Here are some recent comments I have heard on the state of hotel defaults (and to protect the innocent and my relationships I won’t do attributions).
“Hotel owners are in a mass grave that hasn’t been discovered yet” (from a major hotel owner speaking, I guess, from the grave).
“What I, as an owner, worry most about at night is LIBOR. I own fifteen hotels on floating rate loans and if there is a 200 basis point increase I am finished.” (Another body in the grave? And by the way, does anyone really think that interests will stay low for many more years???)
One very smart lender stated that the mantra for servicers on hotel loan modifications is…
“Blend and extend, then
Blend and pray, then
Blend and pretend, and finally
Blend and defend.”
“This is a structurally different hotel recession than we have ever had. The worst since records started in 1937.” (Does anyone reading this blog remember 1937?)
Read it today in the Wall Street Journal- top paragraph left hand side… “IF THE ECONOMY RECOVERS AS ANTICIPATED AND BERNANKE MOVES TO RAISE THE INTEREST RATES…” If that happens then all the nightmares about floating rate hotel loans will come true. Hotel loan recovery is a race that will BEGIN when the economy turns around. Then it will be a contest between rising interest rates and rising hotel demand AND HOTEL DEMAND WILL LOSE. Hotel income (demand and rate) is projected to decrease (yes decrease) by 3-4% in 2010. However, if the current LIBOR of 0.27% goes up just 280 basis points, as it did in the 1994 recovery, then most floaters will go from their current 2.75% to over 5.5%- an increase of 100%. Or worse, during the 2004-2006 recovery, LIBOR went from 1.09 to 5.4, an increase of more than 430 basis points. A reoccurrence of that will sink most floaters.
A compounding problem is the last part of the Wall Street Journal sentence “…and tighten credit”. What credit? For now there are no hotel loans (will some reader let me know if there are any hotel loans), therefore no transactions. If credit tightens, it’s only worse for hotel values and hence recovery of loan principal.
Always one to do my own market research and consistently willing to share my findings with others for the common good, I have discovered a cure for all the headaches and ills that Special Servicers, Asset Managers and other workout artists are facing from hotel defaults on a daily basis. It works better with friends and is more effective after sundown. Overuse may cause minor problems the next day.
My cure is a distillation handmade by Tito Beveridge of Austin, TX.
TITO’S HANDMADE VODKA
It is currently the top ranked Vodka in the world according to Wine Enthusiast reviews with a 95. Wimpy old Ketel One was second at 89 and the froggies Grey Goose third at 84. By unanimous decision, Tito’s has also received the Double Gold Medal at the World Spirits Competition. It is spreading world wide and I recently pushed it at Club 21 in New York and also the Hemmingway Bar at Ritz Paris. Those few of you still reading this will know I am quite serious and encourage you to go out tonight and try it yourself.
Here’s the hotel equivalent of E=MC².
Hotel value = NOI.
Hotel NOI has gone down 39.1%.
How much have hotel values gone down?
Answer: At least 39%, but actually could be worse since hotel values in another life (2007) were based on lower cap rates and bloated financing.
My personal thanks to Bruce Baltin of PKF in LA for his brilliant graph below- it shows how much worse NOI decline is than REVPAR.
1991 NOI decline 9%
2002 NOI decline 18%
2009 NOI decline 39.1% which is an all time record.