The hospitality debt market is becoming more competitive with leverage levels increasing.
Debt funds are leading the way with these offerings and while new acquisitions are their preference, they will quote refinancings, according to the Hospitality Debt Market Commentary from JLL’s Hotel Investment Banking team
For the best assets, debt funds are pushing leverage to 75% or 80%. JLL says debt fund leverage has increased by 5% to 10% since last Fall, while spreads have dropped 25 to 75 basis points in the same timeframe.
One recent entrant into the market is global credit manager ACORE Capital, which raised $1 billion to launch a hospitality-focused rescue capital fund. It originates and acquires structured hotel debt investments, including senior and mezzanine loans, B-notes and preferred equity, investing across the asset class, from high-end luxury resorts to smaller limited-service hotels.
Debt fund pricing is tied to things like asset quality, market, sponsorship and loan type. JLL thinks debt funds will continue to be the primary source of debt capital until fundamentals improve.
Banks are typically offering leverage from 55% to 60%. Last Fall, their leverage levels were around 50%. The most competitive bank prices are in the high-300s to mid-400s over LIBOR. JLL says debt lenders are focusing on 2019 performance and on assets with strong pre-COVID cash flows with debt yields above 10%.
Banks are being selective, focusing on acquisitions loans for high-quality assets. Banks prefer assets with a significant drive to leisure demand or life science demand. They are also focused on high-quality urban assets.
Insurers are beginning to review new hotel origination opportunities, though they are focused on the highest quality properties, according to JLL. Their leverage is usually around 60%, and pricing is from the low- to high 400s spread over LIBOR.
While investment banks have started to quote five and 10-year fixed-rate CMBS loans, they are under tight underwriting conditions. They have a maximum loan-to-value of 60%, but that can rise to 65% for new acquisitions. There are sizing to 10% to 12% debt yield on 2019 NOI that has been discounted by 10%. JLL says CMBS lenders are also focused on assets that had “relatively strong” performance in 2020.
CMBS fixed rates are generally between 4.25% and 5.00% on a 30-year amortization. Lenders also require 12 to 18 months of reserves.
While construction financing is available, it is targeted for the best sponsors and the best projects. JLL says banks are only providing construction loans very selectively and the debt funds can get attractive spreads on existing assets. When construction loans are made, lenders prefer for the leverage to be below 60%.