Stonehill Strategic Capital hit a record high in the first quarter, closing approximately $190 million in hotel financing. That follows a strong 2015, in which the Atlanta-based direct lender executed on 23 transactions. With a substantial number of projects already in the pipeline, the company is actively funding acquisitions and recapitalizations for both stabilized and transitional assets with strong flags in secondary and tertiary markets. President Mat Crosswy and Vice President Michael Harper recently sat down with LODGING to discuss the disconnect between Wall Street and Main Street, dislocation in the credit markets, heightened scrutiny from banking regulators, and more.
The U.S. hotel industry had a record year in 2015, but investors are dumping hotel stocks. What’s your take on the growing disconnect between Wall Street and Main Street?
Crosswy: There is a huge focus with Wall Street money on $100-plus RevPAR markets. We’re not as active in those markets; we’re more active in the $80 RevPAR markets. On Wall Street, with the dislocation and disruption in the credit markets, that’s where we’re seeing a lot of opportunities from CMBS lenders that don’t know how to price secondary paper. We have an expertise in that, we track and follow all that data, and we know how to quote it, price it, and get the deal done. So you’re already seeing a pull back there largely because of the regulators. You’re also starting to see regulators come in and tell larger regional banks and smaller national banks, which have typically been a provider of debt capital in the hospitality space, to pull back on their commercial real estate exposure. Hotels are one of the first asset classes they pull back in. That’s mostly because of how operationally intensive hotels are and the daily leases versus long-term leases in retail, multifamily, office, and industrial.
Why are regulators cracking down on commercial real estate lending?
Crosswy: For the regulators, 2009 is still so fresh. Everybody knows we’re pretty far along in the real estate cycle, but in terms of the regulatory environment, they’re in the very early innings of implementing a lot of reform to make sure 2009, ’10, ’11—the Great Recession—doesn’t happen again. And if it does happen, it’s not going to be on them. You typically hear the analogy where the pendulum swings so far the other way, now it’s probably right there a little past the middle and they’re already checking it back. Our fundamentals are stronger than ever, so it’s also creating a longer runway for our space. As a secondary market lender, that gives us a lot of opportunity and is why we believe 2016 will hopefully be a great year.
Despite this pull back, there is still demand for capital, so is that where you step in?
Harper: There is all this CMBS maturing in 2016 and 2017, so that void has to be filled. We’re seeing a lot of opportunity from that maturing CMBS that needs to be refinanced and recapitalized and have PIP dollars put in. So that’s a lot of what we did in the first quarter: refinances or acquisitions with a large PIP that is going to get a new 15-year franchise license and there’s a real value-add proposition there. We’re seeing more transaction volume than ever because they’re not able to go to their traditional lenders and execute right now.
The debt overhang from 2006 and 2007 is a cause for concern. How does it impact you as a lender?
Harper: Underwriting was really loose back then, because the regulators were not on top of their game at the time. There was a lot of 75 percent LTV and significant IO periods through those loans, so now those hotels have aged 10 years, and they need fresh capital and renovation dollars. And if they didn’t amortize for enough, they are undercapitalized, and you can’t go out and get a 65 percent loan to recap the whole thing. So there is that need for fresh capital to recap and reposition those so they can re-stabilize. We’re starting to see a large pipeline of deals coming from that.
What is Stonehill’s overall strategy and outlook for 2016?
Harper: We’re going to focus on doing good deals. All of this stuff is maturing, but if we don’t feel like the value can be added, we’re not going to chase volume for volume’s sake. We’re going to put our capital to work on what we feel are the best opportunities. We’re conscious of the fact that you can’t continue to underwrite 7 percent RevPAR growth year-over-year. That’s not really realistic when you’ve got an economy growing at 2 percent year-over-year.
Do you foresee any challenges along the way?
Harper: We’re looking at individual markets. Supply is coming at a faster rate, but it too is being constrained a little bit because of HVCRE (High Volatility Commercial Real Estate) exposure. Banks can’t provide higher leverage construction loans, and they’re not providing as many construction loans period because of the regulators, so that’s keeping somewhat of a check on supply. There’s a giant supply pipeline, but it’s one thing to sign up a license and announce a project and another to actually get the financing put in place and get it out of the ground and done. While supply has ticked up a little bit, demand growth has still outpaced supply to this point. So we feel pretty good about the fundamentals of the market still. We’re on track for another record year, so we’ll see how it goes from here.