LOS ANGELES—The focal point of all lenders is to correctly size a loan to maximize debt yield. During an International Lodging Finance Council roundtable discussion earlier this month, lending experts agreed the economic conditions make it a little tougher to make the right call.
Stefani Turner, VP-relationship manager with Wells Fargo Hospitality Finance Group, said Wells Fargo’s confidence level in maximizing that yield is essential to making a senior loan.
“If we’re lending into a story, we’re willing to take a little bit lower going in, debt yield, but we have to have confidence that, at least from our underwriting perspective, that we’ll get to a certain debt yield within the term of the loan, that the hotel will be stabilized at that point,” she said. “We’re looking in the 13% to 15% stabilized debt yield.”
Warren de Haan, chief originations officer and managing director for Starwood Property Trust Management LLC, said today’s balance-sheet lending market indicates debt yields in the high single digits.
“When a hotel is getting repositioned like Stephanie’s talking about and it’s not a securitized loan, you’re not going to see those kind of debt yields going in; you’re just not because a borrower would be able to borrow that money in a CMBS marketplace at a more efficient cost of funds,” he said. “Therefore, you have to dip down into the single-digit debt yields, and depending on where you are and the quality of the asset, if you’re talking about a Four Seasons in a primary market, you’ll start to see debt yields in the 7% debt-yield range with upside based on New York City or something like that.
“If it’s a transitional asset in a secondary market, you’d be looking at debt yields probably in the 8-plus range with generally what Stephanie’s referring to, three years to stabilize, 13 to 15 debt yield,” de Haan added. “Effectively … you can refinance yourself out in a few years. That’s the way we’re looking at it.”
“It's interesting, that math, that if you are taking some risk where with a forward view at a 7 debt yield, but you're sizing to a 15, that's actually about the reciprocal,” added Bruce Lowrey, managing director of RockBridge Capital. “Seven debt yield is about 15 times cash flow. Fifteen debt yield is about seven times cash flow. So the old rule of thumb that hotels are 10 caps, you're saying going forward if it's a 10-cap when my loan matured ... I've got a 70% loan. That should be readily financeable.”