Hotel loan defaults double in the US

Source : Business Times – 2 July 2009

Room rates and property values tumble as recession curbs travel

As many as one in five US 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 US$17.3 billion in the second quarter through June 24 from US$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 pro-perty in November, expects hotel defaults to increase by as much as US$2 billion next quarter, said analyst Jessica Ruderman.

‘Hotels without question will have the highest foreclosure rate of any commercial real estate sector,’ said Mr Rosen, who runs a real estate hedge fund with US$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 securitised mortgage market that fuelled an 88 per cent gain in US commercial prices from 2001 to late 2008 is dormant. Luxury hotel revenue fell 28 per cent in April from a year earlier and has dropped for 12 straight months, according to Smith Travel Research Inc in Hendersonville, Tennessee. The 29 per cent decline in March was the biggest since October 2001.

A third of the US$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.

‘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.’

Securitised loans due over the next 12 months total US$99.8 billion for all commercial mortgage-backed securities, 20 per cent 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 securitised loan balance of US$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 utilised 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.’

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

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 per cent 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 per cent 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, Ms Ruderman said.

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 US$1.3 billion two years ago, defaulted on four loans totalling US$361.4 million, Realpoint said on 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, recently defaulted on a US$69.8 million loan held by PB Capital Corp, 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.