US hotels: Distressed and at high risk of foreclosure

CHICAGO, Illinois (eTN) – In the US, hotel loan defaults and foreclosures are on the rise. Alarmingly, the rate of increased shutdowns is expected to speed up even further. Hotel owners are returning keys and walking away from their properties en-masse, echoed lenders and underwriters involved in hotel deals.

The total unpaid balance on commercial mortgage backed securities (CMBS) pools is over $835 billion. One third of the $8.6 billion in securities backed by hotel loans due in 2010 is at risk of defaulting. Some 20 percent of the $100 billion in CMBS loans due next year is hotel loans, according to Realpoint Research.

According to Trepp LLC, a provider of CMBS and commercial mortgage information and tracker of hotel loans including CMBS pools, there are about 3,800 hotel CMBS loans; of this amount, about 2,300 were done in 2006 and 2007. Almost none were done in 2008.

In January 2008, 0.48 percent of all hotel loans in the CMBS pools were delinquent, further reported Trepp. In January 2009, the percentage increased to 1.72 percent. This July, it went up to 0.65 and just this month, delinquencies rose to 1.22 percent, said Trepp.

Real Capital Analytics report that in the first quarter, the value of hotels in default of foreclosure was placed at $9.0 billion. In the second quarter, it almost doubled to $17.3 billion and in Q3, the projected value will have reached $19.3 billion.

Before a hotel is foreclosed, usually an owner should contact the special servicer about the debt service, said Mark Skinner, partner, the Highland Group. “One typically gets a ‘hello’ letter from the servicer when things start to go south on the loan situation,” he said during the Midwest Lodging Investor Summit in Chicago.

Daniel Marre, partner, Perkins Cole advised owners anticipating default to negotiate early with the lenders. “However, often, there is no early negotiation with the lenders. It would be helpful if special servicers re-underwrite the loans,” he said adding the services have authority to act on behalf of the estate trustee.

Defaults are growing across the board, across all tiers of hotels, all across resorts in the US. Lenders unfortunately would do everything possible not to take back troubled assets. That puts 5.4 percent of all US hotels in default currently. This number is expected to increase to 8 percent and up to 10 percent by the end of 2009 and perhaps 15-20 percent by next year.

“Some assets will have higher priority. Some who have the game plan in place can make it through this economic storm,” said Walker Geyer, managing director, Capital Markets, Paramount Lodging Advisors.

Mitch Miller, principal, Miller Law Group, said that if a borrower is not in actual default yet, he has 6 months down the road to get ready. “In an imminent default, they need to seek the advise of the special servicer and have some real good plan to make payments down the line,” he said.

Skinner thinks the “happy” days are just around the corner. To think that this recession has surpassed historically the longest duration of decline by 20 months (compared to Nov 1973-75 of 17 months), has seen the largest S&P decline over 48 percent (versus that of 1973-75 of 34 percent) and has seen a low point (P/E ratio) of 13.38 (better than March-Nov 2001’s 27.67 low point on P/E and was over recession period 2 years later), this recession will have to be over soon… given a few more months, said Skinner looking ahead.