SAN DIEGO—The quality of a borrower is more important than ever when it comes to securing debt.
Solid sponsorship often is the overriding factor where a deal gets done during this tough lending environment, said several lenders participating in an International Lodging Finance Council roundtable held during the Americas Lodging Investment Summit last month.
“The biggest thing for us is sponsorship—groups who have significant exposure and experience in the business … someone who has been in this business for awhile and frankly, someone who we can do multiple transactions with,” said Bruce Lowrey, managing director of RockBridge Capital’s Investment Origination Group.
Lowrey defined sponsorship as ownership from an experience capacity and a financial capacity. “Those who’ve demonstrated they have net worth, liquidity and the ability and the willingness to put money back into the property,” he said.
Fred van Overbeek, managing director at Prudential, agreed that sponsorship is a critical component: “We saw in the last cycle and the one before that sponsorship is, in large measure, where it stops and starts for us. In some respects, I view it as half the decision to make the deal.”
Experience in hotel operations and ownership are core attributes for any successful borrower.
“There are a number of opportunity funds who got into hospitality as a financial asset, a trading asset, and many times didn’t bring with them the experience of how to own and operate hospitality and view it as a long-term, core part of their business,” van Overbeek said. “There’s a difference, and you experienced that with the amount of stress we’ve seen in the market this last cycle. That means: financial capability, operational capability, reputation, a track record.”
The problem with a down cycle as vicious as the one the hotel industry experienced during the past 30 months is that even quality owners and operators took it on the chin at times.
Even companies with black eyes—such as Sunstone Hotel Investors, which has given more than a handful of non-recourse properties back to lenders during the recession—can come out of the downturn OK because of its long track record. Lowrey said he doesn’t believe those types of companies are as likely to walk away from a bad loan in the future as companies with no track record are.
“Look, we all understand that there comes a point when that owner has the fiduciary responsibility to himself and his investors that may overwhelm his responsibility to continue to pay debt service on a deal that doesn’t work and walks away,” he said. “It’s a long, hard hill for you to climb to convince us that lending to someone with strong sponsorship, who has that history and experience, is more risky than lending to someone who doesn’t.”
Bettina Graef, head of hotel properties and structured property finance for Germany-based Aareal Bank, said lenders can’t underestimate the value of a long-term player that has a respected name in the hotel industry.
“Something else that you should consider is someone who is only active in the hotel industry, who has a name to lose. It may not be as reasonable from a financial perspective to continue supporting a property, but on a whole scale because you have other properties and you want to continue to be in this business, you will continue to support those properties,” she said.
Recourse, of course
Recourse loans—those that require a personal guarantee—have been in the spotlight as borrowers try to find their way from the bottom of the cycle. Lowrey said construction loans most definitely will require recourse.
“If there is a product that is completely unstable, that there’s no cash flow it can underwrite, there probably is another level of credit support, maybe recourse, that is needed,” he said. “If the cash flow is in place, that’s what I’m looking for. I would rather take the risk and do a non-recourse loan and get paid a little more than to have a lender who looks at it more on a credit basis and says, ‘I’ll make the loan but I want credit guaranteed but you won’t get paid as much.’ I’ll make that trade all day long.”
The need for cash flow is prevalent as the industry staggers to recover from the barrage of punches it took during the past two and a half years.
“It needs to be cash-flowing assets,” she said. “Aareal Bank historically did a lot of repositionings … very low yield on debt, which we did successfully because we had experience with those. We can’t do that anymore. We also need existing cash flow.”
More lenders are returning to the hotel lending circles. Mike Armstrong, principal at HREC Investment Advisors who specializes in mortgage brokering, said that the number of lenders engaged in hotel lending has surpassed 50—far more than the less than a dozen who were active in 2010, but far fewer than the more than 100 that were active at the last cycle’s peak in 2007.
“Sponsorship is important, but the first thing I ask is about cash flow,” he said. “The most difficult projects to finance are those that are transitional, that have little to no cash flow.”
