Colony Capital is tapping the commercial mortgage bond market to refinance a portfolio of 30 Courtyard by Marriott hotels with a total of 4,379 rooms across 15 states, according to Morningstar Credit Ratings.

The private equity firm recently obtained a $415 million first mortgage from Barclays and Morgan Stanley; proceeds, along with $125 million of mezzanine loans, will be used to repay existing debt of $512 million that was securitized in two prior transactions completed in 2014, JPMCC 2014-CBM and JPMCC 2014-CMBZ. (The second transaction being repaid included 10 hotels that are not being used as collateral for the new transaction; $76.1 million of proceeds from the new financing will be used to repay outstanding loan balances on those assets.)

The first mortgage, which has an initial term of two years and can be extended for one year up to five times, is being used as collateral for a new transaction called BBCMS Trust 2018-CBM.

Bloomberg News

Morningstar considers the transaction to be highly leveraged for hospitality assets. It puts the loan-to-value ratio at 70%, based on the first mortgage alone. After taking the mezzanine loans into account, the leverage rises to 104.7%. (The rating agency’s final value for the portfolio was 22.2% lower than the appraised as-is value of $675 million and 30.6% lower than the appraised stabilized value of $757.0 million, inclusive of the $9 million portfolio premium.)

The fact that the loan pays only interest, and no principal, for its entire term increases the risk that it will be difficult to refinance upon maturity.

“Hotel loans tend to have more volatile cash flow than other commercial real estate assets because of changes to daily rates and occupancy levels, which can shift dramatically because of factors beyond the hotel operator’s control,” the presale report states. “The portfolio experienced steadily declining cash flow growth, from a year-over-year growth rate of 16% between 2014 and 2015 to -1% between 2017 and the [trailing 12 months] ended April 30, 2018. Although the portfolio has consistently achieved above-average revenue per available room, or RevPAR, penetration of over 118% in the past three years, we consider most of the individual properties average compared with competing properties. This is primarily because the hotels generally lack some of the modern design features that business travelers favor."

Competition is only going to increase. Based on the data from appraisal reports, 6,599 new rooms are planned and would add 15.8% of new supply to the total inventory of the competitive sets, according to Morningstar.

On a positive note, the properties have undergone periodic renovations, with the current owner invested $15.6 million ($3,500 per room) between 2015 and 2017 and the previous owner invested $96.7 million between 2007 and 2014. As part of the extension of the management agreements to 2035, Marriott and the sponsor have agreed to renovations that will include rooms soft-goods renovations, fitness center expansions, public space renovations, tub-to-shower conversions and facade modernizations through 2025. Colony has estimated $80.7 million for the renovation budget.

Morningstar expects to assign an AAA to the senior tranche of notes to be issued in the transaction, which benefits from 62.265% credit support.

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