Lending for the U.S. hotel industry currently is focused on bridging the gap until travel demand returns and hotels can reopen, but challenges now will strengthen hotels as a sector in the future, lenders say.
REPORT FROM THE U.S.—A complete lack of liquidity in the U.S. hotel industry has stalled new financing, as the lending community focuses on forbearance and flexibility to help hoteliers bridge the gap between now and a return of travel demand.
The upside for hoteliers who come out on the other side of the COVID-19 crisis is that the hospitality sector will be stronger as a result, and financing again will flow, sources said.
In the near-to-medium term, loans for new hotel construction are likely to be more difficult to attain, “except in the instance of the best assets with the best sponsors,” said Kevin Davis, managing director of the Hotels & Hospitality Group at JLL.
Even for some time during the recovery, lenders generally will be focused on recapitalizing existing assets, he said.
“It’s also possible some of the financing sources in existence now may no longer be there, and there will be fewer lenders,” he said.
That lending environment will impact hotel supply in a way that ultimately will benefit the industry, Davis said.
“It’s truly a self-correcting mechanism,” he said. “A number of the top 25 markets in the country have been suffering with a significant amount of new supply, which has resulted in fundamentals deteriorating. The fact that it will be more difficult to get construction financing means less supply in markets, which will enable them to absorb the existing supply, which will fundamentally strengthen those markets.”
Peter Berk, president of PMZ Realty Capital, said he doesn’t expect the current crisis to stop hotel construction already underway, though it might delay openings. He does expect a drop-off in new hotel supply, “probably in 2022 and 2023,” as those 12- to 18-month-build projects would be seeking financing now.
“That will be good for the industry quite frankly. In 2022, things will be strong and very healthy again without a lot of new supply coming in,” he said, acknowledging that might seem like a long way off for struggling hoteliers.
Berk added that while the remainder of 2020 is likely to be difficult, he expects “2021 should be OK” for hotels as travel demand rebounds.
Not a full stop
Already, dating back to the Great Recession, there had been “a shadow” somewhat over hotel construction lending, said Mat Crosswy, president of Stonehill Strategic Capital.
“There has always been a little less liquidity for hotels. We’re going to see that exacerbated in the near term,” he said. “This is going to create an even bigger shadow in our space. We already saw banks pulling back; now we’re going to see them being even more conservative.”
Stonehill, however, will continue to be an active lender, he said, “probably doing deals in the next couple of weeks,” despite being “very defensive over the past three weeks.”
“Now, are we going to underwrite term sheets today? No. We’re trying to figure out where the bottom is, what it looks like and how to price investments going forward,” he said. “There’s such little visibility into what the ultimate fallout will look like.”
Harry G. Spirides, founder and president of Spirides Hospitality Finance, said hotel lending hasn’t fully skidded to a stop.
Beyond federal government stimulus and small business loans, “if you see any other type of loan closing, like a hotel construction loan for example, chances are the lender committed to making that loan long before this crisis began,” he said by email.
“For example, I have three new hotel construction loans that will be closing later this month, but those loans were approved and committed to back in 2019. The only other hotel development loans that are being made at this time are the ones with the developers who have the best credit rating and strongest balance sheet, with premium flags, in prime locations, with a low (loan-to-value), high-debt-service-coverage ratio, and solid personal guarantees.”
Forbearance and flexibility
During this crisis, lenders are most occupied by efforts to “triage” existing loans with clients, Berk said.
Much of those efforts are focused on forbearance, or delaying principal payments, on loans, which generally is giving hotel borrowers 90 days of breathing room, he said.
“That 90 days seems to be the magic number for lenders and banks,” Berk said. “We’ve had a couple (of clients) ask if they can use seasonality reserves from FF&E (furniture, fixtures and expenditures) toward operating expenses. In select cases, banks have allowed that to happen.”
Stonehill’s Crosswy said he expects a 90-day forbearance on most loans is not going to be enough, and once it’s up, there will be a second round of loan modifications.
“Banks are being told by regulators to be prepared to provide 180 days of relief,” he said, adding that it will depend on how much burn-through borrowers are showing to get their hotels to break even.
The focus will be on covering all operating expenses and then starting to service debt, he said.
He noted that CMBS (commercial mortgage-backed security) loans have been “probably the slowest to react in terms of documenting any modifications” or entering forbearance.
Berk said CMBS modification is delayed by a process that includes a taskforce analyzing each loan-modification request on a case-by-case basis.
“We’re starting to hear glimmerings” that those loans will be open to 90-day forbearance, he said, noting that CMBS lenders “don’t want to wholesale take back hotels.”
JLL’s Davis said while there’s been “no blanket response” to requests for loan modifications, lenders have been “generally favorably inclined in light of the circumstances.”
Lenders are “doing everything in their power to work with existing borrowers and sponsors to modify the loans and provide the time necessary to recapitalize their hotel and reopen,” Davis said.
The pandemic’s impact on hotel demand has caused a “liquidity crunch” for the industry that will “theoretically be resolved once the economy reopens and people start to travel again,” he said.
“It’s just a matter of bridging the time between today, when the economy is closed, and tomorrow, when hoteliers will have the ability to cover their obligations,” Davis added.
Managing the relationship between banks and borrowers requires a lot of listening, and the understanding that the current situation isn’t anyone’s fault, sources said.
“You can’t say people overleveraged,” Berk said. “Lenders were more restrained, with most loans 70% LTV. There was not a lot of oversupply. This was a true black swan, something unforeseen … which not only affected hospitality but every other business.”
Crosswy said “the most conservative borrower possible, who kept a year in reserves … would have made it just fine.”
“Most are not that conservative. It doesn’t fit the DNA of who a hotelier is. That business model doesn’t work unless you’re born into the right gene pool,” he said.
With generally no one to blame and no lessons to learn, borrowers and lenders can focus on their shared interests: the survival of their hotels, Spirides said.
“I highly recommend to hotel owners that they have honest, polite, direct, frequent and professional communication with all their stakeholders. The survival of their hotels will be a team effort,” he said.