By Rick Swig
Lenders to Lodging Industry
Must Come Out of Their Foxholes
THERE HAS BEEN SPECULATION ON MAJOR
shifts in the hotel ownership landscape as a result
of the current market conditions. Average year-end 2009 hotel revenues are expected to be 17%
to 20% lower than the previous year, which may
result in net operating income or EBITDA declines
of between 30% and 40%, depending on whether
the hotel is limited service (lower decline) or luxury
(higher decline). Values have plummeted, ensuring
that a large percentage—and maybe a majority—of
hotels are now worth less than their total debt levels
as equity has disappeared.
With the aforementioned declines in NOI, hotel
owners are finding themselves in negative cash flow
positions, especially during the lowest demand periods. Many were able to survive the traditionally weak
first several months of this year thanks to summer and
fall vacationers. But what will happen after November,
with seasonal tourism declines, as well as historically
low demand in convention and business travel?
It is obvious that hotel real estate values have
plunged, debt levels exceed the values of many hotels
and continuing the “new normal” is unsustainable. But
the question remains, what will shake the system loose
and recalibrate value and ownership structures? The
answer lies with hotel lenders, many of which are hiding in foxholes, knowing that life will change once they
poke their heads out.
The CMBS and syndicated loan formats, which
supplemented traditional loans, were not ultimately
based on the success of the underlying real estate
value, but on the amount of fees that could be
generated for the related participants. Few lenders
apparently understood the potential to “loan to own,”
as many of them have no financial reserve infrastructure to manage distressed real estate. These lending
structures depended on continued growth without
acknowledgment of potential market corrections,
which, of course, eventually occur.
The inevitable correction has occurred and the
process of unraveling the tangled kite strings of debt
structures is daunting. There is little incentive for
owners or lenders to unwind the mess because it will
be painful with the departure of participating entities
and resulting financial loss. Somehow nobody volunteers for prospects like these.
Some hotel owners are actually forcing the issue
with their lenders by initiating the transfer of assets
to them, realizing they will never recoup their cash
losses or asset value. Many lenders are resisting the
transfer, realizing they have overstated the values of
the same assets on their own books and will face
serious financial circumstances. Others may just
“extend and pretend,” hoping distressed owners will
magically resolve their financial challenges.
Forecasts from firms such as Smith Travel Research
and PKF Consulting indicate that there will be little or
no revenue growth in 2010. During the first few months
of next year, lenders or their servicers will have to come
out of their foxholes. Financially challenged hotel owners will no longer have the reserves to sustain their debt
service obligations, not to mention their operations.
There is also the billions of dollars worth of CMBS
debt scheduled to mature in 2010 and 2011. From
what source will the replacement debt emerge, or will
current lenders become instant owners? Questions
remain about what structures will be in place to handle
what could be a massive transition in hotel real estate.
Can syndicate lenders become effective owners? Will
current owners be asked instead to become custodians on behalf of their lenders? Will debt miraculously
appear to complement vulture equity, which is waiting
on the sidelines? And…what is a hotel asset actually
worth these days, anyway?
Rick Swig is president of
RSBA & Associates, a hospitality industry consulting
firm based in San Francisco.
He may be contacted at
Lenders and borrowers must resolve their
financial relationships before the entire industry
is plunged into chaos.
The hotel real estate sector has always been
alluring for investors and lenders, even those
without a grasp of how these businesses function.
As a result, there has been consistent weaning of
owners and lenders when cyclical downturns occur.
While this cycle will be no different, it is critical that
some steps must be taken to mitigate financial
disaster. Hotel businesses will still require oversight,
expertise and financial subsidy to continue their
operations. Lenders and borrowers must resolve
their financial relationships before the entire industry
is plunged into chaos. ◆
The views expressed in this column are those of the
author and not necessarily REAL ESTATE FORUM.