•Hotel Loan Defaults in U.S. Jump to $17 Billion as Recession Curbs Travel

Discussion in 'Economics' started by ByLoSellHi, Jul 1, 2009.

  1. There is about to be a bloodletting in the hotel industry, the likes of which they've never seen.

    The number of new hotels, built on 125% LTV ratios with loans from idiotic banks, from about 2003 to 2007, is astounding, and at a time when those building paid inflated prices for the land and the labor.

    Now that business has dropped 60% (the officially listed revenue numbers showing 30% declines are old), and and the value of the hotel itself has fallen around 50%....well, good luck to this industry.


    Hotel Loan Defaults Double in U.S. as Recession Curbs Travel
    Share | Email | Print | A A A

    By Dan Levy and Nadja Brandt

    July 1 (Bloomberg) -- As many as one in five U.S. hotel loans may default through 2010 as the recession means companies are spending less on travel and perks, according to University of California economist Kenneth Rosen.

    The value of hotel properties in default or foreclosure almost doubled to $17.3 billion in the second quarter through June 24 from $9 billion at the end of the first quarter, data compiled by Real Capital Analytics Inc. show. The New York-based research firm, which began tracking distressed commercial property in November, expects hotel defaults to increase by as much as $2 billion next quarter, said analyst Jessica Ruderman.

    “Hotels without question will have the highest foreclosure rate of any commercial real estate sector,” said Rosen, who runs a real estate hedge fund with $310 million in assets and is chairman of the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley.

    Hotel owners are defaulting as room rates and property values tumble and the securitized mortgage market that fueled an 88 percent gain in U.S. commercial prices from 2001 to late 2008 is dormant. Luxury hotel revenue fell 28 percent in April from a year earlier and has dropped for 12 straight months, according to Smith Travel Research Inc. in Hendersonville, Tennessee. The 29 percent decline in March was the biggest since October 2001.

    A third of the $8.6 billion in securities backed by hotel loans due in 2010 are at risk of defaulting, data compiled by credit-rating firm Realpoint LLC in Horsham, Pennsylvania, show.

    ‘High Risk’

    “Rates, revenue and cash flow levels across the hotel industry are projected to continue to decline,” said Frank Innaurato, managing director of CMBS analytical services at Realpoint. “If those projections stay true, a lot of these hotel loans that are scheduled to mature are at high risk of defaulting.”

    Securitized loans due over the next 12 months total $99.8 billion for all commercial mortgage-backed securities, 20 percent of which are hotel loans, ranking them second after office building loans, according to Realpoint data.

    A total of 753 properties bearing the Bethesda, Maryland- based Marriott International Inc. brand have a combined outstanding securitized loan balance of $10.4 billion. More than 270 hotels with the Blackstone Group LP’s Hilton Hotels Corp. brand have $5.6 billion in debt, Realpoint said.

    “We do not expect any significant impact,” said Ellen Gonda, a spokeswoman for Beverly Hills, California-based Hilton, in a statement. “Like most of our competitors, our owners have utilized the CMBS market in some cases to finance their hotels. These are certainly challenging times in the industry, but we have very few defaults and this is a small component of our 3,300 hotels worldwide.”

    Hyatt to Starwood

    Forty-eight properties bearing the Chicago-based Hyatt Corp. brand have $1.6 billion in outstanding debt; seven carrying the Windsor, U.K.-based Intercontinental Hotels Group Plc name have $328.4 million; and 17 bearing the White Plains, New York-based Starwood Hotels & Resorts Worldwide Inc. name have $114.1 million, according to Realpoint.

    A Marriott spokesman referred to comments made in April that the company was focused on cutting costs and would delay certain expenditures and investments to help owners, particularly those who invested at the peak of the market.

    Officials at Starwood, Hyatt and Intercontinental Hotels didn’t respond to requests for comment.

    The owners of hotel buildings rely on chains to help them manage and operate their properties, set room rates and hire staff. The chains can have multiple brands serving different market segments.

    ‘Cancel Everything’

    The recession has led to a “cancel everything kind of attitude” for business travel, said Vasant Prabhu, Starwood’s chief financial officer, at a June 1 Goldman Sachs Group Inc. lodging and gaming conference, according to a transcript.

    “It’s too early to call a turn,” he said.

    Bookings are down 50 percent as financial institutions that received funds from the government’s Troubled Assets Relief Program scale back costs, said Kelly Foy, chief executive officer of Elite Meetings International, a luxury event planner in Santa Barbara, California.

    Revenue per available room, a measure of hotel rates also known as RevPAR, dropped 18 percent from January to March this year compared with 2008, with luxury properties faring worse than the overall market, according to Moody’s Investors Service. The slump means “sharply downward ratings pressure” on CMBS deals, the New York-based ratings company said.

    Of 1,036 hotels on Real Capital’s distressed list, 447 are Extended Stay Inc. properties; 126 are controlled by Atlanta- based Homestead Studio Suites Hotels; and 79 are run by Hillard, Ohio-based Red Roof Inns Inc., Ruderman said.

    Extended Stay

    Extended Stay, purchased in 2007 by a group led by David Lichtenstein, filed for Chapter 11 bankruptcy protection on June 15. Red Roof, acquired in a Citigroup Inc.-led buyout for $1.3 billion two years ago, defaulted on four loans totaling $361.4 million, Realpoint said June 23.

    Owners of the 250-room Watergate Hotel, part of the complex made famous by the bungled 1972 burglary that led to President Richard Nixon’s resignation, defaulted on a $69.8 million loan held by PB Capital Corp. this month, Real Capital Analytics said.

    Kurt Sachs, senior managing director at New York-based PB Capital, said the firm has “offers on the table” to purchase the debt. Spokeswoman Tasha Stancill at owner Monument Realty LLC in Washington declined to comment.

    To contact the reporters on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net; Nadja Brandt in Los Angeles at nbrandt@bloomberg.net.
    Last Updated: July 1, 2009 00:00 EDT
  2. Going from memory, I'm pretty sure that there is a hotel shortage in NYC as many hotels converted to residences and lead times to replace are long.
  3. That's absolutely true. But that's nearly a NYC area phenomena.

    They built thousands of spanking new Holiday Inn Express' and Hilton Garden Inns in flyover country during the RE boom.

    I'm not as convinced that what's termed a 'shortage' in even New York now won't return to equilibrium (or nearer), however, if business travel keeps getting hammered and if the financial sector keeps bleeding - which I fully expect both to happen, as realistic as I am.

    Some call me bearish, but I swear I'm just being realistic.
  4. greddy


    Just came back from Las Vegas.

    City Center is a huge development with
    Hotels, condos, and lord knows what else.

    Hopefully this will work out since this looks
    like the biggest project in Las Vegas history.
  5. That was a couple years ago. Now some residential developments are being converted to hotels because they have better prospects than trying to sell overpriced condos or leasing out "luxury" rentals. Really, it's just grasping for straws.