Shhhh…quiet ….don’t tell anyone….but….
A most important measurement of how hotels may recover just came out to silent acclamation. No one wants to talk about it. Stop reading if you are faint of heart.
The plunge in RevPar started in October of ’08 after the Lehman melt down. Since then its been one really bad week after another as we compared the current week with the week a year before. So first week of November ’08 looked really bad because it was compared to November of ’07 (at the peak of the market)- it was down 17.2%. That trend continued for 52 weeks.
But we were all hoping that the first week of November ’09 , since it compares with an already down ’08 week of 17.2% would show serious improvement and most of us hoped it would be down only 0% to 5%.
And the envelope please…. the first week of November ’09 revpar compared to the same week in ’08 is down….another….frightening….11.8%.
So what does this mean for a particular hotel? Owners as well as employees are suffering and this news will only make it worse. Christmas has been put off anoter year.
Many owners have done everything they can to keep their hotels from foreclosure- delaying maintenance, holding off on required PIPs from franchisors, cutting sales staff, and not paying themselves fees. Employees who still have their jobs have been working harder and often longer with no raises since 2007- and in properties that are increasingly capital starved.
But let’s remember this IS the hospitality business and we have a time honored job- take care of our guests. If we do this we will feel better every day (sort of ancient wisdom here) and the recovery will at least seem to arrive sooner.
and the end is 26 months from now. The Fed and most lenders are driving Commercial Real Estate into a box canyon… you know the one with three tall sides and no way out…used in the old west to drive game into and …kill…easily. And hotel loans are the lead cows. Sounds like the perfect scenario for our dear friends the vulture funds. Our canyon has three sides:
the massive Maturity Wall looming in 2012
the towering $850 Billion Equity Gap
the Race between Libor and RevPar which RevPar will loose
The Maturity Wall is the worst – from now until 2012 there are $170 Billion in just CMBS maturities. Those maturities will hit at the same time hundreds of Billions of corporate bond debt is coming due. Hordes of real estate and corporate borrowers will be gathered around a limited watering hole of fresh capital and there won’t be enough to go around.
And our industry’ extend and pretend is driving all the already weakened loans towards that end.
The Equity Gap is the shortfall between the $2.8 Trillion (you know it’s sort of fun to type $Trillion) in commercial real estate loans originated between ‘05 and ‘08 which if refinanced today would be worth $2.0 Trillion. So $850 Billion will need to come from write downs and equity. Hotel loans are about 10% of this say $280 Billion with say an $85 Billion shortfall. Pundits estimate there is about $12 Billion fresh hotel equity raised to help with the butchering. So that leaves about $73 Billion in loan losses. For comparison the TOTAL market value of all hotel REITS and hotel public companies is $33 Billion. Did that sink in? Yes the loss is twice as much as the total value of all hotel REITS and public companies. This will stink.
The Race between LIBOR and RevPar will start to sink most floating loans as soon as the economy starts to recover. When each of the past recoveries has taken hold Libor increases around 300-400 basis points in twelve months. So today’s fairy land of 2% hotel loans (175 over Libor at 0.24 today) will evaporate and payment rates will increase by 150-300%. Some of these loans won’t even make it to the end of the canyon.
So what do we do? Collectively we as a nation could create another RTC (and for those originators I have talked to who didn’t know what the RTC was please call me). Likelihood of that happening in today’s put it off til the next election political environment is shall we say slim. Smart money will wait at the end of the canyon and have a historic feast of cheap hotel asset buys. Most of us will just keep our heads down and try to do the best we can as owners holding on to our hotels or as lenders working out loans. But all of us taxpayers as the lender of last resort will in the end pick up the bill. And a big bill it will be.
Just when I thought I had heard all the bad news possible about hotels, I heard this from Mark Lomanno, President of Smith Travel Research, and THE most knowledgeable person in the industry about rate and occupancy. For inflation adjusted ADR to reach 2007 levels, it could take the same amount of time it took Ulysses to get back home from Troy to Ithaca. (OK- Mark actually just said 10 years).
His very rational calculations include the continuing supply increase problem, the lowest number of rooms going out of use in 20 years, the assumption RevPAR doesn’t turn positive until late next year, a normal dose of inflation, and so forth.
Oh and then there is occupancy. He projects year end to be 55.5%. Last time we had that low was in the 40s. That’s 1940s.
And while we are alluding to the classics, I will personally give $100 to any Diogenes who can find an honest appraiser who will use the 10 year ADR projection.
I am sorry to report that Special Servicing just went above $50B ($50,000,000,000). I know I will be persecuted by my hotel industry friends for “bearing bad tidings”, “declaring the sky is falling” and “spreading panic” by means of this hoteldefaultblog you are reading. (No one claims I am not being 100% truthful).
So here’s the utility of accurate information even if the news is bad:
SPECIAL SERVICERS- hire more senior asset managers and be more proactive! If you have not hired, you are behind the curve and the curve will dramatically steepen. Last Spring many of you thought hotel defaults would not go over 4%- they are over 12% today (that’s about $6Billion in hotel loans) and going over 25% by next summer (you read it here). Hotel NOI performance will continue to decline and won’t start to improve until October…of 2010.
OTHER HOTEL LENDERS- same advise as above, but you have a secret weapon Special Servicers don’t have – seller financing. Offer it and you will get 20-30% more for your asset; and you can sell it now before hotel values get worse. (Sorry but they will).
OWNERS- ok bury your head and don’t read this. Still here? Then go talk to your lender or Special Servicer with some fresh money in your hands or don’t expect to get any relief and to loose your hotel during 2010.
OPERATORS- Hire more direct sales staff and steal business from operators who are not reading this blog. Don’t promise 2010 performance you can’t deliver, as revenue will drop again next year.
Disclosure- the persecution dished out to me by friends amounts to making me buy the first round of drinks, but I manage to make up for it as the evening wears on…
Well its only tangentially related to the hotel business, but for you overindulging grandparents or parents hoping to escape the stress of today’s hotel defaults…the Wizarding World of Harry Potter will open this Spring in Orlando at Universal Studios. I highly recommend it. When I watch Harry Potter with my granddaughter, we are both transported to an exciting world where there are no worries of defaults, bad borrowers or REMIC rules. When she comes to visit, somehow Harry Potter finds out she is coming and his white owl leaves an envelope for her, from HP himself, with directions to the fireplace where she finds a present – sometimes a magic wand, sometimes a HP book or CD. So for all of you who need to get away from it all, make your reservations and by doing so help the hotel business in Orlando. See http://travel.yahoo.com/p-interests-29692008 for a story.
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.
Today the last true defender of optimistic hotel forecasts threw in the towel and declared that year end 2009 hotel income will be 74% worse than forecasted in April. Mark Lomanno, whom I greatly admire, is President of STR and has been the most sanguine of hotel forecasters. In April, he predicted that revenue per available room would be down 9.8% for 2009. Now he is predicting revenue will be down…17.1%. For the full confession see http://www.hotelnewsnow.com/Articles.aspx?ArticleId=1487.
And for those of you hoping for some sort of recovery in 2010, Mr. “Optimist” Lomanno is predicting revenue down an additional 3.7%.
Like it or not, we won’t see any improvement in our business until at least 2011. The wise will keep looking for ways to cut more expenses (the bone?), steal more business from competitors and think twice before trying to predict current hotel values.