Colony NorthStar (NYSE: CLNS), a global real estate and investment management firm, is tapping the commercial mortgage bond market to refinance a portfolio of 135 hotels totaling 12,474 keys.
In November, the company obtained a $960 million mortgage from JPMorgan Chase and Deutsche Bank; proceeds, along with $80 million of mezzanine financing provided by the same two banks and $23.5 million of cash equity were used to refinance approximately $895.9 million of existing debt that was securitized in a 2013 transaction and was transferred to special servicing in June 2017 because the previous sponsor was unable to retire the debt, according to Kroll Bond Rating Agency.
Following the transfer, Colony NorthStar, which was a junior mezzanine lender at the time, took ownership of the portfolio and the loan was returned to the master servicer in October 2017 after a one-year maturity extension.
The new first mortgage, which pays only interest, and no principal, for its fully extended term of five years, is being used as collateral for a new commercial mortgage bond offering called Tharaldson Hotel Portfolio Trust 2018-THPT.
Each of the 135 hotels ultimately backing the mortgage bonds previously served as collateral for the original transaction, COMM 2013-THL CMBS securitization, which was not rated by KBRA. The 2013 CMBS was also collateralized by another 19 properties not included in the new transaction.
The portfolio consists of 41 extended-stay properties (39.7%), 72 limited-service properties (32.2%), 16 select-service properties (16.5%) and six full-service properties (11.5%) located in 68 different metropolitan statistical areas in 28 states. The properties are operated under 20 national flags, and the five largest flags by portfolio balance are Residence Inn (29 properties), Courtyard (16) Fairfield Inn (31) Hampton Inn (14) and Homewood Suites (9).
The assets were constructed between 1964 and 2004, and 64 of the properties (34.4%) were renovated between 2007 and 2017.
The properties range in size from 52 to 259 keys. Since 2014, the sponsor has invested approximately $129.6 million ($10,389 per key) on capital improvements across the portfolio. An additional $187.8 million ($15,052 per key) is budgeted for capital improvements for 94 of the properties.
Kroll puts the loan to value ratio of the transaction at 111.1%, using its own valuation on the property, which is 35.6% lower than that of the appraiser. Kroll considers this KLTV to be high for a single-borrower CMBS. Taking into account the mezzanine loan held outside the securitization trust, the KLTV rises to 120.3%. “Higher leverage implies lower borrower equity levels and higher default probability,” the presale report states.
Another risk is the fact that 69 properties are either currently designated as non-compliant with the quality assurance standards under their respective franchise agreements and/or have other deficiencies relating to such agreements. And one of the properties, The Hampton Inn Houston-Hobby Airport, which accounts for 0.7% of the total portfolio balance, has been closed since early 2017 and is currently undergoing significant renovations.
Kroll expects to assign an AAA rating to the $261 million senior tranche of notes to be issued in the transaction.