Review of debt solutions for the hotel landscape
Providing an overview of the different hospitality industry debt solutions in relation to the current crisis, Alan Cohen, president of the real estate finance practice of Akerman LLP and managing partner of the company’s newly connected New York office with GlobeSt.com to answer a few questions about payment options in the hotel landscape.
Do lenders allow deferred payments from certain hotel borrowers in order to weather the crisis and generate income to pay for debt service?
We all know that the current downturn is very different from that associated with the Great Recession. At the onset of the COVID-19 pandemic, almost overnight, people isolated themselves in their homes, travel and tourism stopped staying in hotels became an unsustainable option.
The average daily occupancy rate of many large city hotels has fallen to single digits and, as a result, many have been forced to close; excluding those who were able to serve medical personnel and other first responders. Subsequently, the cash flow ceased and the operators and owners were unable to pay debt service and operating expenses without paying out of pocket.
With the influx of defaulting hotel loans in mid-March, departments had to engage quickly with borrowers to provide temporary solutions so borrowers and operators could weather the cash flow crisis.
Unsure of the duration of the pandemic, many lenders and services, including CMBS services, responded by using the cash reserves built into the loans to cover debt service payments as well as other operating expenses, in order to prevent loans from defaulting and / or deferring a portion of monthly debt service or conversion to interest only for a period.
For example, if the loan had FF&E, seasonal, PIP, or CAPEX reserves, the services could allow borrowers to draw on those reserves for a portion of the required payments. Service officers also triggered loan cash management arrangements to secure and control cash flow and payments. Most initial or postponed accommodations covered three-month periods in order to keep the loans in good condition, although in some cases, depending on the type of hotel, service providers granted six-month accommodations, making the inadequate three-month solutions. Such longer accommodations were allowed for hotel classes, including resorts, big-box city hotels, and comparable hotel types, where cash flow would likely be severely diminished over longer periods of time.
That being said, some lenders and service agents are unwilling to absorb the pain and offer borrowers a “free trip” through the crisis. Therefore, many managers require borrower sponsors to share the burden by covering at least 50% of operating deficits to cover debt service and other expenses through capital contributions. The logic being this: if a sponsor is not willing to shell out to keep the hotel viable, then why should the lender accept the accommodation? As a result, some of the less capitalized sponsors are “handing over the keys” to lenders.
As the cash flow crisis began in mid-March, the three-month solution period ended in June, and the six-month solutions will end in September. At the end of these periods, borrowers and managers will take a closer look at asset quality to determine which assets should benefit from longer term solutions for debt managers and cover operating deficits. Presumably, as a result of these decisions, lenders and service providers will impose additional and unrelenting burdens on borrowers; at this point, many borrowers can give up their assets.
Are some hotels better placed than others? What factors come into play?
Of course, the ability and willingness of a borrower or operator to work with credit services to get through this crisis depends on a number of factors, including type of hotel, geography, level of management and capitalization of sponsors. Borrowers with outdated hotels, big-box city hotels, or hotels in oversized markets might be less willing or unable to contribute large amounts of capital to cover operating deficits; even when subsidized by service deferrals and access to existing cash reserves.
The same goes for sponsors who are not well capitalized. It depends on a sponsor’s business decision about the hotel’s prospects and whether it makes sense to invest the money.
Large branded chains with professional management will generally have access to capital in this regard; but again, it is a business decision whether it makes economic sense to support the hotel or just hand over the keys to the lenders.
Modernized hotels located in busy business corridors may be more willing to cover operating deficits in order to weather the crisis. However, even these sponsors will need the help of lenders and repairers.
What do lenders consider when strategizing to give hotels wiggle room?
In addition to the various factors mentioned above, officers will, of course, review their initial underwriting for these loans and focus on many of the initial assumptions. Factors such as the type and classification of the hospitality asset (e.g. full or limited service, hotel quality, standalone or branded, management quality and sponsorship capitalization) will play a major role in the extent and willingness with which the term-housing.
Another factor that managing agents recently raised is whether and to what extent a borrower has recently received the proceeds from an asset. If a withdrawal has taken place recently, a provider may require the sponsor to inject some of that product to cover deficits.
The general consensus within the market is that the hospitality industry may not return to pre-COVID occupancy levels until 2022 or 2023. As a result, only sponsors who have quality hotel assets have access to capital. and strong business plans will be able and willing to commit the necessary capital – when combined with the modifications and flexibility of the lender – to cover deficits for such a long period.
Hopefully assuming that the pandemic will end within the next six to nine months, the industry remains hopeful that people will resume traveling for business and / or pleasure, and as a result, tourism will rebound and resorts will reopen and reopen. will thrive again. That said, repairers would be willing to bet on well-capitalized sponsors with quality hotels in strong markets capable of covering deficits. In order to address the current concerns of service providers about underwriting these assets, sponsors should provide compelling and up-to-date business plans, presenting sustainable strategies to withstand the prolonged downturn.
With the growing number of defaulting or near-default hotel loans, it is incumbent on lenders and service providers to find and implement acceptable and long-term solutions for hotel borrowers. However, taking into account the various factors presented above, repairers should not hesitate to recover assets whose recovery prospects are uncertain or questionable.