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CRE Finance World, Winter 2012

Lodging Sector in CMBS: Outlook for 2012 market participants to fill in the gap caused by reduced REIT CMBS conduit performance buying power. Financing is less readily available in an uncertain The lodging sector makes up about 8% of the outstanding CMBS macro environment. Most CRE balance sheet lenders/insurance conduit universe, or about $46 billion by outstanding non-defeased companies are involved in only the best quality assets in gateway balance. In addition, nearly half as much is securitized in floating cities – leaving large sections of the market without a steady rate and single borrower deals, often backed by a single borrower/ funding source. That said, we believe that the CMBS market will asset. Due to the management-intensive and cyclical nature of the still be used as a funding source for new floaters backed by hotel business, the loan to value ratio at origination for hotel properties properties with strong cash flow. Distressed assets, on the other is typically lower than that for other property types, as the loans hand, could attract bids from private equity participants looking for are underwritten to financials typically estimated over several high-yield type returns. previous years. As a result, in an upward-looking economic cycle, hotel sponsors are typically more interested in prepayment flexibility, Luxury versus limited service which allows them to refinance at a higher LTV should the valuation Digging deeper, we expect slowing economic growth to have a bigger increase. Since short-term floating rate CMBS loans typically have effect on the RevPAR of the luxury/full service hotel sector, which this flexibility (compared with 10 year conduit loans, which are usually is typically driven by corporate travel and expenditure. Performance locked from prepayment with yield maintenance or defeasance in this sector had ticked up sharply in 2010, as corporate spending except for a few months preceding maturity date), hotel sponsors bounced back after severe cutbacks in the 2008-09. As such, are naturally more inclined to use floating loans. any future belt-tightening by corporates, as a result of a weaker outlook, should hit this sector first. Figure 6 Hotel delinquency rates in CMBS conduits On the other hand, limited service hotels, that derive most of their revenue from budget travelers, have displayed a lower beta than their full service counterparts, which was somewhat expected, given their cost structure. While occupancy grew (at a somewhat lower pace than the luxury sector), RevPAR for limited service hotels remained stuck at depressed levels (Figure 5). As such, while further downside for the limited service sector is somewhat limited, we expect this subsector to continue to transact at distressed levels in the face of a broader slowdown. Figure 5 Full versus limited service performance Source: Trepp, Barclays Capital Source: Smith Travel Research, Barclays Capital A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 51


CRE Finance World, Winter 2012
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