The troubled real estate market has created a buyers’ market for mortgage loan portfolios, RMBS and CMBS, foreclosed real estate, real estate in corporate turnaround situations, equity and debt of housing-related retailers, and equity, debt and assets of distressed builders. Hear a panel of experts share their insights on market timing and the importance of proactive planning to achieve investment success.
Tuesday, November 10, 2009 12:30 PM ET Cost: FREE Register Now >

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Stiles

SAN FRANCISCO-When the capital market crunch began in earnest, the hospitality sector appeared to be the one asset class poised to ride out the troubles with little impact. Embedded growth in cash flows were strong -- cash flows were growing at rates higher than inflation – and lenders gave this much credence.

Nine months later the sector is traveling the same difficult path as the rest of the industry, Robert Stiles, EVP with Cushman & Wakefield Sonnenblick Goldman, tells GlobeSt.com. “Lenders are giving no credit for growth, but instead are focusing on in-place cash flows over the last 12 months.” In general, underwriting for hotel finance has gotten tighter, to the point where it is indistinguishable from office and retail.

Stiles is also co-chair, along with Michael Cahill, president and founder of HREC Investment Advisors, of the International Lodging Finance Council. The two presented the findings of the organization’s annual survey of active senior and subordinate hotel lenders at Real Estate Media's RealShare Hotel Investment & Finance Summit, held in New York City last month. The ILFC survey was completed by 41 active hotel lenders, including Wall Street investment banks, large commercial banks, finance companies and insurance companies.

The findings were dramatically different than last year, when hotel finance was still flourishing, despite the beginnings of the capital crunch. Since then, Stiles says, available leverage has dramatically reduced to 60% to 65% LTV today compared with 75% last year.

“In early stages of debt crisis there was a lot of focus on the fact that underlying performance drivers in hotel were still strong and growing,” Stiles notes. “Hotels were still -- and still are today -- achieving real RevPar growth.” Now, though, the capital disconnect is having an impact on hotel finance and increasingly, he says, the prices at which they are trading.

“Now owners are not being credited for the operational upside that is embedded in the business. Instead, lenders are laser-focused on in-place or historical cash flow,” Stiles says. Cash flow metrics such as debt yield was ranked as the most important factor when considering a loan. The followed by location and quality of real estate, the sponsor’s track record and experience, valuation metrics like LTV or loan-to-cost, the sponsor’s liquidy and strength of balance sheet, and proposed brand and management of the property.

Many commercial real estate experts also expect hotel lending to decline significantly this year. “Hotels are still being financed, but the terms are much more onerous than before,” he says.