Abundance of debt capital expected throughout 2005

When the economy spiraled downward in 2001, hotel lending and investment activity came to a virtual standstill. Things sure have changed. As hotel operating fundamentals continue to pick up steam and the industry rebounds, lending activity also is on the rise.

It's easy to understand why.

"Compared to other forms of real-estate, hotels are now perceived as having a relatively high upside combined with a relatively low associated risk," said R. Mark Woodworth, executive director of PKF Consulting, in a news announcement.

Certainly lenders are benefiting from the increase in hotel profits and positive industry dynamics. In fact, hotel loan delinquencies dropped from 6.3 percent in 2003 to 5 percent in 2004, according to data from Trepp and JP Morgan. And the percentage of hotels in PKF's database that are unable to generate sufficient cash from operations to cover their interest obligations declined from 19.2 percent in 2003 to 16.9 percent last year, according to PKF. So it's no surprise that financial institutions stepped up lending activity to the hotel industry in 2004. This is expected to continue this year as well, according to capital markets experts.

"Lenders are much more aggressive now because they see that the recovery is in full swing," said Mark Lanspa, managing director at GE Real Estate.

With extremely favorable risk adjusted returns, the lending community is eager to work with hoteliers to restructure debt on existing properties and initiate new loans. For investors, this means they can tap into debt capital more easily and readily than they could during the last several years, said Robert Stiles, managing director and principal at Sonnenblick-Goldman Co.

In fact, an abundance of debt capital--from permanent fixed-rate mortgage loans, to floating rate financing, to mezzanine lending--is expected to be available to borrowers through 2005 as financial institutions augment aggressive funding, according to lenders.

Part of the reason for the increased availability of debt capital will be driven by a greater number of active lenders, many of whom recently began servicing hotel companies, Stiles said. Lenders once inactive in the hospitality business are wholeheartedly jumping in to capitalize on the industry recovery.

In other cases, lenders who used to take into account a hotel company's revenues and profits for the trailing 12 months before funding deals are now more apt to loan money based on the future outlook, Lanspa said.

According to Lanspa, borrowers should experience easy access to debt capital through at least the first part of this year--barring any catastrophic major events that could cause lenders to pull back.

Jerry Earnest, executive v.p. with GMAC Commercial Mortgage, said many of his company's hotel clients are interested in refinancing. With floating interest rates creeping up, now is a good time to lock in fixed rates, which still are at historic lows, he said.

GMAC Commercial Mortgage works with many hotel clients, including Ocean Park Hotels, to replace floating short-term loans with fixed-rate mortgages. GMAC recently provided Ocean Park with $8.4 million in permanent, fixed-rate financing for its Holiday Inn Express & Suites in Valencia, Calif. Ocean Park owns three other hotels in Valencia and has two more properties under development and scheduled to open by 2006.

In addition to saving money from lower interest rates, hoteliers often refinance and take equity out of their properties to either fuel growth or pump funds back into the business for renovations, Earnest said. Much of the industry's lending activity is driven by growing hotel companies, including some of the newer hotel real-estate investment trusts.

Highland Hospitality Corp., for example, announced Dec. 3 that it closed on a $17.6-million, fixed-rate mortgage loan secured by the 238-room Hilton Tampa Westshore Hotel in Tampa, Fla. The new 10-year loan with an annual fixed rate of 5.7 percent was provided by Nationwide Life Insurance Co. It replaces a $17-million mortgage loan with an annual fixed rate of 7.9 percent.

"We are pleased to have refinanced this loan at a very attractive rate several months prior to its maturity," said Douglas W. Vicari, Highland's executive v.p. and c.f.o., in a news release.

"With this refinancing, we now have approximately $293 million of long-term debt on our balance sheet at an average interest rate below 6.5 percent," he said.

While lenders have been busy assisting hotel companies refinance to take advantage of lower fixed interest rates, they also are helping structure debt capital to formulate the best lending strategies for each hotelier's needs and long-term goals. Restructuring financing with fixed rate debt, for example, can provide a company with more stability and this looks better on the balance sheet, Lanspa said.

ALIS THE AMERICAS LODGING INVESTMENT SUMMIT

Name of panel: "The Capital Markets Outlook for the Lodging Sector--The Lender's Perspective"

Time of panel: 4:30-5:45 p.m. Jan. 18.

Moderator: Robert Stiles, managing director and principal, Sonnenblick-Goldman Co.

Panelists: Peter Anscomb, corporate director, leisure & head of hotel finance, The Royal Bank of Scotland; Joseph Asciolla, managing director & head of U.S. lodging group, Calyon Corporate & Investment Bank; Jerry Earnest, executive v.p., specialty lending group, GMAC Commercial Mortgage; Mark Lanspa, managing director, GE Real Estate.

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