Shadow bankers could be left picking up the tab if hotels fail

Apollo, Starwood among mortgage REITs that bet big lending on hospitality industry; coronavirus pandemic exposes that risk

Leon Black and Barry Sternlicht (Credit: Andrew Toth/Getty Images)
Leon Black and Barry Sternlicht (Credit: Andrew Toth/Getty Images)

Billionaire investor Leon Black went big on hotels in the years following the Great Recession, as alternative lenders like his Apollo Global Management stepped into the void left when banks curtailed some of their riskiest lending due to new regulations.

But now, as the Covid-19 pandemic slams into the hospitality industry, Apollo, Starwood Property Trust, Blackstone Mortgage Trust and others in the shadow banking system stand to lose more as their search for risky, higher-yielding deals leaves them exposed to hotels.

“There’s more risk in hotels than, say, a commercial building where you have a rent roll and you know the rent is coming in,” said Eric Orenstein, an attorney at Rosenberg & Estis who works on hotel financings. “[A hotel] can’t guarantee occupancy.”

In the years following the Great Recession, alternative lenders like private debt funds, mortgage real estate investment trusts and other nonbank lenders started playing a bigger role in the financial system. Unburdened by some of the stricter regulations that tied the hands of banks, they sought out high-risk, high-reward investments to juice their returns.

And they found just what they were looking for in hotels. Yields on hospitality properties can be 50 to 100 basis points higher than office properties. That’s because of the inherent volatility of the sector: Rents get reset every night, and shocks to the system — such as the current global pandemic is proving — hit hotels fast and hard.

Traditional bank lenders, experts said, usually steer clear of exposing too much of their balance sheet to hotels, ranging somewhere in the area of 6 to 10 percent. But many nonbanks go much higher.

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Apollo Global Management’s mortgage REIT — Apollo Commercial Real Estate Finance — had 26 percent of its $6.3 billion portfolio allocated to hotels in 2019, the company’s latest annual report with the Securities and Exchange Commission shows. That’s the largest slice of the pie, and up from 12 percent in 2010.

A spokesperson for Apollo did not respond to a request for comment.

Other mortgage REITs have high exposures as well, among them Colony Credit Real Estate (14 percent), Blackstone Mortgage Trust (13 percent) and TPG Real Estate Finance Corp. (13.4 percent).

Starwood Property Trust had nearly 21 percent of its real estate debt portfolio allocated to hotels, second only to office properties. (Starwood has investments other than commercial real estate debt. In terms of its overall portfolio, hotel debt makes up about 11 percent.)

Starwood Capital Group CEO Barry Sternlicht earlier this week acknowledged the severity of the Covid-19 pandemic, but said he believes it will abate sooner than some projections that say it will persist through the summer.

“We’re facing World War III for 90 days. It’s not World War III for five years, or World War III for 10 years,” he said Tuesday.

Contact Rich Bockmann at or 908-415-5229.