Real Estate Forum - May/June 2009

There could be even more challenges on the horizon beyond 2009 and 2010. According to S&P, 182 loans with a current outstanding balance of $10.4 billion are slated to come due in 2011. Consequently, these maturities may come at the same time delinquencies peak, thus making for a tough 2011.

More problems may surface in floating-rate loans, which were underwritten at the height of the market with aggressive terms and short-term maturities on

When
you look
at market
performance,
we are in an
unprecedented
time in terms of
RevPAR declines.”
Geoff Davis
HREC Investment Advisors

transitional properties. The vast majority of floating-rate paper—82%—was originated in 2006 and 2007, reports S&P. Although it counts only three floating-rate loans scheduled to reach maturity this year, S&P finds that “many lodging loans with remaining extension options are transferring to special servicing because they are not meeting the extension requirements in place.”

Yet not every hotel under fiscal duress ends up in foreclosure. The more likely scenario is some type of a workout between the lender and borrower. “Lenders are very reluctant to take assets back right now,” Davis says. “If at all possible, they are going to try to do a workout, give an extension or forbearance ”

Nevertheless, a certain percentage of properties aggressively underwritten at the top of the market with unrealistic projections will end up in default and as REO, Davis says. “From our perspective, of all distressed hotel deals, about 20% end up as bank-owned assets,” he says. “Conservatively, over the next 12 to 18 months, you are going to see at least 300 hotels foreclosed upon. More realistically, the number is between 700 and 800.”

In 2008, Schaumburg, IL-based

82 REAL ESTATE FORUM MAY/JUNE 2009

Hostmark Hospitality Group oversaw seven lodging properties that were involved in a foreclosure, receivership or bankruptcy. The company’s president, Jerome F. Cataldo, says that while such assignments had previously been slow to materialize, he expects the pace to pick up as 2009 progresses.

“Lenders are still reluctant to go down that path,” he says. “For the initial properties that we’ve seen in distress, the lenders have been willing to work out some extensions before they make a monumental decision. We are starting to see, however, the first signs of that changing a bit. We’ve spent a lot of time in the past four months staying very close to lenders and special servicers and people that we have relationships with to monitor that. We are hearing that the trickle is starting, and there is a lot to come.”

According to Real Capital Analytics’ Q1 statistics, 174 hotel properties with an aggregate worth of $8.8 billion are in the troubled asset category, with 47 valued at $647.8 million in lender/REO status. RCA recently added a new category: restructured and extended, which encompasses six lodging properties worth $829.5 million.

Yet John DePaul, president and CEO of National Hospitality Holdings LLC in Philadelphia, says that owners and even lenders appear unwilling to acknowledge the dwindling worth of their lodging holdings due to deteriorating fundamentals. “We are fundamentally resetting the value of hotels right now,” he says. “No one is willing to face the fact that either their assets have no equity in them or that the debt is higher than the value of the asset. I don’t think a lender, servicing company or equity player has any interest in wanting to face that elephant in the room at this point.”

When a hotel falls into financial difficulties, a management company can play a number of roles. It may come in as a court-appointed receiver, in which its main duty is to protect the value of the asset as a neutral party, or act as a mediator between the owner and the lender for a loan workout. Or a company may simply be brought in as the new operator for a troubled hotel or to give an opinion of value.

Since the end of 2008 and the beginning of 2009, NHH has completed six troubled asset advisory assignments, with three more in the pipeline, according to DePaul. He declines to give specifics of those assignments, saying only that his company is typically called in by the

HOTEL PERSPECTIVES

equity partner that owns the hotel, the lender or a servicing entity. “For example, we may be called in prior to an owner of debt being put on notice of default,” he says. “We could help work out the relationship between the borrowing entity and the lender.”

In one high-profile deal, Hostmark was tapped in July of last year to take over the management of the 162-room Hotel Blake in Chicago. The property was originally envisioned as a condo hotel, but ended up in bankruptcy. “We’ve been in the process of evaluating the ongoing strategies for that hotel and have been recommending to the controlling interest what some of its options are going forward,” Cataldo says. “I’m not at liberty today to reveal those, but you will see changes going forward in the positioning of the hotel.” He would not reveal the name of the controlling interest, referring to it only as the mezzanine lender.

Although the number-one tactic is to dispose of the property quickly, Cataldo says sometimes it’s better to wait. “It could be a situation where holding the asset for a year or two makes more sense than immediately putting it up for fire sale,” he says.

For now, however, potential buyers are

No one is
willing to
face the fact that
either their assets
have no equity in
them or that the
debt is higher than
the value of the
asset.”
John DePaul
National Hospitality Holdings

keeping their powder dry. “What we’ve seen primarily to date on a larger scale has been activity to buy the debt as an initial strategy,” Cataldo says. “There is still a strong belief, too, that values are going to continue to decline. So there are a lot of people on the sidelines, thinking it may be too early to try to take advantage of the opportunity.”