National CRE News In Your Inbox.
Sign up for Connect emails to stay informed with CRE stories that are 150 words or less.
Trepp Looks at Cap Rates on Distressed Hotel Resolutions
Over the past year, the most frequently auctioned distressed commercial real estate property type has been hotels, according to Trepp. Auction sales of hotels and hotel loans were plentiful in 2021, with hotels comprising half of the collateral being sold in some auctions.
CMBS data captures sales that take place on and off auction platforms. By parsing liquidation data, future bidders can get a sense of the cap rates buyers are paying for these assets, Trepp says.
The firm analyzed distressed hotel loans that resolved with a loss in 2021, ending up with about 40 liquidations totaling $377 million in loan balance and $264 million in liquidation proceeds for those loans. From there, Trepp took 2019 NOI (2020 NOI was often skewed by the pandemic) and liquidation proceeds to come up with an implied cap rate.
For limited-service hotels, the most commonly resolved hotel subtype, the weighted average cap rate was 10.55%. The range was from a low of 3.08% to a high of 17.24%.
For full-service hotels, the weighted average cap rate was 14.83%. The range was from under 1% to a high of more than 30%. “If we exclude these two outliers, the weighted average falls to 13.78%,” according to Trepp.
For extended-stay hotels – the subset with the fewest observations – the weighted average cap rate was 13.02%.
Trepp looked at the total outstanding reserve balance for each of the assets immediately prior to the resolution. For about half the loans, the reserve was depleted or almost depleted more than a month prior to the loan resolution. Other assets had sizable reserves to tab.
“By removing the reserve balance from the liquidation proceeds, we get a different (higher) cap rate,” writes Trepp’s Manus Clancy. “In the case of limited-service hotels, if we take reserves out of the calculation, the weighted average cap rate goes from 10.55% to 10.79%.”
- ◦Sale/Acquisition
