As of today, I am officially declaring the opening of the hotel default floodgates. Get ready for 400 days and 400 nights of the greatest deluge in hotel loan history. In the past two weeks, I have heard of almost 100 (92 to be exact) hotel loans going into servicing because of default. This is not too far off my prediction that 4,000 hotel loans will default (an 8% default rate on the 50,000 US hotels) in the next year. On a typical business day that would be 16 hotels going into default or 80 a week. (About 250 business days in a year divided into 4,000 times five days). And not to rely on just my personal experience, today’s Wall Street Journal says that Trepp LLC says that currently 5% of securitized hotel mortgages are in default. Did that sink in? ALREADY, JUNE 2009, 5% of securitized hotel mortgages are in default.
The sentiment of CMBS Special Servicers handling hotels at this week’s CMSA conference in New York was grim as expected. Several quotes sum up the gloom..
“The recession has not bottomed and commercial loan defaults peak on average two years after the recession is over and stay there for a long time (two years plus)”.
“Reaction to the appraisals we are getting is initial disbelief followed by resigned acceptance”.
“Loss severity for hotels this time will be more severe than before – to date there have been 420 liquidated hotel loans with an average loss severity of 30.8%”.
And one example of the carnage to come… “a hotel initially valued at $260M in 2007, with a loan of $150M and recently appraised at …$79M. The mezz is gone and not much if any is left for the B piece.”
The conference hotel would not allow securities owners to stay in rooms above the 3rd floor.
A highly important meeting for sales of hotels and value enhancement is occurring today in New York. If agreement can be reached soon, CMBS Special Servicers will be able to sell foreclosed hotels with SELLER FINANCING- thus increasing dramatically the value they get for their REO and providing brokers and buyers with some needed relief.
Current REMIC Rules (don’t go to sleep on me now) and IRS regulations provide that once a Special Servicer forecloses on a hotel and takes the asset into REO the loan is extinguished. The new rule change advocated by a group of influential Special Servicers would allow them to provide seller financing after foreclosure. This would significantly increase the value of the hotels- SELLER FINANCING!!- and get the deal pipeline flowing.
Only snag is opposition from the A rated CMBS bond holders who want to get paid off when the hotel is foreclosed and use the proceeds elsewhere. But the B piece owners would rather wait until the markets get better to increase the chance that their B piece will be worth something. Today’s meeting is between Servicers and A bond holders – if they can come to agreement the powers in DC have said the rules will be changed. Brokers should pray for agreement! Stay tuned.
Sunstone just announced that it is giving back the W San Diego to the special servicer. They paid $96M for hotel in 2006 and took out a $65M mortgage. Do I see a $31M loss here? Most significantly, this is the start of a flood of high end end luxury hotels that will be given back this year and next.
In addition to terrible markets, most luxury hotels are down 30% and morbidly obese loans- these hotels just cannot lean out their operations enough to make an operating profit much less make debt service.
And finally the stigma that once had owners, especially public REITS like Sunstone, pause before throwing in the keys is absolutely gone. Every owner and REIT CEO I have spoken to has already decided to give back their hotel once it makes no sense to feed it. And given market trends, this will soon be the norm. For a good article see today’s Wall Street Journal… http://online.wsj.com/article/SB124441071403592235.html