NEW YORK—Lenders will continue to make debt capital widely available but some evidence of weaker loan underwriting standards and non-economic development as well as the shadow lender impact on the lending environment are longer term concerns, according to Fitch Ratings.
Secured property-level mortgage lenders are constructive on hotel collateral, given higher yields/returns relative to other commercial property types (i.e. multifamily). In addition, balance sheet lenders across the size spectrum are lending for hotel acquisition, refinancing, and, increasingly, new construction.
Pricing remains competitive; underwriting metrics are weakening. Lenders have generally loosened debt service coverage (DSCR) and loan-to-value (LTV) ratio requirements to achieve higher yields amid heavy lending competition. Higher assumed property values (e.g. lower cap rates) and more interest only (I/O) loans with lower debt service coverage understate the amount of deterioration in issuer-underwritten LTVs and DSCRs within Fitch-rated U.S. CMBS conduits. Debt yields and Fitch stressed credit metrics, which are not affected by these factors, have weakened markedly.
Loan structure is also bending, and Fitch expects terms to steadily weaken for the balance of this upcycle as lending competition intensifies. I/O and partial I/O loans are more readily available. Lenders remain focused on cash management; however, less stringent springing cash sweeps with lower coverage triggers are increasingly common. Lenders are reportedly holding firm on key structural elements, such as requiring seller non-disturbance agreements (SNDA), as well as tortious interference clauses.
In addition, Fitch views non-depository financial institutions (i.e. shadow banks) as a potentially destabilizing force within the hotel lending market. Shadow banks are helping to shape the lending environment. They have heighted loan competition and contributed to weaker underwriting by frequently making loans at higher LTVs.
Shadow banks arguably are less likely to service the market if/when lodging fundamentals deteriorate, in Fitch’s view. Their lending appetites are not conditioned by liabilities arising naturally from operating activities (i.e. deposits and premiums) in contrast to traditional regulated balance sheet lenders such as banks and insurers.
