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CMBS investors booking high-end hotels
Demand for hotel rooms is running high, and mortgage bond investors are lining up to finance acquisitions and upgrades of even the largest resorts.

At one time, big loans like the $470 million mortgage on the Orlando Hilton, the $189 million mortgage on the Turtle Bay Resort in Oahu, or the $189 million mortgage on the Renaissance Aruba Resort & Casino were routinely whacked up into multiple conduit offerings. But it has become increasingly attractive to securitize these mortgages on their own in what are known as single-asset, single-borrower deals. This kind of financing is shorter term than loans sold to CMBS conduits, and it is floating-rate — a sweet spot in a rising-interest-rate environment.

Joseph Franzetti, senior vice president for capital markets at Berkadia Commercial Mortgage, a mortgage brokerage, said that there was an 80-basis-point reduction in the spreads on the least risky tranches of notes issued in single-asset, single-borrower deals over the past year or so.

“CMBS became a much more attractive rate avenue for borrowers who want to take on floating-rate debt,” Franzetti said.

Last year, most loans used in single-asset or single-borrower securitizations refinanced existing debt, but this year, M&A is also a driver, according to Erin Stafford, a managing director at the credit rating agency DBRS.

“There are new borrowers that have acquired major portfolios,” Stafford said.
One of the reasons there are so many of these deals to finance hotels is there has been so much growth in the underlying cash flow of trophy properties, Stafford said. “Some of it has to do with a shift in consumer behavior; they are looking more toward experiences as opposed to acquiring goods.”

In a lot of portfolios that DBRS rates, “the sponsors [borrowers] have put a lot of capital back into the properties, in the range of $8,000 to $20,000 per key, on a regular basis,” she said. It makes a lot of sense to take out floating-rate debt in order to capitalize on potential future growth.

The rush of deals comes despite emerging signs of oversupply in the broader hotel market. Last month, Fitch Ratings warned that is has seen an increase in the volume of securitized hotel loans transferring to special servicing in seven of the top U.S. metropolitan markets. Nevertheless, Fitch expects revenue in the broader U.S. hotel market to grow through the end of 2018, albeit slowly, and that the impact of oversupply on mortgage bonds will be limited this year.
Resorts are not the only kinds of hotels being financed via single-asset, single-borrower deals.

Single-asset-, single-borrower financing is not limited to resort hotels. Recent deals have also financed the acquisition of portfolios of hotels by the real estate investment trusts Colony Northstar and Ashford Hospitality Trust, among others.

Franzetti said there are few alternatives to CMBS financing available for these kinds of acquisitions. Insurance companies sometimes co-underwrite “club” loans for large buildings, but it can be hard to get them comfortable with a portfolio of assets.

There have also been several securitizations of large loans backed by multifamily and office properties.