deals in the $50-million to $100-million range, according to Miller.
“Given the amount of competition in the … last 24 months here, I’d say it’s maybe one or two out of 10 deals,” Miller said.
Gao said ICBC is a traditional bank that includes hotel financing as part of its overall loan program.
“If the customer starts working with us and put a deposit on to work on the appraisal and environmental, our success rate is over 90%,” she said. “So, when they start working with us, we take it seriously to start underwriting, most likely we get the loan closed.”
Gerstein said a major part of his job at IHG is to advise owners on financing and capital source financing to get all the right buckets represented.
“Given some of the flow rates we’ve heard and approvals here, I try to steer them to where a broker can help them,” he said. “Or help them in terms of sourcing their capital what makes sense for the opportunity.”
Loan requests, PIPs
Moderator Rob Stiles said it sounds like the lenders spend a lot of time turning down loan requests—a notion that the panelists didn’t dispute.
Watson said the upside is the answer comes from them quickly.
“The two or three (per month) that we like to pursue we’re pushing those out to committee, to credit and attempting to get a term sheet out the door, those we’ll spend 95% of the time,” Watson said. “Those we’re saying no to … we’re spending very little time on deals that don’t fit.”
Watson said loan requests that are too small or are for markets BMO Harris isn’t comfortable in often get the quick hook. Construction loans are not often approved.
Slagle, whose bank doesn’t fund hotel construction loans, said sponsorship is a big factor when it comes to approving loans.
“The heavier the lift—if you have to do a lot of heavy renovations, (property-improvement plan) financing or refinances that require a PIP—the better the sponsorship needs to be or the better the track record,” Slagle said. “If that is not there, that’s easy to focus resources elsewhere.”
Lenders tend to tread carefully when it comes to PIPs, according to Miller.
“One thing we are sensitive to is lift from a PIP, so, we spend a lot of time talking to credit about the business plan and putting in a big number per key,” he said. “We’re going to be conservative on how much lift, because we still view a lot of PIPs these days as defensive in nature and not accretive to cash flow.”
Bank on brands with a good track record
Banking on an unproven brand is a no-no for borrowers, Miller said.
“If it’s a brand we’ve never heard of or there’s only one or two in existence, we don’t want to explain to committee how this is going to be successful,” he said.
Gao said “cash flow is the key.”
“As long as the cash flow is there, then we look at a couple of other factors … we want to see the track record of the sponsor … and also the loan to value and the location,” she said.
Past bankruptcies and a net worth that’s not high enough to support loan guaranties also are common reasons why loans are declined, Gerstein said.
Miller said the other fundamental need is valid and thorough information.
The picture isn’t as rosy on the construction lending side of the business, panelists said.
“Construction still remains challenging right now,” Gerstein said. “Some of the bigger banks are getting their foot back in, so maybe a tad better (than last year), but it’s still challenging when you get to different loan sizes.”
Some community banks are financing hotel construction loans under $15 million, but larger loans are harder to come by, Gerstein said.
In the event a construction loan is granted, borrowers can expect a longer wait than when they’re arranging financing for an existing property, Watson said.