Last Out of the Gate, Hotel Lending Revives

Lenders have resumed pursuing mortgages on hotels - the last sector to emerge from the credit crunch.

Over the past few months, a cross-section of players has shown renewed interest in financing hotels, which previously had been left out in the cold as resurgent lenders focused their attention on shopping centers, office buildings and warehouses.

"There has been a shift in the mindset of the market," said Geoff Davis, president of Denver-based HREC Investment Advisors. "All of the traditional lenders are sticking their toes back in, not just a few specialized debt REITs. We're seeing the commercial banks, the investment banks and the CMBS lenders all getting active again."

What broke the ice? Growing signs that hotels have hit bottom. "People believe the worst is over for hospitality," said David Sonnenblick, co-founder of brokerage Sonnenblick-Eichner of Beverly Hills. "It's not so much that things are rapidly improving as it is that lenders believe things won't be getting any worse. People can underwrite based on the last 12 months without having to account for a big drop in revenues."

To be sure, the spigot isn't wide open. Lenders are approaching hotel loans cautiously in the wake of the carnage suffered in the sector during the downturn. But in recent weeks, Bank of America, Deutsche Bank, J.P. Morgan and others have closed on more than a dozen hotel mortgages in total - up from virtually zero in the first half of the year.

The hotel market was hit disproportionately hard by the recession. Unlike office buildings, which tend to have long-term leases, hotels immediately felt a big drop-off in customers as business and leisure travel plummeted.

As occupancy rates and revenues fell, owners had a hard time keeping up with loan payments. The 60-day delinquency rate on securitized hotel mortgages exploded from a minuscule 0.19% in August 2008 to a whopping 21.3% in September - far higher than in any other sector, according to Fitch. The origination of hotel mortgages just about dried up by the beginning of 2009. And even after lending generally started to pick up a little bit of steam earlier this year, lenders continued to shy away from hotel mortgages.

Now there's growing evidence that the hotel sector has hit bottom. Occupancy rates and revenue per available room are stabilizing. And hotels are positioned to quickly feel benefits when business and consumer spending resume.

What's more, some progress is starting to be made on reducing the huge overhang of troubled properties. In fact, the resolution of $6.6 billion of distressed hotel mortgages caused the delinquency rate in that sector to plunge to 14.1% last month.

As troubled loans are worked out and properties are revalued, the demand for mortgages should pick up. For example, fund shop Blackstone is seeking up to $700 million of financing on 14 hotels it is seeking to take over from Columbia Sussex (see article on Page 1).

"Lenders are gearing up for more product to come to market," Davis said. "Values are as much as 50% off peak pricing. The discounts have grown to the point where people are getting excited."

A few loans on full-service hotels have shown up in recent securitizations. The collateral pool of an $856.6 million securitization that Deutsche priced on Oct. 20 included two hotel loans totaling $12.7 million. A week later, a $735.9 million offering led by BofA and Wells Fargo included three hotels totaling $62.5 million. Among them: a $25.3 million loan that BofA originated on a 156-room Embassy Suites in Fort Worth, Texas.

In the most noteworthy hotel financing since the market downturn, J.P. Morgan and Deutsche last month funded a $2 billion loan as part of the restructuring of the Extended Stay Hotels chain. The five-year loan, backed by 664 hotels, coincided with the chain being bought out of bankruptcy by a Centerbridge Partners group. J.P. Morgan and Deutsche securitized the mortgage last week via a stand-alone deal that was well-received by investors.

The new loans are being written to the conservative underwriting standards now prevailing. For example, in late September, BofA originated a $92.5 million fixed-rate mortgage on a Manhattan hotel with a loan-to-value ratio of less than 50%. The 10-year loan, with a 5% coupon, is backed by the 444-room Hilton Times Square, at 234 West 42nd Street. The hotel, owned by Sunstone Hotel Investors of Aliso Viejo, Calif., was appraised at $222 million in June. BofA plans to securitize the loan in an upcoming deal. Sonnenblick has arranged more than $100 million of hotel loans over the past few weeks. Two European banks funded an $80 million floater on the 435-room Charleston Place Hotel, a luxury property in Charleston, S.C. The initial all-in rate was less than 4%, and the loan-to-value ratio was less than 60%. The loan has a three-year term, with two one-year extension options.

Meanwhile, Sonnenblick placed a $20.5 million floater with a five-year term on Surfsand Resort in Cannon Beach, Ore., with an unidentified debt fund. The 97-room hotel is owned by Martin Hospitality of Cannon Beach.

And last week, Dallas-based Ashford Hospitality obtained a $105 million fixed-rate loan from Deutsche on the 697-room Marriott Crystal Gateway in Arlington, Va. The 10-year mortgage, with a 6.3% coupon, replaced a $60.8 million loan slated to mature in March 2012.

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