CHICAGO — With $21.7 billion of hotel CMBS loans due to mature this year amid an improving lodging sector, lenders have an opportunity to bring to market the non-performing assets that have been bogging down their balance sheets. So says Mathew Comfort, executive vice president with Jones Lang LaSalle Hotels, who expects large portfolio note and REO sales to dominate the select-service hotel market in 2012.
Many of the troubled CMBS hotel loans that were originated in 2006 and 2007 have already gone through one round of workouts, and in many instances borrowers received a loan extension of 12 to 24 months. Now, banks and special servicers are “realizing the time is right to divest these assets as the discount to par is not as significant as it’s been over the past 2 years,” said Comfort in a news release highlighting disposition trends in the hotel sector.
Large note sale portfolios, those in excess of $150 million or collateralized by multiple select-service hotel properties, will be in greater demand this year as investors look to put capital to work in search of higher returns, according to Jones Lang LaSalle Hotels, which operates as a subsidiary of Chicago-based Jones Lang LaSalle. REO sales also are expected to achieve higher prominence, following a cooling off period that began in the first quarter of 2011. In addition, the firm also expects loan-to-own scenarios to remain strong.
The term “select-service” refers to hotels that offer either a limited food and beverage service, or none at all. Frequently, these properties are priced in the middle to upper-middle tiers within their respective markets.
In 2009 and 2010, notes that were not attractive candidates for restructuring were put on the market by special servicers or lenders as the best way to dispose of a transaction in the absence of financial liquidity from borrowers, according to the global hotel real estate services firm. In many cases the servicers only choice was to liquidate through a note sale, which frequently occurred at a deep discount due to uncertainty in operating performance and a lack of experienced note buyers. (The trends in CMBS delinquency rates are highlighted below.)
“The increased liquidity in today’s capital market has provided additional options for both the borrower and the existing lender or servicer,” said Bill Grice, senior vice president of Jones Lang LaSalle Hotels, in prepared remarks. “Previously, there was no ‘Plan B,’ and now there is.”
In 2009, the majority of hotel notes were selling for all cash at significant discounts to par, whereas today the discounts are typically less significant, pointed out Grice. “Overall lodging asset performance has improved and there is less distress in the market, so bulk transactions are rare and very attractive today,” he emphasized.
The U.S. hotel industry reported increases in all three key performance metrics in 2011, according to Hendersonville, Tennessee-based Smith Travel Research. Overall, the U.S. hotel industry’s occupancy rose 4.4 percent to 60.1 percent. The average daily rate was up 3.7 percent to $101.64, and the revenue per available room (RevPAR) increased 8.2 percent to $61.06.
“For loan-to-own note sales there is likely to be a 2- to 3- year window, which began in 2011, that will provide exceptional buying opportunities to seasoned hoteliers with the resources to acquire lender controlled lodging assets,” said Grice.
Jones Lang LaSalle Hotels’ select-service division focuses on the transaction needs of clients in the mid-tier segment of the hotel industry, ranging from $5 million to $20 million in asset value. In 2011, the firm completed more than 76 select service transactions in the United States, representing more 20,000 rooms.
— Matt Valley