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Starwood tapping CMBS for cashout refi of extended-stay hotels

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Starwood Capital Group Global is tapping the commercial mortgage bond market for a cashout refinancing a portfolio of extended-stay hotels.

The private investment firm has obtained a $471 million mortgage from Goldman Sachs that is secured by 85 properties with 10,764 keys operating under the InTown Suites flag. Starwood acquired the properties in two separate transactions in 2013 and 2015. Loan proceeds were used to refinance $381 million of existing debt, return $70.5 million of equity to the sponsor, cover closing costs of approximately $18 million, and fund a $1 million reserve to address inadequate parking at the Independence Boulevard property.

The prior debt was securitized in the CSMC 2015-TOWN securitization, according to DBRS.
The new loan, which pays only interest (one-month Libor plus 2.25%) and no principal for its entire extended term of up to five years, is being used as collateral for a new transaction called InTown Hotel Portfolio Trust 2018-STAY.

DBRS expects to assign an AAA rating to the $139.12 million senior tranche of notes to be issued.

Among the strengths of the deal, according to DBRS, is Starwood’s experience in the hotel sector and the fact that is has been the sole owner of the portfolio since 2015. In its presale report, the rating agency noted that Starwood implemented a capital plan that included creating a companywide call center, upgrading to high-speed internet at the properties and upgrading select soft goods. “The properties operate such that they make renovations as needed along the way,” the report states.

Since acquiring the properties in 2013 and 2015, Starwood has invested roughly $75.5 million, or $7,010 per key, of capex across the collateral portfolio.

Another strength is the portfolio’s long historical background of high occupancy, with a 10-year average of 83.7% and a 10-year average revenue per available room of $26.78.
However, DBRS noted that the cash flows generated from hotels can by volatile, and after eight consecutive years of growth in revenue per available room, “the relatively easy gains appear to be gone,” the presale report states.

DBRS also considers the properties to be highly leveraged. The portfolio has been appraised at $770 million, which equates to a relatively moderate loan-to-value ratio of 61.2%. But the rating agency values it much more conservatively at $490.7 million, which produces an LTV of 96%. This lower valuation is based on a cap rate of 11.75%, or 267 basis points higher than the average current market cap rate for this product type, according to PwC.

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