The qualitative aspects of a financing request, such as location and quality of real estate, has surpassed the pure cash flow driven metrics as the single most important “gating” issue for financiers of U.S. hotels, according to the year-end release of the quarterly Hotel Lender Survey conducted by STR and RobertDouglas.
The results and analysis were based on responses from 53 senior balance sheet lenders, CMBS lenders and providers of subordinate debt financing.
Fully, 47% of the survey’s respondents indicated the location and quality of the real estate is the top metric they look at when considering a hotel deal. It was followed by cash flows metrics of debt yield or DSCR (37%); the sponsor’s experience and track record (12%); the sponsor’s liquidity and strength of balance sheet (2%); and the proposed brand and management of the property (2%).
Survey responses indicate the lenders see luxury products as having the least financing risk. Many key findings of this year’s survey echo the sentiment from last year:
- Urban areas continue to be viewed as the least risky to provide financing for hotels. Independent hotels carry the most risk.
- A U.S. economic slowdown and/or a faltering economic recovery is still seen as the biggest potential threat to existing hotel loan portfolios.
- 83% of the respondents said they expect to fund in 2015 an amount equal to or greater than the amount they funded during 2014.
- Senior lenders require, on average, a minimum debt yield of 10% on underwritten cash flow for an existing hotel.
- 70% of lenders expect hotel property values to increase over the next 12 months.
- Lenders who provide construction financing have a high interest in every property class with the exception of economy.
“The survey results suggest a continued optimistic outlook from lenders, who are looking to increase their origination volumes in an environment of stable credit spreads with moderate increases in benchmark rates expected in the coming year,” said Stephen O’Connor, principal and managing director at RobertDouglas.
“The borrower’s overall cost of financing capital has been enhanced over the past 12 months as the long term U.S. treasury rate defied expectations and decreased by 100 basis points,” said Chris Ropko, senior director at RobertDouglas. “While debt yield remains the primary cash flow determinant of loan sizing, borrowers should be able to enjoy more comfortable debt service coverage ratios and find deep liquidity for acquisition and repositioning investment strategies.”
“Overall, lenders continue to have a positive outlook for the hotel industry and are most concerned about macroeconomic risk,” said Steve Hennis, director at STR Analytics. “However, the threat of increasing supply to undermine performance growth is of increasing concern.”