The qualitative aspects of a financing request, such as location and quality of real estate, has surpassed the pure cash flow driven metrics as the single most important 'gating' issue for financiers of U.S. hotels, according to the year-end release of the quarterly Hotel Lender Survey.
The survey, conducted by STR, Inc. and RobertDouglas in conjunction with Hotel News Now, includes responses from 53 senior balance sheet lenders, CMBS lenders and providers of subordinate debt financing.
Forty-seven percent of the survey’s respondents indicated the location and quality of the real estate is the top metric they look at when considering a hotel deal. It was followed by cash flows metrics of debt yield or DSCR (37%), the sponsor’s experience and track record (12%), the sponsor’s liquidity and strength of balance sheet (2%), and the proposed brand and management of the property (2%).
Survey responses indicate the lenders see Luxury products as having the least financing risk. Many key findings of this year’s survey echo the sentiment from last year:
- Urban areas continue to be viewed as the least risky to provide financing for hotels. Independent hotels carry the most risk.
- A U.S. economic slowdown and/or a faltering economic recovery is still seen as the biggest potential threat to existing hotel loan portfolios.
- Eighty-three percent of the respondents said they expect to fund in 2015 an amount equal to or greater than the amount they funded during 2014.
- Senior lenders require, on average, a minimum debt yield of 10% on underwritten cash flow for an existing hotel.
- Seventy percent of lenders expect hotel property values to increase over the next 12 months.
- Lenders who provide construction financing have a high interest in every property class with the exception of Economy.
“The borrower’s overall cost of financing capital has been enhanced over the past 12 months as the long term U.S. treasury rate defied expectations and decreased by 100 basis points,” said Chris Ropko, senior director at RobertDouglas. “While debt yield remains the primary cash flow determinant of loan sizing, borrowers should be able to enjoy more comfortable debt service coverage ratios and find deep liquidity for acquisition and repositioning investment strategies.”
“Overall, lenders continue to have a positive outlook for the hotel industry and are most concerned about macroeconomic risk,” said Steve Hennis, director at STR Analytics. “However, the threat of increasing supply to undermine performance growth is of increasing concern.”
About the Hotel Lender Survey
The Hotel Lender Survey is part of the Hotel Investors Gauge, which is produced quarterly by STR, Inc. The Hotel Investors Gauge is a survey of lenders, developers and investors that measures the current state of financing market conditions and ascertains critical future expectations through the lens of the hotel investment community. The Hotel Lender Survey is the in-depth year-end survey that focuses on the outlook of major hotel lenders. To order a copy of the survey, go to http://www.str.com/products/hotel-investors-gauge. To participate in future surveys, contact email@example.com.
RobertDouglas is a privately owned investment banking firm with offices in New York, San Francisco and Los Angeles that specializes in the sale, financing and equity capitalization of hotel, resort and gaming properties throughout North America. Founded by two of the hotel industry's pre-eminent finance professionals, Rob Stiles and Doug Hercher, RobertDouglas offers clients access to exceptional domestic and international institutional investor and lender relationships, as well as the structured financing experience that comes from closing complex transactions throughout North America. RobertDouglas combines the capital markets sophistication of top-tier investment banks with detailed hotel underwriting and asset management experience, giving this hotel investment banking firm unique capabilities in an underserved market. For more information, go to www.robert-douglas.com or email firstname.lastname@example.org.
About STR, Inc.
STR, Inc. (www.str.com) provides clients—including hotel operators, developers, financiers, analysts and suppliers to the hotel industry—access to hotel research with regular and custom reports covering the United States, Canada, Mexico and Caribbean. STR provides a single source of global hotel data covering daily and monthly performance data, forecasts, annual profitability, pipeline and census information. STR founded the STR family of companies and is proudly associated with STR Global, STR Analytics and Hotel News Now. STR also founded the Hotel Data Conference (www.hoteldataconference.com).
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