Since his passing, I have successfully avoided watching more than five seconds of news (the time it takes to switch channels, encounter another pop eulogy and then turn off the damn thing) about a genius musician and typically neurotic child star….but fate has placed Michael Jackson in the hotel business news.  Several hotels near Neverland (please never again) booked up to 100% occupancy within 20 minutes of the announcement that his body may be displayed there.  America get a life!!!  Whether this boon keeps the hotels out of default will be a topic later.  I know you cannot wait.

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 3^rd floor.

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

I have had so many requests for the poem I read at Meet the Money last week that I am posting it here in full.  It sums up the view of the wisest conference speakers on the current state of the CMBS loan market.  I can just see that huge stone head toppled in the sand and sense how the mighty have fallen. 

Ozymandius
by: Percy Bysshe Shelley (1814)

I met a traveler from an antique land
Who said: “Two vast and trunkless legs of stone
Stand in the desert… Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed;
And on the pedestal these words appear:
My name is Ozymandius, King of Kings,
Look on my works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.

Just a few frightening take-aways from Jim Butler’s Meet the Money in LA this week.

1) Most candid honest and valuable hotel conference in recent memory. People actually attended the sessions -instead of loitering at the bar (I didn’t see many people there) and hallways!  Reason- our industry is in dire trouble and everyone wants to hear the most up to date opinions of how to: A) survive the disaster; and B) how to take advantage of those who don’t survive the disaster.

2) How bad is it? The first panel with such battle hardened veterans as Jonathan Roth from Canyon Capital, Bernie Siegel from KSL Capital and Barry Olson from Archon/Goldman Sachs, (and these guys really know how to make money I assure you) was the most pessimistic I have ever heard.

“Bridging (repairing) the capital stack is somewhat impossible today…all equity invested in 2006, 2007 and 2008…is essentially GONE.”

“CMBS is dead. Infrastructure for originations is gone. There is no other outcome than a massive reset of capital values.”

“Pool of capital for hospitality is radically reduced.”

“Wave of defaults has to happen until the decent yields on

      senior debt will return.”

And the best quote of the conference- “I have to wear a helmet to investment committees these days.”

3) And here is one so shocking that it deserves separate treatment- “The estimate of CMBS hotel defaults going from 2% to 8% (400% increase) is WAY UNDERSTATED (emphasis mine).  From discussions last week at ULI, it may 16% to 24%.  (No I did not write this one at the bar- I will share some of those later.)