GRAPEVINE, Texas—Special servicers have seen a lightening of the load with regard to hotel assets during recent months, but it might be the calm before the storm.
With a flurry of loan maturities during the next three years, special servicers anticipate a hectic schedule. Until then, things have begun to slow, according to several special servicers participating in a panel discussion during last week’s 10th annual Fishing for Solutions conference at the Gaylord Texan Hotel & Convention Center.
Panel moderator Kevin Donahue, VP of special servicing at Midland Loan Services, said the pace of transfers has moderated and it seems better because 2009 was such an extraordinary year.
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| Panel moderator Kevin Donahue, VP of special servicing at Midland Loan Services, said the pace of transfers has moderated and it seems better because 2009 was such an extraordinary year. (Credit: Chris Bryan/Prism Hotels & Resorts) |
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“It has started to cool down, but we have seen an increase in special service transfers in the last 30 days, particularly in hotel assets,” said Curt Spaugh, senior VP of Helios AMC.
Spaugh said Helios AMC is seeing two to three transfers going out for each one coming in.
Michael O’Hanlon, senior VP of Berkadia Commercial Mortgage, said his company’s portfolio consists mostly of projects funded prior to 2004.
“Our transfers have slowed down considerably in the last three months,” he said. “Due to the age of our pools we have a lot of maturity defaults. It’s going to continue at this pace for another year.”
O’Hanlon said his company is seeing two assets leaving for every one that comes in during the past several months.
Dan Olsen, senior VP of KeyBank Real Estate Capital, said his firm picked up about US$47 billion in distressed CMBS loans since 2007, and the bulk of that was priced with floating interest rates. A number of those floating rate deals are running out of extension possibilities.
“That floating-rate financing… if the financing doesn’t come in, we’re going to have a little bit of a problem with those final extension dates,” he said.
“Once that extension option in the deal expires, all of that product is going to come into special servicers,” O’Hanlon said. “And there’s a lot of that out there.”
Olsen said there is a potential solution to help hotel owners who are facing the end of extensions.
“While you can’t extend a loan beyond that date, there’s nothing that says you can’t forbear,” he said. “We’re going to find a workaround, and right now we think forbearance is the workaround at this point.”
In general, forbearance allows the borrower to put a temporary hold on monthly payments, usually for up to one year.
It’s been a busy year for Situs Companies with more than 1,700 non-performing hotel loans being serviced, said Steve Hanover, managing director, special servicing. Most of those were picked up through the Federal Deposit Insurance Corporation when it closed banks.
“From the FDIC direct we have seen a marked drop off in the delivery of failed financial institutions,” he said.
Hanover said the number of banks that are failing has decreased, because they are now being gobbled up by bigger banks rather than being closed.
“We have seen an uptick in activity from investment banks that are providing white knight money to cherry pick portfolios,” he said.
The return of CMBS
The panelists hope that deals similar to commercial mortgage-backed securities deals that were popular before the recession will gain momentum.
O’Hanlon said the parameters for such activity are simple: 50% loan-to-value and Class A properties.
“The real primo stuff,” he said. “We have to find a home for the B and C properties.
“We are doing due diligence on CMBS (loans) today. It’s going to be very selective. It’s going to have to be an asset that fits. It’s starting. We’ll just have to see if first and second quarter of 2011 is going to be robust.”
Donahue said the new CMBS bonds look reasonable to those who have cash sitting around and no place else to deploy it.
The panelists agreed that there still has to be a ceiling for the size of loan that can be executed before a new CMBS market becomes a reality.
Hospitality loans make up 10% of the CBMS universe in total but 20% of the assets in special servicing, according to Donahue.
“A lot of those loans are big, highly structured, capital intensive,” he said. “We’re trying to find ways to bring cash to the table.”
Donahue said there’s a US$1.5 trillion worth of loans maturing over the next four years. “There’s going to have to be a reemergence of capital markets execution,” he said.
CMBS fallout
One prominent issue that remains from the previous CMBS cycle is that the various lien holders are battling to get money out of deals that involved hotels that went bankrupt or are no longer held by the initial borrower. This involves A piece holders and mezzanine lenders.
“In CMBS, you’re seeing people buy subordinate bonds that virtually on their face are worthless but they still hold control rights,” Donahue said. “It prolongs the resolution strategy.”
“Tranche warfare is definitely out there,” O’Hanlon said. “It’s only going to get worse. … It’s turned into a giant (problem), that’s what it is.”
Panelists agreed that nuisance money—lenders trying to recover at least some portion of their losses—often is a driver behind a lot of the tranche warfare.
Looking ahead
The prognosis for hotel lending isn’t good.
“I don’t see the banks getting better sooner than later,” Hanover said. “We’re not going to see the assets working through the system like they did before. In the overall economy, we’re going to find a lot of challenges, especially the tertiary markets.”
“2011 will be a lot like 2010,” Spaugh said. “There are some markets that will take years and years and years to bounce back.”
He cited Phoenix and Las Vegas as prime examples of that.
Olsen said the wild card is the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation, which became law in July, implements major changes in the oversight and supervision of financial institutions, including the establishment of the Financial Stability Oversight Council.
“Until we know what the rules are, that will hold us back,” he said, adding that banks are holding US$3 billion in cash and companies are holding US$2 billion in cash and won’t disperse it until the Dodd-Frank rules are fully understood. “No one is going to spend it until we know what the game rules are. It’s another 200 days (before implementation); once we get there, we’ll see what happens.”
