Hotels Attract JPMorgan as Loan Recoveries Beat Other Properties

JPMorgan Chase & Co. and Wells Fargo & Co. are seeking to increase financing for hotels as lenders recover more money from loans backed by lodging than from debt secured by other types of commercial real estate.

Lenders’ losses on non-performing hotel loans were about 53 percent this year through September, compared with 63 percent for retail property loans, 62 percent for industrial, 61 percent for multifamily and 57 percent for office, according to data from Trepp LLC, a New York-based mortgage-information provider. The figures exclude loans with losses of 2 percent or less.

A recovery in the lodging industry helped delinquencies on U.S. commercial mortgage-backed securities drop for the first time in almost three years last month, Fitch Ratings said in a Nov. 5 note. The revival is lifting hotel property values and enticing lenders to rework existing loans and seek out new ones.

“Right now is a particularly attractive time to be lending to the hotel sector,” Christopher Jordan, head of hospitality banking at San Francisco-based Wells Fargo, said in a telephone interview. “We prefer lending at the trough to lending at the top. Now you are at the front end of the upswing.”

The Hilton Times Square in New York City is among properties benefiting from the renewed interest in hotel lending, completing a $92.5 million, 10-year loan this month. The senior loan, which carries a fixed interest rate of less than 5 percent, was secured through Bank of America Merrill Lynch and replaced financing set to mature in December, real estate services provider Jones Lang LaSalle Inc. said Nov. 11.

‘Actively Seeking’ Loans

“It’s a true indication that lenders are actively seeking to place debt on high-quality, well-located hotels,” Jeffrey Davis, a New York-based executive vice president at Jones Lang LaSalle Hotels, based in London, said in a statement.

Hotel occupancies in the top 25 U.S. markets climbed to 65 percent this year through September from 61 percent in the same period in 2009, said Smith Travel Research Inc. of Hendersonville, Tennessee. Revenue per available room rose 6.3 percent to $75.79.

“We are definitely making loans on hotels,” said Jon Strain, head of capital markets for JPMorgan’s commercial real estate group. Revenue and occupancy “trends have been very strong across the U.S.,” he said.

The New York-based bank doesn’t break out its hotel lending. It had about $8.4 billion in loans tied to lodging, real estate investment trusts, homebuilders and other properties as of Sept. 30, according to the bank’s third-quarter filing with the Securities and Exchange Commission. That compares with $11.2 billion at the end of last year.

Wells Loans Rise

Wells Fargo had about $6.5 billion of mortgages or construction loans tied to hotels and motels outstanding at the end of September, according to its quarterly filing. That’s up from $6.4 billion a year earlier. The lender’s entire commercial real estate portfolio was $126.7 billion, or about 17 percent of total loans, as of Sept. 30.

CMBS delinquencies dropped to 7.78 percent at the end of October, down 88 basis points from the previous month, according to Fitch. Hotel delinquencies fell to about 14 percent from 21 percent in September, the largest percentage-point decline ever recorded by Fitch for any property type.

The resolution of seven loans greater than $100 million contributed to the decline, Fitch said. That included a $4.1 billion Extended Stay Inc. loan backed by a portfolio of 682 hotel properties. Extended Stay last year filed the largest bankruptcy by a U.S. hotel owner.

‘Very Attractive Investment’

“Hotels represent a very attractive investment opportunity because they’ve seen such a sharp decline,” Jonathan Gray, senior managing director and co-head of real estate at Blackstone Group LP, said during a conference in New York on Nov. 18. “We’ve been deploying a lot of capital in this area.”

Gray has invested $4 billion in distressed deals for Blackstone in the past year, including stakes in Extended Stay, mall owner General Growth Properties Inc. and Sunwest Management Inc., an assisted-living provider.

Rising prices for hotels and money raised in share sales by real estate investment trusts have boosted lender confidence in the lodging industry, said Jordan of Wells Fargo.

“REITs and other hotel buyers have been paying tomorrow’s prices today, particularly in some cities, like New York and Washington, D.C., so they don’t miss out on the opportunity to own those assets,” he said. “These transactions have been a window into the value of hotel properties and have injected confidence into the system.”

Eleven Hotels Trade

This year through October, 11 hotels have traded for more than $100 million each, up from three a year earlier, according to Arthur Adler, managing director and chief executive officer for the Americas at Jones Lang LaSalle Hotels.

Low interest rates also have helped keep loan losses lower on lodging because hotels, more so than other commercial properties, tend to be financed with floating-rate debt, according to JPMorgan’s Strain.

The highest loan loss on an individual property in the lodging sector this year through September was 86 percent. That compares to an individual loan loss of 112 percent in the multifamily sector, 110 percent in retail and 99 percent in industrial, according to Trepp data.

Losses can total more than 100 percent because such costs as legal expenses, appraisals, tenant improvements and court- filing fees often aren’t repaid.

Floating Rates

“Part of the reason for lower loan losses is that the majority of hotel financing was done with floating rates,” said Strain of JPMorgan. “With the Fed injecting liquidity into the market, keeping interest rates low, a lot of the hotels are performing despite tremendous stress on them. Their interest debt service is low relative to the office and industrial sector.”

Losses on financing backed by midscale hotels or properties in suburban and rural markets are greater than those secured by hotels in metropolitan areas, said Paul Mancuso, vice president at Trepp.

“Loans backed by hotels in prime geographic locations are being modified more easily,” he said. “Some loans backed by midscale properties or hotels in suburban locations and tertiary and secondary markets, those loans are the ones that still have trouble.”

Morgans Hotel Group Co. in October won extensions for loans backed by its Hudson New York hotel in Manhattan and the Mondrian Los Angeles after paying down a portion of the money owed on the two properties. The company was able to negotiate a lower interest rate.

Boost Rents Quickly

Hotels have another advantage that other types of commercial real estate lack, said Morgans President Marc Gordon. They can boost rental rates quickly to take advantage of economic growth, while tenants at offices and retail properties tend to sign multiyear leases.

“Almost the entire tenant base of a hotel checks out every morning, and the operator effectively re-leases the building the next day,” he said. “With other commercial real estate, the operator usually has multiyear-term leases. As a lender, you don’t really know where rent rates will reset. At a hotel, a lender can see exactly how the hotel does operationally.”

To contact the reporters on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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