Debt yield is the single most important loan-sizing metric for financiers of U.S. hotels, according to the year-end release of the quarterly Hotel Lender Survey. The survey, conducted by STR and RobertDouglas in conjunction with Hotel News Now, includes responses from more than 50 senior balance sheet lenders, CMBS lenders and providers of subordinate debt financing.
Forty-three percent of the survey’s respondents indicated debt yield is the top metric they look at when considering looking at a deal. It was followed by the location and quality of the real estate (40%), the sponsor’s experience and track record (13%), the sponsor’s liquidity and strength of balance sheet (2%), and the proposed brand and management of the property (2%).
“Overall, the survey results suggest an optimistic outlook from lenders, who have an underlying expectation of moderate increases in longer term interest rate benchmarks, such as 10-year Treasury bonds, and further increases in property values,” said Stephen O’Connor, principal and managing director at RobertDouglas. “The potential impact on a borrower’s overall cost of financing capital could be partially mitigated by moderate levels of compression in credit spreads, which a large proportion of lenders forecast will occur in 2014.”
“Lenders have been somewhat subdued since the end of the recession and that clearly is an underlying theme in this survey,” said Steve Hennis, director at STR Analytics. “There is an aversion to excessive risk, which has had a direct impact on the favorable supply-and-demand growth ratio that has helped fuel the hotel industry’s rebound from the recession.”
Survey responses indicate the lenders see Upper Upscale products as having the least financing risk, while the Independent segment carries the most risk. Other key findings of the survey include:
- Urban areas are the least riskiest to provide financing for hotels.
- A general economic slowdown and/or a faltering economic recovery is the biggest potential threat to existing hotel loan portfolios.
- Senior lenders require, on average, a minimum debt yield of 10.1% on underwritten cash flow for an existing hotel.
- For subordinate lenders, the maximum average loan-to-value ratio on lender underwritten cash flow for an existing hotel is 75.8%.
- Lenders who provide construction financing have an interest in four segments (in order of preference): Upper Upscale, Upscale, Luxury and Upper Midscale.
- Eighty-three percent of the respondents said they expect to fund in 2014 an amount equal to or greater than the amount they funded during 2013.
The Hotel Lender Survey is conducted quarterly, with the year-end edition providing more in-depth analysis than the other quarterly versions. To order a copy of the survey, or participate in future surveys, contact firstname.lastname@example.org.
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