Lehman Brothers and UBS are shopping a $2.45 billion fusion deal that has a 21.4% concentration of hotels, the largest allocation to the sector since Sept. 11 and a significant increase from average hotel concentrations included in new CMBS deals over the past year. Originators, investors and analysts are saying that the Lehman-UBS deal is a forerunner of what is to come--significantly higher hotel concentrations in new deals. Officials at Lehman and UBS did not return calls.
Before LB-UBS Trust 2006-C1, hotel concentrations in new deals had creeped up into the mid-teens, said Lisa Pendergast, managing director at RBS Greenwich Capital markets. The expected increase mirrors the significant rebound in the fundamentals of the hotel sector in 2005, which has opened up new financing opportunities, said Vishal Vanjani, a v.p. at IXIS Real Estate Capital, which recently provided $58.5 million of financing on two hotels.
Despite the strength of the collateral in the Lehman-UBS deal, concerns remain for investors who have been burned by hotel loans in the past. Hotels have historically had more volatile cash flows than other asset types and are more exposed to the overall economy's whims.
The fifth-largest loan in the pool is a $120 million mortgage on a portfolio of Courtyard by Marriott hotels. One investor pointed out that the mortgage is supported by long-term ground lease payments on the 49-property portfolio rather than the hotel's operating income, which has helped to assuage concerns. He added that this brings the actual hotel exposure to 13%, a level that investors across the board are more comfortable with.
Despite better fundamentals for the sector, there is a concern that debt service coverage levels are getting tighter, creating less of a margin for error, the investor said. He added that the underwriting on a deal of this kind might only reflect 12 months performance at a time when the sector saw its best performance in five years, leaving little room in the event of a large credit event.
One analyst pointed out that full-service hotels are becoming the norm, with re-branding efforts that will increase the need for construction or rehabilitation financing. Indeed, CNL Hotels & Resorts is re-branding a number of hotels, including the Grand Wailea, the Arizona Biltmore and several La Quinta properties to fit in with Hilton Hotel's plan to introduce a new luxury hotel line that will be a part of New York's legendary Waldorf=Astoria hotel.
