Optimism about the near future of the lodging business, coupled with competition for yield among lenders, has allowed hotel owners to refinance billions of dollars worth of properties at low rates in recent months.
Commercial mortgage-backed securities lenders and private debt funds account for much of the loan volume, market participants say. As a result, buyers in property acquisitions and M&A have ample capital at their disposal — though the ability to borrow large sums against owned properties is making some hotel owners think twice about selling.
While debt markets are generally strong across the real estate industry, lenders have been especially focused on property types that they believe offer stronger growth potential, Fitch Ratings analyst Stephen Boyd said in an interview. In recent months, that includes hotels, which have begun looking more attractive as group and corporate travel have shown signs of a rebound, leading some observers to believe the current cycle, though already mature, will continue for years.
Jonathan Mehlman, president and CEO of Hospitality Investors Inc., a nontraded real estate investment trust, called debt capital markets "white-hot" in a recent conference appearance, noting that the company refinanced its portfolio for $1.23 billion in April 2017 at a spread of the London Interbank Offered Rate plus 3.02%. Just over a year later, he said, the company is being told that the same portfolio could be financed, with 3% to 5% more proceeds, at a spread 60 basis points narrower.
"That's across the board, from institutional investors looking to find yield," he said, adding that inexpensive financing has helped hotel companies cope with rising labor costs amid low unemployment rates.
Douglas Kessler, President and CEO of Ashford Hospitality Trust Inc., chose a different term during the same panel, calling debt markets "pistol-hot." Beyond the narrowing spreads for floating-rate CMBS loans, fixed-rate loans are even cheaper, despite relatively high 80% loan-to-value ratios, he said. For low-leverage loans — at 55% to 60% loan-to-value ratios — hotel owners are refinancing at spreads above LIBOR of roughly 175 to 200 basis points, Kessler said.
Ashford Trust has been among the most aggressive hotel real estate investment trusts in the debt market. Most recently it refinanced $1.07 billion in loans covering 34 hotels, bringing its total refinancing activity since the start of 2017 to $3.4 billion.
Kessler said property owners' ability to secure inexpensive debt likely slowed the pace of asset sales.
"People have the option to refinance," he said. "And if they have a vision that the cycle isn't decelerating ... as an owner of a hotel asset, you'd be less inclined to pull the trigger and sell it."
Notes of caution
Boyd said private debt funds have been particularly aggressive in lending on assets that banks, and even typically more risk-tolerant CMBS lenders, have been reluctant to touch — including those generating little or no income while in the midst of a repositioning or renovation.
Eagerness among lenders could help acquirers, too, he said, adding that Blackstone Group LP, which plans to acquire LaSalle Hotel Properties, has tended to use CMBS debt as "low-cost, de facto M&A financing."
Not all property owners have been eager to take on debt, though, regardless of cost. In a conference panel appearance, Park Hotels & Resorts Inc. Chairman, President and CEO Tom Baltimore Jr. said equity investors in public REITs tend to favor companies with low-levered balance sheets. He added that the company hopes to attain an investment-grade credit rating, which would involve demonstrating its stability to rating agencies.
"I want to continue to de-lever over time, so that I can continue to have that strong balance sheet, so I can go on offense and get it to the point of investment grade," Baltimore said. He said Park, which spun off from Hilton Worldwide Holdings Inc. in 2017, is not actively pursuing acquisitions but will likely pursue assets more aggressively in late 2018 or early 2019.
Some observers worry that high leverage could worsen a downturn in the traditionally cyclical hotel business, however encouraging fundamentals may appear at the moment.
Boyd said that opportunistic lenders to high-growth property sectors such as hotels, while a boon to debt markets at the moment, could change strategies quickly.
"They'll go where the best risk-adjusted returns are, and when we get into a different capital markets environment, maybe a more stressful capital markets environment, a lot of that capital may flee some of these sectors," he said. "Unless somebody steps into the vacuum to do refinancing, that's something of a risk."
For now, though, aggressive lenders appear committed, leaving at least one hotel owner to predict that even construction lending — a still-scarce form of financing — could rebound.
"The commercial banks can't put money out, because the CMBS market is crowding out all of that demand," Tyler Morse, CEO and managing partner at MCR Development LLC, said on a panel. "They're going to start lending to construction, and they're going to start watering down their terms. ... I think you'll start to see the supply picture moving up, at a macro level, because of the supply and demand of financing."