Lending pace is strong, but not frothy
26 NOVEMBER 2013 8:38 AM
Financing is plentiful for nearly all kinds of hotel deals, including acquisitions, refinancings and even new development, said speakers on a NAHIC panel.
CHICAGO—While it’s a great time to be a borrower in the hotel industry, the market hasn’t become overheated … at least not yet, said speakers last week during a general session panel titled “Who’s got money” at the North America Hotel Investment Conference.
The panelists agreed financing is plentiful, especially for hotel acquisitions and refinancing, and even for new development. Rates and terms are also favorable.
“There’s more money in the market today than at any time in the last 30 years,” said Robert Sonnenblick, chairman and principal of Sonnenblick Development LLC. “There’s lots of competition among lenders to make deals.”
Sonnenblick, whose firm has six hotel development projects underway, said in the past 30 days he’s received construction loan commitments for two of the hotels. Five lenders bid on the senior construction loans, and six or seven firms tendered offers for preferred equity, he said.
Supply and demand dynamics and generally favorable hotel industry performance are fueling the interest from the lending community.
“(Loan-to-value ratios) are being pushed up to 75% in some cases because of where we are in the (industry’s) cycle,” said Scott Kaniewski, senior VP of HREC Investment Advisors. “Values are still appreciating and lenders are trying to build or protect market share, so they’re more aggressive in their underwriting. There’s lots and lots of competition, which allows borrowers to get some good deals.”
The panelists insisted that despite the liquidity in the market, the environment is not yet “frothy,” or in danger of overheating, as it did in the mid-2000s.
“I still see very diligent underwriting,” said Jeffrey Bucaro, senior VP of Aries Capital. “People are only lending on cash flows. Projections mean nothing, but they’re going back multiple years to see how the assets have performed.”
Pricing and terms
Bucaro said debt yields are compressing from 11% earlier this year to approximately 10.25% for many deals. LTVs are creeping upward.
“Not too long ago, LTVs were often 69% because no one wanted a ‘7’ in front of the number,” he said. “Now 72% to 74% are common. All things considered we’re in a good spot, not frothy.”
Michael G. Medzigian, chairman and managing partner of Watermark Capital Partners, outlined some of the loan pricing and terms he’s encountered in the marketplace in recent months. Medzigian’s companies have purchased 11 hotels so far in 2013 with several more closings anticipated before the end of the year, he said.
Medzigian said he’s able to secure debt at 50% to 60% LTV, including provisions for capital expenditures, with maturities between five and 10 years. Often, the loans are interest-only from 18 months to the full term of the loans. Amortization following the interest-only period is typically 25 to 30 years.
Medzigian said interest rates have crept up by about 25 basis points since May and are typically at about 4.25%, or up to 50 basis points higher, depending on the type of asset.
William G. Sipple, executive managing director of HVS Capital Corp., said bridge loan financing is available for as low as 6% interest to as high as 7% or 8%. Pricing for mezzanine loans ranges from 10% to 12%.
He said some loan originators are accommodating borrowers in other ways than rate and terms. He said his firm has arranged deals with limited or no cash management requirements.
Markets and segments
The panelists agreed the financing landscape changes by market and segment. They said different metrics are used for deals in hot markets such as New York and San Francisco.
“For whatever reason, and I can’t explain it, our industry has become unbelievably New York-centric,” Sonnenblick said. “New York has something like 9,000 new rooms (in the pipeline) so you would think if there was one city to shy away from, it would be New York, but all the standard underwriting rules don’t apply there.”
Kaniewski believes San Francisco is a strong market because of an upturn in commercial development and high barriers to entry for new hotel projects.
“In both cities you’re seeing a lot of inflows of capital from Europe and Asia, because investors from those regions view the (United States) as safe,” he said.
In general, there are five markets in the U.S. that attract the majority of financing, Medzigian said. He said while a deal in one of these cities will attract between 15 and 20 debt quotes, that number is cut in half in the next tier of markets.
He said his deal focus is on the areas of economic growth in the country, which are the two coasts and the Sunbelt.
“A map of our assets looks like a smiley face because that’s where you’ll see the growth,” he said.
Other panelists said product segmentation is just as important as market location in finding favorable financing.
In secondary and tertiary markets, Kaniewski said there is plenty of money for select-service hotels with flags from one of the primary franchise companies.
“Once you move into full service in those markets, financing can be more of an issue. There are options, but it’s a thinner market than there is for select service,” he said.
Financing is most difficult to obtain for the resort segment, especially for new development, said the speakers.
“Other than a gaming deal, I don’t think there has been a construction loan made on a major resort in the U.S. in the last year,” said Sonnenblick.