A real estate investment trust with a portfolio of luxury properties is getting $363 million of new financing backed by five full-service hotels spanning 1,789 keys in four U.S. states and Puerto Rico.
Braemar Hotels & Resorts, an affiliate of Dallas-based Ashford, has landed the two-year, floating rate interest-only mortgage loan with three one-year extensions from originator JPMorgan Chase Bank in a deal expected to close on March 17. The mortgage loan is expected to refinance $355 million of existing debt and pay an estimated $8 million in closing-related costs. The borrower is getting no equity as a result of the deal, according to a Fitch Ratings pre-sale report.
The portfolio and the deal are a "bit unusual" with the pool of hotels having a slightly higher loan-to-value ratio compared with other hotel loan pools rated in the last year, said Chandan Banerjee, a Fitch Ratings senior director and one of the authors of the pre-sale report. The pool had a loan-to-value ratio of 111.5% compared with an average loan-to-value ratio of 107% in 2024, Banerjee said in an interview.
"In terms of the composition of the pool, it has the high-end resort hotel, the Dorado in Puerto Rico, and the other four hotels in the pool are more business full-service hotels in Chicago, San Francisco and Philadelphia," Banerjee said. "They have a different target market than the Dorado. In that sense, it's different than a typical hotel portfolio, which tends to be one or the other."
The new financing originated by JPMorgan comes at a time when Ashford Hospitality Trust, an affiliated REIT, was also able to secure $580 million to help pay off a portion of its loans. Other hotel owners are seeking to refinance debt this year after sitting on the sidelines waiting to see what happens to interest rates. Lenders expect more movement on financing deals this year.
Fitch Ratings expects the growth of revenue per available room to slow this year as leisure travel demand normalizes, ending the post-pandemic spike in so-called revenge travel. Hotels reaching or exceeding historical revenue peaks are expected to return to more stabilized levels at a time when expenses are escalating, the report added.
Eric Rothfeld, managing director in Fitch Ratings' commercial mortgage department, said in an interview the credit rating agency looks closely at in-place hotel performance and adds varying levels of "stress," or "deductions" to account for future possibilities of property performance to determine what's sustainable over the long haul.
"A significant amount of capital invested by the hotel over the last several years provides us more comfort that current performance is sustainable," Rothfeld said. "RevPAR is stressed on every asset, meaning we are pulling cash flow back, we're pulling revenues back and we're pulling income back. We are not assuming any type of increase in performance."
Since 2016, the five hotels in the loan pool have received $224.3 million in renovations, including a $78 million gut renovation of the Dorado Beach hotel and a $62 million renovation of the guest rooms, lobby, front desk, meeting spaces and other public areas, including the restaurant space, at The Clancy in San Francisco. The Dorado Beach hotel was the first Ritz-Carlton Reserve in North America and remains one of only eight such properties throughout the world.
The Dorado in Puerto Rico is the hotel with the largest amount of mortgage debt in the new loan pool that also includes the Seattle Marriott Waterfront hotel in Seattle; The Notary Hotel, Autograph Collection in Philadelphia; The Clancy, Autograph Collection in San Francisco; and the Sofitel Chicago Magnificent Mile in Chicago. Each full-service hotel has meeting and event spaces, as well as multiple food-and-beverage outlets.
As of July 2024, Braemar Hotels & Resorts owns interests in 15 hotel properties spanning 3,799 rooms in seven U.S. states, the District of Columbia, Puerto Rico and St. Thomas, according to Fitch Ratings. The properties are located primarily in U.S. urban cities and in resort areas.
The new loan's final maturity date is scheduled for March 2040.
San Francisco concerns
San Francisco is a market that Fitch Ratings analysts see as being "volatile" with more stresses — or deductions — added to historic performance to reflect the potential impact.
"As with everybody else in the commercial real estate space, we continue to be concerned about the overall sector in San Francisco," Fitch Ratings' Banerjee said. "We are concerned about the recovery of the office sector and the return to office and all of that and how it impacts hotel performance, especially a hotel pegged as a business hotel."
San Francisco's hotel market is lagging behind other U.S. cities, with the Oakland Marriott City Center hotel being the latest in the Bay Area to recently fall into financial distress as office vacancy remains among the highest in the country. Some officials in San Francisco are pushing policies to help convert some of that empty office space into other uses.
"San Francisco is a market that we have greater concern than maybe some other markets, like New York. [It's] a market we deem to have more volatility," said Rothfeld with Fitch Ratings.
Climate concerns
In measuring risk for hotel loans, Rothfeld said he and his team are paying close attention to hotels with coastal locations and the potential for windstorm risk and insurance structure.
The Fitch Ratings team inspected three of the five hotels in the portfolio being refinanced by Braemar Hotels, including The Ritz-Carlton Dorado, the Sofitel in Chicago and The Notary in Philadelphia, prior to its rating of the loan pool. Hurricanes remain a threat to the Dorado hotel, and the property's exterior cleanup from Hurricane Maria, which hit Puerto Rico in September 2017, is still ongoing, according to the rating agency's report.
Current zoning and safety regulations in Puerto Rico are unlikely to allow construction on the beach of new guest rooms, the agency noted, setting the Dorado that was built in 2012 apart from its rivals.