Banks get creative in containing hotel credit risk
Bankers are getting creative when it comes to addressing credit risk in their hotel portfolios.
When the coronavirus pandemic struck in March, lenders granted scores of deferment and modification requests from hoteliers. Since then, banks have been parsing through the financials and circumstances of individual properties to better understand their borrowers' issues — and how best to mitigate them.
About 4.8 million leisure and hospitality jobs have been lost since February, according to the Bureau of Labor Statistics. Occupancy is down 32% since then, and the sector could lose up to half of its revenue — more than $120 billion — this year. More than half of the 600-plus hoteliers that responded to a recent American Hotel & Lodging Association survey said they are facing foreclosure.
But no two hotels are alike, requiring lenders to offer relief on a case-by-case basis.
"Business center, resort, high-end and airport properties are under the greatest amount of stress," Timothy Huestis, chief credit officer at Pinnacle Financial Partners in Nashville, Tenn., said during the $33 billion-asset company's earnings call. Huestis characterized Pinnacle's exposure to those types of hotels as "limited," adding its borrowers "have strong track records."
“Banks, rightfully so, are taking a closer look at each individual case," said Chip Rogers, president and CEO of the American Hotel & Lodging Association. "I think that trend will continue. … It will be tougher and tougher to get any forbearance or forgiveness. We expected that. I think the industry is prepared for that — or at least attempting to prepare."
While forbearance and modifications are no longer automatic, bankers said they are willing to work with borrowers to give them time to recover.
“Fortunately, we’ve taken the time to understand the people we’re lending to and what it is they’re relying on,” said John Mangan, commercial real estate team leader at the $2.5 billion-asset Howard Bancorp in Baltimore. “We know the vast majority of these hotels will come back over time. … You’ve just got to understand how to restructure long enough so that they're able to stay in business.”
Western Alliance Bancorp in Phoenix has developed a comprehensive process to tackle issues in its $2 billion hotel portfolio.
The $32 billion-asset company offers clients several options for deferrals. Some schedules are set for six months, while others can stretch over a year. But in all instances, Western Alliance is requiring borrowers to advance several months of loan payments.
Deferrals kick in when upfront funds are exhausted.
The program is intended to give customers a “runway to resolve liquidity issues and allow the appropriate time to recover,” President and CEO Kenneth Vecchione said during Western Alliance's quarterly earnings call. “We established the expectation that the burden of responsibility for solving long-term cash-flow problems remains with our client base.”
The strategy is a time-tested tool that ensures borrowers remain invested, said Rajinder Singh, chairman, president and CEO of the $37 billion-asset BankUnited in Miami Lakes, Fla.
“You demonstrate you have skin in the game through a number of means — putting a little more cash into the deal, providing more collateral, maybe pledging another property or your home," Singh said. "You’re showing that you really want to work and make this right.”
Huestis said during Pinnacle's earnings call that the company would likely seek added cash or collateral as it works to modify the loans in its $963 million hotel portfolio. Pinnacle, though, stopped short of adopting Western Alliance’s systemic approach to its exposure.
Timothy Coffey, an analyst at Janney Montgomery Scott, said Western Alliance's policy is unique.
“The government has put so much liquidity into the market,” Coffey said. “Western Alliance is saying, `'If we give our borrowers time to figure things out, the situation will sort itself out.' … I haven’t seen anything else like what they’ve done.”
"You cannot underestimate the resiliency and creativity of entrepreneurs," said Bill Phelan, general manager at Paynet, which provide small-business ratings and data analytics. "Hotels are adjusting and they'll continue to adapt."
With $621 million of hotel loans, BankUnited can take a more individualized approach to its portfolio, Singh said. BankUnited granted deferrals on 93 hotel loans, representing 86% of its book. Of those, 21 clients with $298 million in loans have requested a second deferral.
“We're entertaining re-deferrals for another 90 days,” Singh said. “When you only have a couple dozen clients, you don’t need a program, every loan can be dealt with one-off.”
Occupancy in Florida, where most of BankUnited’s hotel loans are concentrated, has improved steadily since a low point in April.
“If I was talking to you 45 days ago, you would have heard a very pessimistic view from me,” Singh said. “Having said that, it is still going to be a long sled and we will help them with deferrals and any other way we can. … When we see a path to recovery, we're going to be flexible and do what makes economic sense for us as well as for the clients.”
Howard could also afford to be very hands-on with borrower, as it has just $61 million of hotel loans.
“It was really on a person-by-person basis because every one of these hotels has a different situation,” Mangan said.
“When coronavirus hit and things started to look pretty shaky, we were already proactively talking to our borrowers," Mangan added. "It wasn’t very hard. We said, '`You keep us informed. Call us as often as you want. We’ll call you at least once a week. Let us know how your revenue looks this week. What’s happening. What’s changed.' ”
Howard has approved modifications covering about 90% of its portfolio. It too has heard from some operators that want more time to right the ship.
About a dozen hotel loans in Howard’s portfolio are backed by “plain vanilla” properties that do not rely heavily on business travel, conventions or restaurant traffic, Chairman and CEO Mary Ann Scully said on the company's quarterly call.
“We don’t have what’s generally referred to as full-service hotels,” Mangan said. “Almost all of ours are limited-service or no-service, which means there’s a small or no kitchen. … A lot of times, especially in full-service hotels, they’re making a lot of money from the restaurant and bar. It will be very difficult to bring that back until everybody is comfortable with what’s happening.”
Howard reported that the dollar volume of all modified loans fell by 28% from late April to July 24, to $228 million. While the company didn't break out data for its hotel book, executives said they expect positive trends in that portfolio as well.
“We do have a good set of operators,” Chief Credit Officer Randy Jones said on Howard's quarterly call. “They’re very skilled. I think they’re making this landing as softly as they can.”