Hotel Bankruptcies On The Rise As Lenders Lose Patience With Recovery
Hotel Bankruptcies On The Rise As Lenders Lose Patience With Recovery
February 18, 2021
The past year has been a historically harmful time for the hotel industry as the coronavirus pandemic pushed demand off a cliff, and it has yet to climb back up.
This fall wasn’t accompanied by an avalanche of hotel bankruptcies, as lenders provided enough forbearance to keep hotel owners hanging on throughout much of 2020. That is now beginning to change.
A string of hotel bankruptcy cases have been filed in the last two months, and hospitality finance experts believe this trend will continue to increase as owners of still-struggling hotels remain unable to pay their debt service and lenders are less flexible than they were a year ago.
“One of the reasons we’re starting to see increased activity in terms of foreclosures now is lenders don’t have the same sense of patience, and they don’t have much confidence in a sharp rebound,” said Herrick Feinstein partner Stephen Selbst, a New York-based bankruptcy lawyer.
Some lenders are still granting flexibility to borrowers in hopes that the market will rebound this summer, experts say. But every day that passes with hotel occupancies remaining low means more lenders leaning toward foreclosing on properties.
With many hotels on the brink of foreclosure, the next two quarters of hotel performance will determine the fate of many properties. If this summer’s hospitality demand is weaker than expected, the growing trickle of hotel bankruptcies could turn into a wave.
“Come the second half of the year, if things don’t improve, you’re going to see more widespread distress,” said Clopton Capital founder Jake Clopton, a commercial real estate debt broker.
The distress will vary based on market segments. Limited-service hotels in vacation destinations are likely to benefit from an increase in leisure travel. But with the recovery of business travel expected to be slower, downtown hotels that depend on meetings and conventions are expected to feel more pain.
The damage could be blunted by a movement of capital flowing in to provide liquidity to the market, such as the $1B ACORE Capital this week announced it has raised for a new fund to invest in distressed hotels. ACORE Managing Partner Warren de Haan told Bisnow Wednesday it aims to provide much-needed liquidity for the growing number of hotels that are on the brink of foreclosure.
“Now we’re going on almost a year and we believe there’s going to be an inflection point where lenders can only keep pushing out debt service payments for so long, and borrowers can only keep feeding the properties for so long,” de Haan said. “The longer this goes on, the more difficult the conversations are becoming between the lenders and the borrowers.”
‘Occupancies Are Still Woefully Low’
The U.S. hotel market is still severely depressed as a lowering of case rates and the beginning of vaccinations haven’t turned into travel demand. Key hospitality metrics are still far below normal levels, and several hotel owners have filed for bankruptcy in recent months.
The average occupancy rate for all U.S. hotels during the week ending Feb. 6 was 40.9%, according to STR, down more than 30% from the same time last year. Average daily rate was down 29% from 2020 levels.
Revenue per available room, a key hotel performance metric that can determine whether a property is profitable, was down 50.6% from last year.
“The low occupancy is because the pandemic is still very much on the psyche of the traveling public, be that on the leisure side or on the corporate side,” STR Senior Vice President Jan Freitag said.
Donohoe Hospitality President Thomas Penny, whose firm’s 18-hotel portfolio is concentrated in the D.C. region, said there was a slight uptick in business last weekend because of the Valentine’s Day and President’s Day holidays, but he said demand is still well below normal levels.
“We’re still in a pandemic,” Penny said. “I think there’s reason to be optimistic, but occupancies are still woefully low.”
He said his firm has had a strategy in place to continue paying debt service on its hotels, but the sustainability of the strategy will depend on how long occupancies remain low. He said he is starting to see lenders becoming less flexible.
“We’re coming to an end of lenders being supportive,” Penny said. “We’re definitely coming to an end of that.”
Last year, just two hotel companies with liabilities greater than $50M filed for bankruptcy, according to a Bloomberg report. That was more than any year since 2012, but less than the 10 bankruptcies of that size that happened in 2009.
The situation now appears to be worsening, with a string of bankruptcies filed over the last two months.
- Dec. 18, the owner of the 174-room Tillary Hotel in Brooklyn filed a Chapter 11 bankruptcy petition. The owner, Cornell Realty Management and partners, said it had liabilities between $50M and $100M.
- Dec. 21, the owner of an under-construction tower in Brooklyn’s Williamsburg neighborhood planned for 235 hotel rooms and apartments filed for Chapter 11 bankruptcy. The owner listed liabilities between $10M and $50M.
- Jan. 11, The owner of the historic Washington Marriott Wardman Park Hotel in D.C. filed a Chapter 11 bankruptcy petition. The owner, an affiliate of Pacific Life Insurance Co., had about $130M in debt obligations and said it is looking to sell the 1,152-room hotel as part of the bankruptcy process.
- Jan. 18, a subsidiary of Eagle Hospitality Real Estate Investment Trust that owns 18 U.S. hotels filed for Chapter 11 bankruptcy protection in Delaware. The hotel group had more than $500M in outstanding debt.
- Feb. 3, the owner of the Clarion Hotel Atlanta Airport filed for Chapter 11 bankruptcy, citing debts between $10M and $50M.
- Feb. 16, the owner of the Hotel Indigo development, near the site of the Coachella music festival in California, filed for Chapter 11 bankruptcy in Los Angeles. The owner listed liabilities between $10M and $50M.
Bankruptcies became more common during the winter months, Selbst said, because lenders had previously been granting more forbearance in hopes that the end of the pandemic was near. The summer bump in occupancy had given them hope that the recovery might be underway, but that changed when a surge in COVID-19 cases again depressed the hotel market.
“Lenders started thinking maybe the worst was behind us in the middle of the summer last year, and then the fall came and things got worse again,” Selbst said. “The wave of [bankruptcy] activity you’ve seen in January and February is an augury of what 2021 is going to look like for the hospitality industry.”
Fitch Ratings Senior Director Melissa Che, who researches the CMBS market, said the hotel loans she has seen become delinquent have largely been on the properties that were among the worst-performing before the pandemic.
“The ones that have come into issue today were the under-performers even pre-pandemic,” Che said. “You’ll see some of those borrowers, where the forbearance probably was a couple months, that has gone away and those existing issues prior to the pandemic have been exacerbated.”
She also said distress is more common among smaller, local hotel owners that don’t have the cash reserves of institutional players.
“The high-quality, well-experienced sponsorship generally do have the liquidity, and also the value that’s in their property, to weather through this,” she said. “It becomes an issue when you’re the local guy running the hotel.”
The delinquency rate for hotel loans in the CMBS market was 18.97% as of January, according to DBRS Morningstar, down from the June peak of 23.89% but still well above pre-pandemic levels.
DBRS Morningstar Head of CMBS Research Steve Jellinek said he has seen multiple large, new delinquencies this year, including the loan backed by the W Chicago City Center hotel. He said the $75M loan became 30 days delinquent this month.
Jellinek said CMBS servicers have largely been willing to extend forbearance agreements because they still see underlying value in the assets.
“We’re seeing a lot of willingness to ride it out from the servicer standpoint,” he said. “The servicers are taking a hard look at ‘Is it worth the risk of extending forbearance versus foreclosing the hotel, if the hotel had been performing well before the pandemic?'”
Atlas Hospitality founder Alan Reay, whose California-based firm consults with hospitality lenders, said many of them have continued to defer debt payments this year, but he said they are adding more stipulations. He said some are only extending forbearance if borrowers make concessions, such as agreeing to make partial payments or add collateral.
“Unlike in 2020, what they’re doing in 2021 is basically asking for some concessions from borrowers,” Reay said. “Where we’re seeing notices of defaults being filed is where borrowers are saying, ‘I’m not willing to give concessions.'”
Reay’s firm also conducts market research, and he said it has noticed a sharp increase in defaults on hotel loans this year. It found 17 notices of default on California hotel loans in 2020, and it has already tracked more than 20 such notices this year.
JLL Vice President Kyle Kaminski, a member of the firm’s Loan Sale Advisory Group, said many lenders had reached forbearance agreements with borrowers at the start of the pandemic and then extended them in three-month increments.
“The number of people that were able to get an extra three months and another three months are going to slowly decline, and as that happens, we are going to start to see more foreclosures and loan sales,” Kaminski said.
Where The Market Is Heading
The hotel market is going to experience some form of a recovery this summer, experts agree, given that the vaccine will become more widely distributed during the months when people often take vacations. But the strength and durability of that recovery could determine how many hotel owners are able to stay afloat.
Freitag said STR projects 2021 occupancy will average 48.6% for the full year, but it will gradually increase as the year progresses. STR projects 2021 RevPAR will be 21.6% higher than last year, but still 39% below 2019 levels.
“We expect some leisure demand to return in the summer but then in earnest by the fall,” Freitag said. “Corporate transient demand and some group demand will return after Labor Day as well.”
Penny said he expects some improvement in Donohoe’s hotel portfolio in Q2 and Q3, and he expects to be around 60% to 75% of normal RevPAR by Q4. This growth is expected but not guaranteed, and Penny said if it doesn’t come, many hotel owners will be in trouble.
“If Q3 still looks like February, most of the industry would be in a really desperate position,” Penny said.
The central business district hotels with large conference facilities are going to be the slowest to recover and are at the greatest risk of foreclosure, Kaminski said.
“Those tend to be the bigger loans, and those are going to be the ones where lenders are going to have some decisions to make,” Kaminski said. “And they’re going to have to make them somewhat soon.”
Selbst, the co-chair of Herrick’s Restructuring & Finance Group, said lenders are taking a close look at the financial stability of their borrowers, the performance of the properties and the prospects for improvement.
“It’s going to be a tough year,” Selbst said. “You’re going to see more properties get in trouble and more properties default.”
The financial situation for hotel owners going forward not only depends on market demand, but on the level of support they continue to receive from the government.
Many hotels have benefited from the Paycheck Protection Program, and the December stimulus bill provided another $284B for the program. Congress in the December bill increased maximum loan amounts for the hotel and restaurant industry to three and a half times a company’s average payroll.
Congress continues to debate the components of another stimulus bill that could provide more money for hotels. But at some point, Clopton said, the government money is going to stop coming.
“At a certain point, the economic aid is going to run out, and they’re going to say ‘Look, we can’t support hotels forever,'” Clopton said.
Funds To The Rescue
As more lenders stop offering forbearance to struggling borrowers, a growing pool of “rescue capital” may be able to swoop in and help stop the bleeding.
“There are a lot of rescue funds out there eager to step in and take loans or help owners with recovery capital, which some call rescue capital,” Freitag said. He noted that some funds are more likely to wait until after a foreclosure to swoop in.
One major fund was announced Tuesday from ACORE Capital. The commercial real estate lender has raised $1B to originate and acquire hotel loans. De Haan said it has one large transaction in the works that should close within 45 days, and it has a pipeline of others lined up.
“We are here to solve for some of those liquidity needs when borrowers and lenders come to an impasse,” he said. “There is definitely a need.”
Kaminski said there is “tremendous interest” in the market to buy hotel loans, with some opportunities generating 10 or more bidders. He said the buyers of the loans are often able to offer greater flexibility to borrowers than the original lender.
“The demand from the buy side is absolutely there,” Kaminski said. “It’s actually pushing pricing to levels that do make it attractive from a lender-seller standpoint to really give them that option to do a loan sale as opposed to forcing it through foreclosure.”
Part of the reason demand to buy hotel loans is so strong is because hotel owners and capital providers see the pandemic-induced pain as unrelated to the underlying fundamentals of the property, and they expect hotel demand will eventually return to normal levels.
“There are borrowers that want to hold on and are looking at their assets to say ‘I have a fantastic asset and I just need the vaccine to kick in and people will come back to my hotel and it will go back to what it was in 2019,'” de Haan said.
Freitag said his sense from speaking with capital sources is that they have more certainty about the timing of the recovery than they did during the Great Recession.
“In this recession, we know exactly how the story pans out,” Freitag said. “Once vaccinations have been distributed and herd immunity has been reached, the travel industry will be back to its old self.”
This sentiment about hotels stands in contrast to the way investors feel about other struggling sectors such as regional shopping malls, Che said.
“The shift to online is slowly phasing out or rightsizing that mall concept, but I don’t think anyone feels that hotels are not going to stick around,” Che said. “People are dying to go on vacation. There’s so much pent-up demand right now that when things get better, leisure travel should normalize.”
