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Advisers See Opportunity in Surge of Troubled Hotel Loans
(Friday, 01 May 2009)
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By John Covaleski, Commercial Real Estate Direct Staff Writer
While special servicers scramble to keep up with a surge in troubled loans, hospitality-industry
consultants and asset managers eye an expanding opportunity to sell their workout expertise for
loans on hotels.
They claim that the servicers are particularly hard-pressed to handle workouts of hotel loans
because of the sector's reliance on business income, as opposed to solely rents as in other
sectors.
A total of 137 securitized hotel loans totaling $1.7 billion are now delinquent, according to
Realpoint, and account for 9.6 percent of all delinquencies. That's up sharply from 40 loans
totaling $368 million last November, when hotel loans accounted for 6.8 percent of all
delinquencies.
Meanwhile, 147 hotel loans with a balance of $2.6 billion are in special servicing, providing a
solid indicator that hotel-loan troubles will continue.
Standard & Poor's expects the hotel loan-delinquency rate to quadruple to 8 percent by the end
of the year.
"Hotels are not real estate, but rather a business housed in real estate," explained Morris Lasky,
chief executive of Lodging Unlimited, a Chicago hotel consulting and management firm that is
among those jockeying to get assignments from servicers. "Special servicers aren't necessarily
going to know that much about the business," he said.
Hotels are more management intensive because of their daily turnover of guests, than traditional
commercial properties, where space is leased to tenants for extended periods of more than a
year.
Lasky theorized that servicers' lack of knowledge of hotel operations may be keeping them from
reaching out to help owners of poor-performing properties determine ways to improve cash
flows and avoid defaults.
"If you own a hotel whose loan is in special servicing and you want to have the servicer take a
re-look at the loan, forget about it," said Richard Warnick, head of Warnick & Co, a Phoenix
hotel asset manager and investment banker. "The only way to get special servicers' attention
now is to stop payment and shift the loan from technical to monetary default."
"Workouts are not happening for hotel loans because the special servicers just have too much on
their plates," Warnick added.
Indeed, Fitch Ratings recently determined that asset managers at special servicers are now
handling an average of 14.5 loans each. That's up 54 percent over the past quarter. In total, $24
billion of securitized loans are now in special servicing, according to Realpoint.
Meanwhile, $17.2 billion of CMBS loans are more than 30-days late.
In an indication that troubled loans are multiplying faster than servicers' ability to handle them,
the amount of loans that are more than 90-days delinquent grew by $960 million in April.
Servicers were able to move only $330 million of loans to foreclosure and $65.9 million to real
estate-owned during the month.
"Servicers are definitely drinking from the fire hose when it comes to work - there's so much
coming at them," said Ann Hambly, president of 1st Service Solutions of Dallas, which advises
borrowers and represents them in dealings with servicers.
She said potential problems for troubled hotel loans include servicers' practice of managing or
"sweeping" the available cash from properties taken in foreclosure. That's generally not too
much of a headache for an office building, whose tenants are usually signed on for long-term
leases. But hotels rely on day-to-day leases, and any degradation of service or amenities is
usually felt immediately.
"A repositioning of an office or industrial (property) can be carried out over several months, but
if it's not done right on a hotel, the property can end up shut down in a week. Their income is
from daily guest not annual leases," she said.
Steve Van, president of Prism Hotels & Resorts, a Dallas hotel owner/operator and consultant
that has provided workout services to several of the major loan servicers, concurred.
"Lenders and owners have never faced tougher times," he said, noting that with hotel
performance weakening, lenders are less likely than ever to provide their borrowers with the
cash needed to meet ongoing expenses, such as payroll.
He has warned that unless lenders and servicers become pro-active in helping troubled hotel
operators work out their problems, there will be a surge of borrowers abandoning their
properties.
To be sure, loan servicers all are staffed with hotel specialists.
CWCapital Asset Management, for example, has five people with hotel backgrounds, including
property management experience, in its special servicing unit.
David Iannarone, managing director at CW, said that his office has not had any particular
problems dealing with hotels loans, but noted that an uptick in that business has prompted him
to have the group's five hotel specialists work on only those types of loans rather than handling
all property types.
CWCapital is among five of the largest special servicers of hotel loans. It is the named special
servicer of CMBS deals that contain 358 hotel loans with a combined balance of $8.3 billion. A
total of $461 million is delinquent, according to Bloomberg (for function, type DQSP.)
LNR, meanwhile, is the top special servicer of hotel loans and is named on CMBS deals that
hold $18.6 billion of hotel loans. A total of $621 million of that is delinquent.
Top Hotel Loan Special Servicers
Servicer
# Hotel Loans
Balance of Hotel Loans ($Bln)
Delinq ($mln)
LNR Partners
1,039
18.56
621.29
Midland Loan Services
404
6.60
303.66
CWCapital
358
8.29
460.69
Capmark Finance
290
5.07
64.67
Orix Real Estate Capital Markets
130
0.70
91.75
Source: Bloomberg
The expectation is that hotel delinquencies will continue increasing due to a steep drop in the
sector's operating fundamentals.
In the first quarter, nationwide revenue per available room skidded 17.7 percent, according to
Smith Travel Research. Occupancy dropped 6.3 percentage points from last year to 51.4
percent, while the average daily room rate fell 7.7 percent to $100.13. It projected a RevPAR
drop of 9.8 percent for the full year, thanks to a hoped-for uptick in business during the second
half.
The Plasencia Group, a hotel broker and asset manager, has predicted that a RevPAR drop of
just 7 percent this year could be devastating to the hotel sector's ability to meet debt obligations.
It also said that kind of RevPAR drop would reduce income levels to the point of creating
debt-service shortfalls on a hypothetical loan on a property generating $1.27 million of net
operating income.
There's also the general sense that many hotel loans written in 2005 to 2007, like those on other
property types, were based on projections of future income growth that has and is not being
realized during the economic recession.
Problems on hotel loans are compounded by the fact that in most cases, their collateral is tied to
long-term management contracts that cannot be voided or rewritten if the property changes
hands through a sale or loan foreclosure.
"Lenders really like hotel properties with brand names," said James Butler, a partner in Jeffer
Mangels Butler & Marmaro, a Los Angeles law firm with a hotel practice that provides
asset-management services. There was a point, he said, "where you could not get a loan without
a brand name attached to it. The problem now is that the contracts are complex and the
managers are not always the best fit for a property."
He added that terminating those contracts can be difficult. The process of re-branding a hotel
and changing management takes a fairly high degree of hotel-management expertise.
Comments? E-mail John Covaleski or call him at (215) 504-2860, Ext. 208.
Copyright ©2009 Commercial Real Estate Direct, a service of FM Financial Publishing LLC.
All rights reserved.
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