05.20.20

What’s next for capital markets

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alternate textBarring a resurgence in COVID-19, the fourth quarter of 2020 will once again see loan closings in the hospitality sector, according to PMZ Realty Capital. Photo credit: Getty Images/Natee Meepian

 

As the majority of the country begins to “reopen,” the capital markets have begun to reopen as well. However, the appetite lenders/investors have for hospitality assets is still minimal. Our clients’ focus for the next few months will be on asset management, both in terms of property operations and working with lenders on forbearance in order to get to “be here next year.” PMZ has been involved with helping hotel owners obtain a variety of short-term relief structures for their properties. Typically, these have included deferral of interest payments from balance sheet lenders to approval of secondary debt and use of reserves attached to CMBS loans.

A variety of portfolio lenders we often work with to fund our client’s loans have been in the market to generate capital for reinvestment and rebalance portfolios by selling hospitality loans. These loans have typically been for performing assets. Until there is more clarity in the market as to the volume of truly impaired hotel loans, it’s unlikely that there will be significant transaction volume in nonperforming loan sales. Fitch has reported that more than 5,000 loans representing over $120,000,000,000 in principal balance are now either in default or have requested modifications from the special servicers. It’s too early to tell if special servicers will be willing and/or able to work with the majority of these requests.

The market for new debt will remain relatively illiquid for the summer as well. Due to the lack of sales transactions and normalized TTM’s, lenders will not be able to comfortably value assets. Balance sheet lenders who have provided summer deferrals on the majority of their portfolio will not be able to make new loans at terms that borrowers find attractive. On the positive side, subordinate debt (rescue capital) will begin to enter the market in earnest as borrowers prepare for a more active fall financing season when capital market reopen for hotels.

In the short term, borrowers should continue to focus on expense management as revenues increase. The “new normal” as it relates to staffing, housekeeping, amenities and brand requirements may provide an ability to increase cash flow and make up for some of the increased costs that are going to be required. We expect that strongly branded hotels located in drive-to, secondary and tertiary markets will be the first to recover to levels where financing makes sense. Extended-stay properties have performed the best during the past few months, and we see this trend continuing. We believe these types of assets will begin to be financeable at reasonable levels over the next several months. Leisure travelers will return to the road before business travelers, flipping the typical metrics for many hotels.

In conclusion, we see the hotel capital markets beginning to reopen in the third quarter. Initial investments will involve preferred equity and other forms of rescue capital. Barring a resurgence in the virus, we believe the fourth quarter of 2020 will once again see loan closings in the hospitality sector.

Michael Sonnabend is managing member and co-founder of PMZ Realty Capital.


This article originally appeared in Hotel Management on May 20, 2020

PMZ has refinanced a substantial portion of our portfolio: 18 loans for both limited and select service hotels across four states, in excess of $200 million total in-debt financing. I always value PMZ’s insight into the current state of the financing market. They are always responsive, enthusiastic and have in depth knowledge of the financing markets. I am confident that PMZ would add value as financial consultants/brokers from their experience in the hospitality industry.

Hasmukh (H.P.) Rama
Auro Hotels (Formerly JHM Hotels), Chairman of the Board

PMZ has worked with our franchisees for over two decades financing all of the Hilton brands.  They have extensive experience with our brands and in the capital markets and have provided outstanding customer service.  Their business consistently finds creative financing solutions for our licensees, which, in turn, helps the Hilton Franchise Development Team achieve our growth objectives. PMZ brings trust and commitment to our franchisees.  We look forward to continuing our relationship with PMZ and recommending them to our franchisees in the future.

Bill Fortier
Senior Vice President Development, Hilton Worldwide 

We have worked with the PMZ team for many years.  They have done exceptional work for us in securing great financing for our assets in multiple locations.  They are professional and knowledgeable in all aspects of real estate finance.  

Mitch Patel
President & CEO, Vision Hospitality Group

I’ve had the opportunity to complete a dozen debt and equity transactions with Mike and Peter over the past ten years and value their financial and business insight. They bring innovative ideas and fresh thinking to each of their deals, and helped structure both debt and joint venture transactions that exceeded our expectations. Above all, we respect them and their firm as trustworthy advisors who are focused on their clients and their needs.

Ashish Parikh
Chief Financial Officer, Hersha Hospitality Trust

PMZ and their team of experts has been arranging financing for IHG owners for over 20 years. Their deep understanding of the hospitality industry, and the capital markets, has allowed many of our owners to secure the necessary financing to grow and expand their portfolios. PMZ has always and continues to put relationships first by acting with transparency and professionalism throughout their entire process. We appreciate what they do for IHG and the hotel industry as a whole.

Julienne Smith
Chief Development Officer, The Americas IHG Hotels & Resorts

I have worked with PMZ for over 10 years and during that time have had nothing but positive experiences.  They deliver at closing exactly what they promised at the beginning of the project.  PMZ has helped Sun Companies secure over $150 million in financing for such brands as Hilton, Marriott, and IHG.  Their business is relationship-based, therefore, they are the perfect partners for us and essential to our company’s growth.

Bharat Patel
Chairman & CEO, Sun Development Company

I’ve completed a myriad of transactions over the past 10 years with Mike and Peter and their clients. Through the ups and downs of the real estate market cycle, they have consistently presented us with transactions that are attractive based on current market dynamics. Throughout the process from origination to closing they have been a strong advocate for their clients, and on more than one occasion, thought of an innovative solution to structure around significant issues. Their creative thinking has benefited their clients and made me confident that once we begin a transaction, it will lead to a successful closing.

Michael Amoia
Director, NY based insurance company

I initially called Peter and Mike several years ago when I was seeking refinancing of two of our properties in Pennsylvania. The lender we were working with at the time had changed the terms on us several times. I explained the situation to them, and they assured me that they would close at the same exact terms or better than originally quoted. Not only did they close at better terms then originally outlined, but they exhibited a sense of professionalism and integrity that every intermediary should possess. I have since worked with Peter and Mike on several other transactions, and their high level of service is consistent. I would recommend the PMZ without hesitation to anyone seeking financing.

Atul Patel
CEO, HMB Management, Allentown, PA

Our firm currently operates over 75 hotels and restaurants in the upper midwest. When we wanted to arrange financing for eight of our limited and full service hotels in Iowa and Kansas, we started working with Peter after he was highly recommended by several of my peers. He did not disappoint us. He understood our unique local markets and secured $60 million from a national insurance company. We have since engaged his firm several other times to arrange financing for us. There is no doubt in my mind that the professionalism and knowledge of PMZ will benefit anyone looking to finance or refinance hotels.

Bruce Kinseth
Executive Vice President, Kinseth Hospitality Companies

The loan arranged by PMZ allowed us to retire our existing financing and provided a stabilization period for the Embassy Suites now that the renovation is complete. By providing us with multiple financing options, PMZ helped us find the best lender suited to our specific needs.

David Marvin
Founder and President, Legacy Property Group

PMZ has brought us multiple financing quotes and helped us select the one most advantageous to the ownership group. They have consistently helped us navigate the closing process flawlessly.

Danny Patel
CEO Peachstate Hospitality, Former Chairman Asian American Hotel Owners Association (AAHOA)