The Hotel Times - March 2008 - (Page 8)

CAPITAL OUTLOOK » BY STEVE VAN CMBS market forecast isn’t pretty Special servicers anticipate rocky road in late ’08 and ’09 F Steve Van is president and c.e.o. of Prism Hotel Management Co. ortunes are made in each downturn cycle purchasing distressed hotels from lenders. Is now the time to repeat the process? The commercial mortgage-backed securities hotel loan market provides the best answer. CMBS hotel loans differ from more traditional ﬁnancings in the all-important category (relatively new to the loan business) of transparency. They are part of multibillion-dollar pools structured to perform like bonds. These pools are rated on a frequent basis so that investors can see how the loans are performing. The ratings include default information. The workout experts in the CMBS world are known as special servicers. Using default statistics and internal “watch lists” indicating hotel loan performance, they are in the best position to predict the future magnitude of distressed hotel loans and thus the opportunities for acquisitions. There are about 20 special servicers, and the top six—LNR Partners, CWCapital, Centerline, Midland Loan Services, Bank of America and J.E. Robert Cos.—service 83 percent of the hotel loans. What are the hotel special servicers saying? They are concerned about the last half of 2008 and more so 2009. Although defaults are just now increasing, the maturities bubble, coupled with the credit crunch and the possibility of recession, are causing the most anxiety. Hundreds of CMBS hotel loans are coming due this year and next. In January, spreads for all indices in CMBS widened to alltime highs. Finding loans for balloon loan replacement will be more difﬁcult. Those not paid off will go into special servicing and the acquisition opportunity basket. The bubble has multiple causes. The 10-year loans made in the banner years of 1998 and 1999 are coming due — close to $2 billion in 2008 and $3 billion in 2009. Shorter-term loans issued in 2005, 2006 and 2007 have much higher leverage, often are interest-only and allow for mezzanine debt. Funding the payoff for these loans in today’s credit market will produce a signiﬁcant number of defaults. Even a moderate recession could cause the number of defaults to double. This could present a huge buying opportunity. By 2000, approximately 7,500 CMBS hotel loans had been Although defaults are just now increasing, the maturities bubble, coupled with the credit crunch and the possibility of recession, are causing the most anxiety. originated and about 750 defaulted. As of 2006, there was over $40 billion in CMBS hotel loans. If only 5 percent of these default, distressed asset investors should be calling on special servicers. Stay tuned. hmm@questex.com 8 The Hotel Times March 2008 www.TheHotelTimes.com http://www.TheHotelTimes.com

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The Hotel Times - March 2008 Business Outlook Editorial Outlook Contents Conference Preview Capital Outlook What's Driving Growth? European Outlook Development Outlook Fractional Outlook Branding Source List Insurance Outlook Brokers Update Brokerage Outlook Lodging's Balancing Act Transactional Facts Lending Outlook Lenders Source List In Closing

The Hotel Times - March 2008

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