PHOENIX — Transaction activity in the hotel industry has largely been down in 2023, but lenders still have been able to get some deals over the finish line.
Carlos Rodriguez Sr., founder, chairman and CEO of Driftwood Capital, said the lending side of his business has been “extremely active,” and his company has given out mezzanine loans to at least 70 hotels over the past seven months.
“It’s starting to soften up, starting to open. I’m starting to see more competition, but it’s been very, very active,” he said during a meeting of members of the Lodging Industry Investment Council at The Lodging Conference 2023 in Phoenix.
Maturing loans, refinancing by hotel owners and an increase in buyers have opened up opportunities, he said. Driftwood hasn’t provided loans for any development projects this year, but has been active with mezzanine loans for refinancing and acquisitions.
The floating rates on these deals have been in the 15% or more range. Rodriguez Sr. said Driftwood likes to leave a reserve to give the borrower a chance to ramp up operations and improve, so it may start at 12% with the rest accruing or it could be a back-end kicker that turns into equity.
He said in most scenarios, a senior loan will account for the first 50% to 55% of the capital stack before the addition of Driftwood’s mezzanine loan. In some cases, albeit rarely, the stack has reached 75%.
“It’s a case-by-case situation. We underwrite [for] No. 1, frankly, the borrower, their wherewithal, their track record. Then No. 2, the asset,” he said. “Since we’re also managers, we’re also operators. We underwrite and say to ourselves, not that we want to do that because we want to help out, but in the worst-case scenario, know we will step in at that basis.”
As demand picks up for these loans, so do the suitors, Rodriguez Sr. said.
“Banks are starting to open up. Funds are starting to open up,” he said. “I’m definitely seeing competition, so that is changing. …. I do foresee that margin compressing and rates starting to lower as a result of the competition.”
Loan Maturities
Jeff Kolessar, chief development officer for GF Hotels & Resorts, said sophisticated borrowers that have a loan due within the next 12 months are having discussions with their lenders to stay on top of loan maturities. A potential complication could be on the appraisal side, as it has to be updated every so often.
“If there’s an appraisal reduction or something when an appraiser starts changing the cap rates … if they’re stable ... and the [net operating incomes] drop a little bit, that’s where I think we might see some of the problems occur,” he said.
Prudent borrowers will begin to trade in some keys to boost their stock pricing and equity — like Ashford Hospitality Trust did in July — but it isn’t likely to be a big trend across the industry, Kolessar said. There are a lot of conversations going on in regard to commercial mortgage-backed security loans but as five-year, rather than 10-year, loans.
Mike Cahill, CEO and founder of Hospitality Real Estate Counselors, said the five-year CMBS loan could be more advantageous than a 10-year loan.
“Two years from now that’s going to be a dominant tool to use,” he said. “If you get rid of the 10-year duration and cut it down to five years, and you can do a CMBS loan and actually do your two-, three-year ramp up, and then the last two years your defeasance is going down rapidly and to have a non-recourse five-year [loan] — I just think that’s a fantastic problem [to have].”