DebtX recently executed a $95MM, four relationship sale on behalf of a large bank. This sale was deemed a huge success with high water marks set for “Covid-impaired” hospitality loan pricing (high 90’s), and buy-side yields as low as mid-high 6’s. Also evident was superior liquidity and pricing for a significantly impaired NYC hotel loan. Overall, the sale pricing for the portfolio exceeded the bank’s reserve by $7MM.
Transaction volume since July 2020 stands at ~$500MM across 61 loans. With this recent sale adding to our data set, we’re sharing the following observations about the current secondary market for hospitality loan sales.
- Abundant capital – Widely marketed sales are extraordinarily well attended. It’s common to see 200-300 separate investor groups execute NDAs to access deals.
- Narrowly marketed sales – This structure is uncommon but can be successful. The key is to know the aggressive buyers. Who has been winning deals, executing on acceptable contracts?
- Yields have tightened – 6.75% YTM in the last sale. This is comparable to the high end of non-bank new origination yield requirements.
- Further tightening? – Challenging unless banks start buying. Today, banks are net sellers with little appetite for adding exposure without risk mitigation features such as interest reserves. Loan acquisitions provide no mechanism for added risk mitigation features. However, we continue to be pleasantly surprised as capital and competition grind buy side yield requirements lower with every sale.
- Don’t rely solely on hotel investors – Relying on the hospitality buyer database alone will miss a large portion of the market. Generalist capital has flooded the hospitality sector due to a lack of sizeable opportunities in other sectors.
- Don’t miss small funds and family offices – Be sure to capture the small investor audience (<$20MM). Much of this is generalist capital that is aggressive and moves quickly.
- Seller financing – Accretive seller financing can increase pricing by 4-8 points for larger transactions. Note that the transaction noted above DID NOT include seller financing.
- The market is highly fragmented – No one buyer is dominating the market. This is healthy for sellers but adds some uncertainty when dealing with a limited number of counterparties.
Winners and losers in the hospitality sector have yet to be fully identified. Some are obvious; pre-Covid impaired versus those impacted solely by the pandemic, or NYC versus a select service hotel in a drive-to leisure destination. However, others are not so obvious, and this is reflected in sale results. Most “Covid-stressed” hotel loans secured by economy, limited, and select service assets price similarly as optimism abounds due to stimulus, vaccines, and upcoming summer vacations. Moving forward, hotel assets failing to catch this rising tide will be easily identified resulting in a bar belling of loan sale pricing within hotel service categories (some loan pricing will remain high while others will decline).
If you’re interested in a no cost, no obligation evaluation of your hospitality portfolio, please contact us.