Lenders Get Picky on Hotel Refinancing

NEW YORK CITY-Recovery in the lodging sector has begun building momentum across all segments and price points as 2011 progresses. That’s welcome news, but it’s not being matched by a similarly even-handed attitude on the part of lenders asked to refinance hotel debt, says a report from Standard & Poor’s.

“We believe that borrowers for the maturing lodging loan collateral will find refinancing very selective over the next two years,” credit analyst Larry Kay says in a release. He adds that the level of lender interest “will vary by loan, market and chain segment.”

In S&P’s view, RevPAR recovery to date, coupled with the ratings agency’s forecast of continued single-digit RevPAR growth this year, won’t be enough to compensate for the operating declines the sector has recently experienced. “This will be particularly true for the maturing 2006-and 2007-vintage loans that were originated at or close to peak rental rates,” according to S&P’s report.

In addition, the report states, “maturing lodging loans from these vintages may be more susceptible to default or modification,” since they were characterized by high leverage and underwriting based on pro forma operating statements. Furthermore, “the scarcity of capital for large loan lodging maturities and the limited interest for inclusion in conduit/fusion transactions also complicate the sector’s refinancing. We also expect that rising interest rates could present problems for loan refinancing.” Citing the example of the recent recapitalization of Hotel del Coronado in San Diego, in which Strategic Hotels & Resorts formed a joint venture with the Blackstone Group and KSL Resorts, S&P predicts “more instances of borrowers using equity or mezzanine financing to fill the equity gap to effectuate refinancing.”

However, S&P notes that the burgeoning recovery in the hotel sector “couldn’t come at a more opportune time.” This year will be a big one for hotel loan maturities; about $9.76 billion of CMBS backed by lodging assets is coming due, compared to $2.62 billion in 2010 and $852.6 million in 2009.

Thirty-four percent of S&P-rated lodging loan collateral matures this year and next. That’s a far higher concentration than office, multifamily, industrial or retail, in which the maturity concentration in ’11 and 2012 ranges from 15.3% to 17.9% of their total outstanding principal balance, S&P says.

Additionally, 86% of the lodging loans scheduled to mature over the next two years come from the go-go years of ’06 and ’07. “During these two years, RevPAR enjoyed strong growth,” S&P’s report says. RevPAR rose 8.0% in 2006 and 5.9% in 2007, before declining 1.7% in ‘08 and 16.7% in ‘09.

For upper upscale and independent lodging properties, which comprise about two-thirds of the maturing lodging loans over the next two years, the RevPAR drops in ’09 were even steeper. Upper upscale RevPAR declined 17.2% in ‘09, increasing 5.7% in ‘10, while the independent segment saw a steeper drop of 17.8% in ‘09 and a smaller improvement of 4.2% last year, according to the report. “Independently operated properties typically fare worse than brand hotels in economic downturns, as travelers seek out more familiar names,” the report says.

As the sector continues to recover, S&P says, independent properties will start seeing occupancy increases “due to travelers seeking more distinguished personal services and experiences than chain hotels can provide.” The agency also anticipates that independents will be able to raise room rates quicker than other chain segments, especially at the high end of the market. “As a result, some of the maturing loans in this segment may have a stronger opportunity to attract refinancing capital.”