Coronavirus Hits Hotel Sector Hard
The COVID-19 pandemic hit the hotel sector exceptionally hard, leading to some creative financing and investment opportunities, said Cushman & Wakefield, Chicago.
In its report, The Current and Future State of the Hotel Industry: Opportunities and Strategies, Cushman & Wakefield said “substantial” capital from private equity firms and opportunistic funds is poised to execute on hotel investments when they become available. “Investors and lenders have learned from the recovery of the Great Recession and are poised to act quickly,” the report said. “Owners and investors view the scale of available cash to be the strongest resource to weather the COVID-19 pandemic.”
Current hotel investment opportunities include note sales from real estate investment trusts offering mortgages at discounts, properties in need of a performance improvement plan and land-banking entitled construction projects unlikely to get funding in the current environment, Cushman said.
Cushman noted hotel borrowers and lenders are working together to amend bank credit facilities to provide extension options, waive or modify certain covenants and establish interest reserves for near-term debt service.
For example, in Hersha Hospitality Trust’s most recent earnings release, CEO Jay Shah noted the REIT’s revenue per available room grew 3.9 percent during January and February. “However, in March, the novel coronavirus outbreak led to a near immediate shutdown in travel, resulting in an unimaginable impact to the lodging sector,” he said. “The deep and pervasive effects led us to immediately pivot to a near-term operating strategy of curbing expenses and boosting our liquidity.”
Hersha amended its existing bank credit facility and its borrowing base of assets to access an additional $100 million on its $250 million senior revolving line of credit without changing its interest rate. The amendment resulted in the company obtaining waivers on all financial covenants through March 2021, giving it additional operational and financial flexibility.
“If a hotel loan includes participation from multiple banks, borrowers are advised to work with senior lenders as funding will be extremely difficult to replace,” Cushman said. “Regardless, further creative financing or preferred equity will need to be negotiated with the senior lender.”
Some investors will provide capital to maintain a hotel property’s cash flow structured as preferred equity, Cushman said. Others offer “ground lease” financing–converting the land held in fee to a ground lease.
Some under-construction or newly opened hotel projects can access Property Assessed Clean Energy financing, Cushman said. PACE financing places a debt on the property and the payment is made via a voluntary tax assessment. Some PACE loans can be prepaid while others cannot.
