Debt financing is particularly hard to come by for boutique hotels right now, but there are opportunities on the equity side.
REPORT FROM THE U.S.—In a difficult lending environment for hotels, financial professionals in the industry said it’s a little easier to get equity financing now, but on the debt side, there are crickets.
On a panel titled “Financing a boutique hotel in today’s landscape” during the 2020 Boutique Lifestyle Digital Summit, hosted by the Boutique & Lifestyle Leaders Association, Geoff Davis, founder and senior principal of Davis Hotel Capital, said “nothing is easy right now, but debt is incrementally harder than equity.”
“The majority of lenders have run to the sidelines given the craziness of this particular cycle, and if you can get debt, it’s going to be (costly),” he said.
After the COVID-19 pandemic hit, a lot of investors moved to a preferred equity model where “they are coming into a safer place in the capital stack,” Davis said.
He said preferred equity is “sort of like supercharged” mezzanine lending.
“It doesn’t attach to the title, but it’s pretty expensive, and it’s before the current equity,” he said.
Hoteliers considering preferred equity should have at least two years of interest reserves because it could take that long to turn around, he said.
“If you’re burning cash from operations, get a reserve for that. If you need to pay down your lender to pay down your loan modification, get (cash) for that,” he said.
He added that preferred equity can be used for many things, but comes at a high cost.
High costs for debt financing
In the past, it was easier to get debt financing than equity financing, but “it’s flipped today,” said Matt Livian, CIO at The Sydell Group.
“What we’re seeing is … there’s actually been a ton of equity raised and dry powder out there to capitalize on the dislocation in the hotel markets today,” he said. “That equity is having a hard time finding suitable deals at discounts that really reflect today’s values.”
Livian said on the debt side, lenders are less active.
“There are lenders willing to lend, but it’s expensive,” he said. “High single-digit-type rates, comes with recourse, only available to the strongest sponsor. It’s very hard to find debt that’s actually accretive today.”
The shifting balance between equity and debt “is creating an interesting dynamic,” Livian added.
During a second part of the boutique financing session, Kevin Davis, senior managing director of capital markets at JLL’s Hotels & Hospitality Group, said he had a $7 billion pipeline of hotel financing on 10 March, which “went to zero” over a two- to three-week period.
“In late March, we were picking up the pieces like everyone else, really trying to figure out what was going on in the world and understanding the situation with clients, distress and helping clients consider opened versus closed scenarios, et cetera. Fast-forward over the course of the spring, our business really morphed from less of a financing business … we started to focus on loan sales,” he said.
Since April, JLL has “taken out a number of loan sale opportunities, generally … on behalf of debt funds for the most part as well, as some UTC foreclosure opportunities,” he said.
Markets have started to open up “just a touch” in the last month, and JLL has started focusing on some new financing, he said. But in the current environment, “loan sales are the bulk of the business as well as some structured equity and a couple of financings,” he said.
Asked why a lender would sell their loan in this environment, Kevin Davis said it’s happening “only because of need or if the lender feels like the borrower is not prepared to support the asset and the lender doesn’t want to take the keys.”
He said his fundamental belief about this cycle, which is different from other cycles, is that “given the breadth of the distress and the magnitude … lenders don’t want to be saddled with the liabilities.”
“It’s literally affecting every asset, every single hotel asset on every lender’s book,” he said.
Advice for newcomers in the industry
Newcomers to the industry might find that “times of distress” present “really the best opportunities,” Kevin Davis said.
“If you ask me ‘what’s the toughest type deal to get done right now?’ I’ll tell you development, full stop. But because of that, development, particularly in markets that haven’t had a lot of supply, right now makes a ton of sense because when you’re opening 18, 24 months from now, you should be opening into a rising market,” he said.
He added that it’s incredibly difficult to get deals done now, so newcomers should have patience as “everything takes time.”