MADRID — From a borrowers’ perspective in the hotel industry, credit is affordable despite a little continued tailwind on base rates.
Debt still is deemed expensive, which makes it more difficult for some hotel buyers to be competitive, especially if they want more traditional leveraged loans. More expensive mezzanine debt remains out of the picture for many.
Tom Waycott, principal at London-based real-estate investment fund and debt advisory RCP Finance, said on a lending panel at the Atlantic Ocean Hotel Investors’ Summit that credit funds and lenders can compete in asset-light purchases. Banks, too, should be as competitive if they fully understand the advantages they have.
Phil Golding, partner at Cedar Capital Partners, also based in London, said he also sees credit availability in Europe from senior lenders and balance-sheet lenders, but it's often at higher-risk terms, involving taking on more debt and mezzanine loans.
"We are now in pre-2008 numbers, but from the borrowers’ perspective credit is affordable despite tailwinds on base rates,” he said.
"Higher gearing" on a loan means a company is taking on a higher amount of debt compared to equity capital. In economic downturns, higher gearing potentially can increase the financial burden.
Panelists indicated they did not feel an impending downturn is near despite worries about the cost of living.
António Pereira Dias, partner and chief investment officer at Lisbon-based investor Bondstone, cautioned that hotel properties with complicated elements and operations are currently more difficult to underwrite.
“I prefer modestly sized portfolios,” he said. Eighteen months ago his firm launched a debt platform.
Alfonso Agulló Torres, head of real estate for Europe at Santander Asset Management, said high loan-to-value debt has been the order of the day over the last few years.
He said high LTVs are among the reasons there is space for alternative lending.
“To ramp up assets, if pre-sales are not enough in that moment,” he said.
Credit funds must need an angle to be in the running, Waycott added.
“Mention cross-border deals, and the room gets suddenly chillier for the banks. Banks like vanilla deals, not higher leverage and brands that are not so known,” he said.
Speed to market also is a consideration, Golding said.
“It is a sweeping generalization, but balance-sheet lenders do move slower,” he said.
Expensive debt requires hand-holding, especially if a hotel has no competitive set and there is no history around it, or its management and market, Waycott said.
Agulló Torres said higher downside protection is also now the norm in most cases.
“We have seen in the last years a lot can happen that affects profitability. If banks understand the portfolio, that helps,” he said.
Golding said he sees it as important to now get closer to owners.
“We provide capital but also expertise, the knowledge to get [a deal] through. … We have the scars on our backs to show how expensive [capital expenditure] has been,” he said.
He added Cedar Capital has not been active in Spain for a decade.
“One of my goals is to change that in 2025,” he said.
Loan-to-own
The panelists dismissed the idea that hotel lenders are increasingly becoming owners.
“We are not in this environment. Can we name five [such lender-owners] in Europe? I do not find that sentiment. The industry is more collaborative. Hospitality is a great investment,” Golding said.
Despite the awfulness of the pandemic, panelists said COVID-19 resulted in strong fundamentals for the hotel industry.
“Three years ago, the market was full of distressed capital not being deployed. Look at this in terms of pragmatism, which we need to bring this to business decisions. We should not be ashamed of realizing upside,” Dias said.
Waycott said it's a fallacy that there were lenders out there who secretly or not-so-secretly want some hotel properties back.
“I do not think this is their strategy,” he said.
Not in a boom, but ...
The current era is one of reflection, due diligence and flexibility for hotel investment, panelists said.
“I can live with commercial buyers. That is a temporary solution for some, but once the assets are stabilized, traditional banks will come in, and I will be happy with a nice exit,” Agulló Torres said.
Golding sees the current scenario as a larger canvas.
“There are adjustments we all need to make. The main one is that we all got used to 0% interest rates,” he said.
Waycott said there remains a lot of dry powder out there waiting to be deployed, something the hotel industry has been saying since the worst of the pandemic was over.
“Outside 3%, 4%, 5% base rates, there is space,” he said.
“We live on assumption that debt should be accretive, that there always will be more business. Lower interest rates are not always bad for our industry,” Dias added.