The Wall Street Journal Tuesday reported Goldman Sachs and Bank of America Corporation soon would sell their combined US$3 billion in senior debt they still hold from Blackstone Group’s boom-time buyout of Hilton Worldwide. If it goes through, the deals represent the largest commercial mortgage-backed securities debt trade since the financial crisis began.
The first thing to understand is that these two CMBS financings have nothing at all to do with your 150-room hotel. They are sponsored by major institutional owners, and they are large corporate financings of portfolios. They also are being done after a complete capital stack restructure with a sizable new equity infusion, so the balance sheets are completely delevered and the financing is conservative. This is not your individual select-service property.
CMBS is slowly coming back, but so far it is only large sponsors and larger assets. Barclays is about to release a pool of more diverse assets and different than what has come so far, but it is still not a bunch of over-leveraged hotels. It is possible the Barclays deal will entice some others to do more diverse pools going forward, but again these are not bailouts for your over-levered hotel.
There will be approximately US$10 billion or US$12 billion of CMBS issued this year—a drop in the bucket. Next year maybe that will be US$30 billion-US$50 billion. It is hard to say, but even these volumes barely make a dent in the need for refinancing of the US$800 billion or so of just CMBS debt outstanding. Keep in mind the new CMBS was new debt mostly and not a refi of any outstanding CMBS debt, so no dent has yet been made in coming maturities through new CMBS issues.
Extend and pretend continues
Extend and pretend continues, but at the end of the day you have to suspend reality to believe your hotel will be worth enough in another year or two to be able to refi under the new underwriting guidelines, which are back to when we created this business in 1993. Think in terms of historic cash flow. That means provable cash, not dreams.
Nobody seriously believes there is going to be any V-shaped recovery of the economy or real estate values. Last week, I ran a panel of several of the most senior and experienced real estate fund owner investors in the country. None of them think values are returning to 2007 levels for many years. They are investing for yield and a mid-teens current return. Nobody serious thinks 20%-plus returns are achievable without going way out on the risk spectrum. Core returns are 7.5% -8%. Riskier asset returns ramp-up from there and do not exceed mid-teens returns unless you over lever or just happen to get an unusual buy opportunity, which almost nobody is getting these days.
Sophisticated investors are doing their own analysis and their own valuations and none are relying on appraised values. Neither are lenders now. Cash flow is the measure, not 10-year nursery rhymes. Lenders are mainly looking at the borrower and the asset, and the CMBS lenders are not looking at anything that is not major markets located yet. It will come, but not for awhile.
Bottom line: Do not expect CMBS to finance your hotel anytime soon. Just because they reportedly will do these two major deals does not in any way indicate they will soon do your refi bail out. You need to find another answer.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real-estate financing firm he launched in 1981. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross is also the author of Ross Rant, a commentary on the economy, financial markets and politics that is available through his website, www.citadelrealty.com.
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