How much longer can lenders hold out in the current environment?
Many lenders have been okay not receiving a full months payment since the start of the pandemic in the hope that this recession will be short lived. That can’t last forever. How much longer can lenders go along not enforcing covenants? Especially for hospitality properties where there’s a net operating deficit and the bank/lender would have to fund a cash shortage during operations.
[{"id": "g4gzur7", "text": "Best alternative?   Who is going to buy or refinance one of these assets for what is owed on it?  The end of a 10 year bull run has left a lot of property highly leveraged for a stream of cash flow that the bottom just dropped out of.  \n\nYou're going to see a bunch of restructuring by the end of the year to take advantage of regulatory relief in the CARES Act but fundamentally a lender will either take a haircut to get the loans moved elsewhere or work with the borrower to keep them paying some amount.  Bend &amp; extend, collateral grabs, note splits, and forbearance plans are the name of the game right now.", "replies": [{"id": "g4h0cd7", "text": "Why should a lender take a haircut on a loan that was originated at 65% LTV. Shouldn\u2019t equity take that hit?", "replies": [{"id": "g4h3vba", "text": "Sure.  But where is the payoff coming from? You call a borrower in default and demand the note... where can he get it refinanced right now? If there's an operating deficit then foreclosing costs even more than usual (and its not cheap to begin with) since the lender now owns the property and has to make up the shortfall.  The current owner/borrower will get a better sales price than the bank so restructuring and kicking the can down the road is the best option for the lender right now.", "replies": [], "depth": 3}, {"id": "g4hb0yw", "text": "In some cases the equity is gone. The Palmer House Hilton in Chicago is entering foreclosure at a value 40% below peak. So all the equity in that deal was already wiped out.", "replies": [{"id": "g4hbt4x", "text": "So why\u2019d they foreclose and not just accept deferred payments? I guess equity just couldn\u2019t operate at a loss until that point in time?", "replies": [], "depth": 4}], "depth": 3}, {"id": "g4ji1jc", "text": "We had an office building reappraise and lose 30% of its value even with s 9% DY. We are now 105% ltv, non recourse", "replies": [{"id": "g4jiksu", "text": "So now what?", "replies": [{"id": "g4jiual", "text": "Hold out, the property is cash flowing so debt service is secure for the next several years. We are trying to find a debt fund", "replies": [], "depth": 5}], "depth": 4}, {"id": "g4jk9ep", "text": "I'm not a banker, so I'm not familiar...what is \"s 9% DY\"?", "replies": [{"id": "g4jkg3q", "text": "Debt yield = NOI / debt. It's an income leverage ratio.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g4h4aen", "text": "This moratorium on loan payments will (and already has) severely limited the ability to lend new loan dollars. \n\nCurrently, myself and other lenders I know are waiving covenant busts on hospitality properties in exchange for putting up 6-12 month payment reserves as additional collateral.", "replies": [{"id": "g4h5et8", "text": "We\u2019re 6 months in already...\n\nHow long can you sit back and not receive any payments at all. There\u2019s a chance that Biz Travel never recovers (at least in next few years) which just screws hotels. I mean why should I pay a consultant to come on site every week if they\u2019re able to do a bang up job remotely. What then?", "replies": [{"id": "g4h7f23", "text": "It really depends on how the Federal Reserve decides to allow banks to still consider assets as \u201cnormal\u201d despite not making loan payments.", "replies": [{"id": "g4hqlnp", "text": "Can they cover interest only? Could they cover P&amp;I on an extended amortization? Does the borrower have other resources to make the payments?  What is the nature of the recourse? What's the trend line? Where is break even revpar? \n\nA lot of variables and the borrower and lender have different priorities.  I had a hospitality borrower decline to go IO because it was going to shorten his term even though the property could support those payments.  He didn't want to refinance in 2022 based on an unknown trailing 12.  He's liquidating a pretty large SFR rental portfolio to cover the full payments until 2024 even though the property is cash flowing around .50x.", "replies": [{"id": "g4hrohj", "text": "That\u2019s precisely why we\u2019re asking for 6-12 month payment reserves upfront as collateral now for hospitality loans wanting payment relief. Borrowers are fumbling to provide updated revpar pro formas, so who knows what break even will be circa 2021?", "replies": [{"id": "g4k786j", "text": "What do you think of revpar in regional hotel chains? Will they improve if people start taking vacations inside the country?", "replies": [{"id": "g4kvi0w", "text": "Obviously a lower revpar is better than no revpar, right? \n\nRegional hotel chains geared towards vacationers versus business travelers have a chance of surviving if people start traveling, but they will operate at a significantly lower occupancy percentage. \n\nPeople that are willing to travel will, of course, expect lower ADRs so they can \u201cget a deal\u201d. \n\nLower rates combined with low occupancy spells trouble. At some point, it\u2019s cheaper to just shut down versus stay open at a huge loss.", "replies": [{"id": "g4m5v9s", "text": "But isn't keeping ADR/revpar higher almost necessary to keep up property value? I think its like other CRE that functions on leases; if a hotel lowers prices the value decreases and the borrower becomes responsible for the difference in price cushion between the loan and real value. I feel like its still better to stay open and wait than close and lose the whole property.", "replies": [{"id": "g4m9wcu", "text": "Since RevPar is a calculation determined by the ADR x occupancy, a lower ADR with higher occupancy results in more revpar. \n\n$300 ADR x 10% occupancy = $30 revpar\n\n$200 ADR x 50% occupancy = $100 revpar\n\nAs you can see, lowering ADR to boost occupancy results in a higher revpar, but at some point, variable operating costs at a lower ADR/higher occupancy won\u2019t result in an overall higher NOI. \n\nIt\u2019s also worth noting that hotel valuations place more weight on the market than other CRE property types encumbered by leases.", "replies": [{"id": "g4mdmow", "text": "I see. Thanks for the explanation!", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g4h4r73", "text": "Specifically for hospitality properties, it really depends on the type of debt they have. We're already seeing some distressed sales from CMBS debt, as the operating advisors/special servicers can be pretty inflexible. \n\nFor balance sheet hotel debt, lenders are more willing to kick the can down the road as long as the borrower is willing to stand behind the property and fund operating deficits. When the borrowers can't/won't cover expenses, the borrower is more likely to just hand the keys over willingly than the bank is to force a foreclosure, which will typically lead to a sale. The other tricky moment comes when you face an upcoming maturity, as pretty much all banks are not willing to extend new term or proceeds for hotels (unless that is their only bargaining chip). \n\nSo far though, I've really only seen properties get handed back due to issues that were present pre-covid, but got tipped over the edge. Things like ground leases, oil exposure, lack of fund-level liquidity, or investments that have already realized their returns.", "replies": [{"id": "g4jvb5l", "text": "Piggybacking on this to note that the Cares Act and regulating bodies have been pretty flexible in treating this crisis as an act of god sort of situation and adjusted capital reserve tests on these assets to avoid having bigger capital charges than they\u2019d normally do when giving payment relief.  Takes some pressure off.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g4hatrs", "text": "You are overlooking the other side of the equation. Yes, a lender may be making little or even loosing money on a loan on a property, but what is the alternative? Selling the note at a loss or foreclosing on an asset like a hotel in this market? Banks don't want these assets back in most cases, so they will do what they have to to work with borrowers, at least for awhile longer.", "replies": [], "depth": 1}, {"id": "g4hdkov", "text": "Called in for a refinance on an investment property. Chase has a blanket no refinance available on investment properties on stuff of my size (under 1mil) for my area.", "replies": [{"id": "g4ikyc8", "text": "What are you trying to refinance and what area.\nI\u2019m familiar with a handful of lenders who will refi smaller investment properties now.", "replies": [{"id": "g4itscs", "text": "I\u2019m sure I can use a mortgage broker to find something. I was pointing out that such a large institution like Chase has a new blanket policy to curb riskier lending.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g4izzud", "text": "Definitely depends on the asset type. Affordable multifamily is still seeing volume.", "replies": [{"id": "g4j006s", "text": "Happy Cake Day nessyjewman! Use what talents you possess: the woods would be very silent if no birds sang there except those that sang best.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g4jriic", "text": "As always, it depends, but I think there's still a decent runway. Unless there is a major regression with COVID, ie new massive outbreaks or a failure to get a vaccine in the next 6 months, that result in new shutdowns - things will be ok.\n\nBanks do not want to force a permanent solution on a temporary problem. There are caveats for properties with pre-exisinting problems, and loan with pending maturities are being handled on a one-off basis.\n\nHospitality will continue to suffer but things have started to slightly recover from what I've heard.", "replies": [], "depth": 1}]