For now, hotel finance trends can be summed up in one word: triage. Lenders are working out forbearance and debt structuring as tourniquet measures to stanch the fiscal bleeding, while governments craft stimulus packages, generate funds for small- and mid-sized business loans and try to pick up part of the tab of unemployed or furloughed workers. What’s the longer-term prognosis?
Expect more order. “The Federal Reserve will have to step in to regulate the CMBS market,” says Sloan Dean, president and CEO, Remington Hotels, Dallas. “Most of the US$86 billion outstanding is nonrecourse debt, and hotels are the collateral. That could translate to a default rate of 20% starting in late May/early June and into Q3.”
Contributed by Mary Scoviak
Anticipate challenges as deferred payments come due. “It’s not as if most lenders are forgiving debt; they’re just extending it,” says C. Patrick Scholes, managing director, lodging, leisure and gaming equity research, SunTrust Robinson Humphrey. Clients with strong relationships can expect more leniency; for smaller players, many of the deferrals will run out at or near the same time.
Watch for subtler plays as hoteliers get their footing. “In some cases, capital is coming in as a wedge between the senior loan and the borrower’s equity,” said Malcolm Davies, principal and managing director, George Smith Partners, at an early April webinar on the state of the hotel market. “Today, all parties are stakeholders, not rivals.”
Prepare for a cool reception. “Even as we overcome [COVID-19] and travel resumes, most countries are going into recession. It’s inevitable that most lenders and investors will dial back on hospitality projects,” says Sonu Shivdasani, CEO and joint creative director, Soneva, Bangkok.
Look for more conservative terms — and bring cash. “There’s currently capital available for low-leverage, ‘no-brainer’ deals in which the terms are so attractive that the lack of clarity on current valuations can be overcome,” says Michael Sonnabend, managing member, PMZ Realty Capital. “Generally, debt will?become increasingly conservative and higher priced relative to the benchmarks. Deals will require more equity.”
Brace for new underwriting and appraisal criteria. Deals are difficult to underwrite amid uncertainty about performance recovery, says Chad Crandell, CEO and managing director, CHMWarnick. “In the near term, an income approach to value doesn’t work. So, we may have to rely more on a cost basis — or price per pound.” In his view, a discount to replacement cost “will likely be the interim metric, similar to the approach used during the financial crisis.”
Appraisals are changing. “Our appraisal group has macro projections, but we have to view each asset as unique,” says Daniel MacDonnell, senior managing director, Cushman & Wakefield. “We’re doing models month by month, breaking down the process into multiple components.”
Strategize around low interest rates. The U.S. Congressional Budget Office predicts interest rates on 10-year Treasury notes at under 1% this year and probably next. Europe may be looking at zero or even negative interest rates. Some contrarians say cashed-up investors could consider ground-up development, the majority of the industry doesn’t see that happening. “New construction is dead for at least five years,” says Jon Bortz, founder, chairman and CEO, Pebblebrook Hotel Trust, Bethesda, Maryland.