As $17.5 billion in securitized loans backed by U.S. hotels come due in the next two years, lenders are doing more to avoid foreclosure on lodging properties than on any other type of commercial real estate.
Workout agreements have been reached on 53 percent of distressed hotel loans since the start of 2008, the highest among six commercial-property categories, according to data from Real Capital Analytics Inc. in New York.
Special servicers, who negotiate with landlords on behalf of investors in commercial mortgage-backed securities, typically install a receiver or hire a broker to sell an office, apartment or industrial building with multiyear leases. Hotel rooms, on the other hand, rent by the night, and contracts with such operators as Marriott International Inc. may be terminated if a property is repossessed, making it harder to run or market.
Hotels are “operating assets where income goes up and down overnight,” said Rick Kirkbride, chairman of the resort, restaurant and recreation practice group at law firm Paul, Hastings, Janofsky & Walker LLP in Los Angeles. “Servicers do drag their feet with them a lot more because they aren’t sure what to do.”
Among hotel loans being worked out is $1.44 billion in financing backed by 355 La Quinta Inns & Suites owned by a unit of New York-based Blackstone Group LP. It will mature on July 9, 2012, after three one-year extensions, according to Standard & Poor’s. The loan was transferred in September to the special servicer, Bank of America Corp., after the borrower requested modification.
“La Quinta is performing strongly and has over seven times cash flow to interest expense,” Peter Rose, a Blackstone spokesman, said in October. “Special servicing is a routine precondition to requesting an extension and we have done this in over a dozen other similar situations.”
The loan was sent to special servicing to allow time to work on the borrower’s request to modify or extend the loan, S&P said. Blackstone indicated that, under existing market conditions, it’s unlikely to get refinancing for the $2.93 billion loan balance by July, according to S&P.
Special servicers try to avoid taking over properties like Blackstone’s La Quinta hotels. The 53 percent workout rate for hotels compares with 45 percent for apartments, 37 percent for retail properties and 29 percent for industrial, according to Real Capital. The remaining hotels either have been taken over by lenders or their owners continue to negotiate with servicers.
No Easy Solution
“We work long and hard to not take title to hospitality assets because it’s not an easy solution to operate,” Tom Nealon, vice chairman of LNR Asset Services, the special-servicing unit of LNR Property Corp., said in October at an Urban Land Institute conference in Los Angeles. With “office and other properties that are not as labor-intensive, the marketability is better,” he said.
Loans totaling $978 million backed by the Kyo-Ya hotel portfolio, which includes six luxury properties in Hawaii and California and is owned by New York-based investment firm Cerberus Capital Management LP, were transferred to a special servicer in April because the borrower was unable to pay off the debt by its July maturity, according to Morningstar Inc.
The servicer, Wells Fargo & Co., agreed in July to a standstill in exchange for the borrower’s admission of default, Morningstar said. Conditions of the forbearance agreement included making a $77.2 million payment and promising that all future excess cash flow will be applied to the loan principal. The primary mortgage was extended until July 2013.
“Having some type of extension on an existing loan already in place, rather than a foreclosure or REO situation, is more likely in hospitality than in other commercial sectors,” Stacey Berger, executive vice president at Midland Loan Services Inc., said in October. REO refers to real estate owned by lenders following a foreclosure.
A loan with an original balance of $425 million and backed by luxury hotels owned by Beanie Babies creator H. Ty Warner -- including Four Seasons Hotel New York, San Ysidro Ranch and Las Ventanas Al Paraiso -- was transferred in October 2009 to a special servicer, Berkadia Commercial Mortgage LLC.
In May 2010, Berkadia agreed to a maturity extension until January 2011, which included a principal payment of $25 million, and later approved another extension until January 2012, according to Morningstar. The second extension included an additional $10 million principal payment.
‘Make It Work’
“With portfolios of assets of big hotels, you often have institutional or Wall Street-backed borrowers who can come up with more money and a business loan and, given time, we can make it work,” said Andrew Hundertmark, senior vice president at CWCapital Asset Management LLC. “With $5 million and under, you’re often dealing with less sophisticated, less financially secure borrowers. Those assets tend to be sold as notes or REO more often than larger deals.”
Hotels were among the first real estate categories to recover following the recession that ended in 2009, aided by a rebound in business travel and tourism. Lending to U.S. lodging properties increased fivefold in the third quarter from a year earlier, the biggest gain of any real estate asset class, the Mortgage Bankers Association reported Nov. 3.
High-end hotels in such major U.S. cities as New York, Boston and San Francisco have fared best during the recovery. The occupancy rate was 71 percent for the highest-priced segment of the lodging market this year through October, compared with 62 percent for all U.S. hotels, according to Smith Travel Research Inc. of Hendersonville, Tennessee.
Wall Street banks have arranged $27.2 billion in bonds linked to skyscraper, shopping mall, hotel and other commercial property loans this year, compared with $11.5 billion in 2010, according to data compiled by Bloomberg. Sales plummeted from a record $232 billion in 2007. Lenders pulled back from making new loans to package into securities in July as European debt woes roiled credit markets, making it harder for borrowers with debt coming due to refinance.
Hotel foreclosures may accelerate amid a sluggish economic recovery. In the last two months of this year, $5.52 billion in loans backed by hotels are maturing, followed by $9.11 billion next year and $2.9 billion in 2013, according to New York-based data provider Trepp LLC.
Federal Reserve policy makers are forecasting “moderate” growth for the U.S. economy that won’t push unemployment below 8 percent until 2013 at the earliest. The jobless rate was 8.6 percent in November and had been at least 9 percent in all but two months since May 2009.
The surge of commercial mortgage-backed securities needing replacement debt “is going to be a close to catastrophic problem,” Robert Sonnenblick, chairman of hotel developer Sonnenblick Development LLC, said at the Bloomberg Commercial Real Estate Summit in New York on Nov. 9. “The end result of all of this is you’re going to see a huge increase of hotel foreclosures.”
Not all hotel owners with debt problems have received forbearance. Innkeepers USA Trust, which owns hotels in 20 U.S. states and the District of Columbia, including Residence Inns by Marriott and Hampton Inns, was acquired in October by Cerberus Capital Management LP and Chatham Lodging Trust after filing for bankruptcy protection in July 2010.
Foreclosures are most likely outside of major metropolitan areas, where smaller loans often are backed by family-owned hotels.
“In secondary and tertiary markets, the owners themselves don’t have any real equity left at all,” said Kirkbride of Paul Hastings. “There, it’s much more likely that they’ll have to let these assets go.”
In larger cities, few foreclosures and more loan workouts mean a dearth of buying opportunities. Ian Schrager, the pioneer of the boutique hotel concept, this year agreed to buy two development sites in New York City because he doesn’t expect existing properties to come up for sale at reasonable prices in the near future.
“Having gone through three or four bad cycles, other than in the early ’90s I haven’t seen an avalanche of foreclosures then, and I don’t expect to this time,” Schrager said in an interview. “Hotels are operating businesses and the only reason a bank will take on such an asset is if they’re dealing with someone less than forthright. So in isolated areas we may see foreclosures, but not on a whole.”
Kirkbride said he expects few hotel foreclosures in the coming year.
“It would be better for the economy, and for the hotel sector specifically, if more hotels would wash their way through the system and be sold at the true, current, fair-market value,” he said. “But I don’t see that happening.”