By Mark Kay, CFO Capital
We all understand how important it is to create the right financing structure for each project. While no one has a crystal ball regarding future interest rates, our primary focus is to consistently work with hoteliers’ portfolio of assets, providing strategies on each asset as it enters a different life stage. Our “ears to the ground” approach allows us to actively provide solutions using floating versus fixed-rate products.
The rise in 5 and 10-year bonds
Although the market consensus is that interest rates will not be on the rise over the next couple of years, we can’t ignore the fact that since October 2016, the 5-year Canadian bond has already risen by 50bp, and 10-year bonds by 80bp. If you take a sample portfolio of hotel mortgages with an outstanding balance of $50M, assuming 25-year amortization, the investor will lose $1.2M over the course of a 5-year mortgage. An 80bp difference on a 10-year mortgage would equate to an opportunity loss of $1.93M.
Economically challenged areas also affect rates
When locking in interest rates, another factor to consider depends on the lender’s “spread” over the bond, cost of funds, or swap rates. On average, the spread is a larger figure in more economically challenging markets when compared to economically flourishing markets. Hence, in a diverse portfolio it is most optimal to lock in rates on assets that are within positive economic conditions.
Floating/variable loans are ideal in three scenarios when financing, or refinancing, hotel assets:
2.If the hotel has not achieved stabilization and the hotelier’s objective would like to maximize their equity take-out
3.When the hotelier is expecting to sell the asset in the near future, since most floating/variable loans have limited to no prepayment penalties
When is the best time to take out equity?
For hoteliers who have assets in vibrant geographic areas where there is a surge in hotel performance, such as Ontario, with emphasis in Toronto (GTA), Vancouver, and Halifax, we are observing a trend in the “refinancing” of existing well-performing assets. The primary purpose is to acquire new assets, take-out shareholder loans/distribution, or to subsidize working capital strain on other assets in the portfolio.
About CFO Capital
CFO Capital is a commercial mortgage brokerage firm and administers its own commercial mortgage fund providing billions of dollars in hospitality financing, including ground up construction, conversions and long-term financing. Since 2004, Mark Kay and his team, at CFO Capital, have supported the construction and term financing for all asset classes, including apartments, condominiums, retail, office, industrial and land.