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CRE Finance World, Winter 2012

Lodging Sector in CMBS: Outlook for 2012 Figure 9 Access to financing limited, expect more extensions at balloon Hotel maturity profile Based on our estimates, 50–60% of maturing hotel loans are unable to secure refinancing at the end of their term (Figure 9). While insurance companies remain a primary source of financing, their interest is often limited to the best full service hotels in gateway cities. For the rest, CMBS new issuance in 2010 and 2011 opened some avenues — offering both standalone single borrower format, such as Extended Stay (ESA 2010-ESH), or an option to be securitized as part of broader conduits pool. However, with spreads remaining relatively wide and volatile in the secondary sector, CMBS financing may not be easily available in the near term. Private equity funds will likely continue to buy distressed assets at a deep discount, but for the mid-range assets (not highly distressed, with decent cash flow but secondary location), refinancing opportunities might remain limited. As such, we expect a significant share of the $5bn of CMBS hotel loans coming due in 2012 and 2013 to receive extensions to their terms. Away from the conduits, we expect floating rate hotel loans, often structured with multiple annual extensions, to use their ex- Note: Chart shows share of loans still outstanding at or 3m after maturity. Source: Intex, tension options and eventually extend beyond them via modification. Barclays Capital In a sluggish growth scenario in 2012, we expect this dynamic to continue. Larger, luxury hotel properties could receive fairly aggressive modifications — involving either a carve-out of a large B-note or a significant rate cut along with extension (the Four Seasons Maui is a recent example). In any case, this would impose significant interest shortfalls on the trust, though the probability of eventually recovering some of the B-note value is somewhat higher — if and when the sector snaps back up. Severities should stay elevated Severities on liquidated hotel collateral had been level with other CRE sectors in the CMBS conduit universe, up to the beginning of 2011 (Figure 8). Since then, however, losses on hotel loans have stayed close to 10% higher, on average, than other sectors. In our base case, where the broader economy continues to exhibit sluggish growth, we expect this basis to persist, as investors apply a higher discount to distressed hotel properties, which are more leveraged to macroeconomic conditions. As such, CMBS trusts should be on the receiving end of 60–70% loss severities on hotel liquidations, mostly concentrated in the limited service segment. Note sale activity continues to be elevated in this segment, also contributing to higher loss severity. A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 53


CRE Finance World, Winter 2012
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