Hotel Distress Helps Stoke Transaction Activity

Opportunity knocks
Kimpton hasn’t been able to take advantage of hotel distress, but the boutique hotelier recently bought the vacant Lafayette Building in Philadelphia for $11.5 million. It plans to convert the 11-story office building into a 270-room four-star Hotel Monaco, spending approximately $70 million for the adaptive reuse project.

Kimpton now has $120 million left in an equity fund it hopes to leverage into another $250 million in deals. “We are sellers of stabilized assets and buyers of properties with repositioning characteristics,” says Long.

Kimpton, like many others, hopes to play the role of white knight in saving an asset from distress. “We'll pay down the debt for a loan extension or bring capital in for renovation plans and get a stake, usually the preferred position because new money is the white knight,” says Long. “Or if the asset is foreclosed on, new money is very preferential.”

Long believes the extend-and-pretend strategy employed by many lenders during the recession will become less prevalent as they regain confidence with escalating sales prices. As a result, owners will see the writing on the wall and look for a way out before facing foreclosure.

‘Shadow inventory’ lurks
Atlas Hospitality Group’s third-quarter Distressed California Hotel Survey revealed 529 hotels are in default or have been foreclosed on, but Reay estimates there is a “shadow inventory” of 1,000 hotels operating under some form of forbearance agreement. “If the lender doesn’t sell the loans, the vast majority will come to market,” he says, adding the situation is not unique to California.

The delinquency rate on securitized hotel loans jumped 41 basis points to 19.33% in September, according to Trepp, a New York-based analytics firm that tracks the commercial mortgage-backed securities (CMBS) industry. Although the delinquency rate fell to 14.92% in October, that was largely due to the resolution of a $4.1 billion Extended Stay Hotels loan, says Paul Mancuso, a vice president with Trepp. Overall, hotel loan delinquencies 30 days or longer now total $9.6 billion, up from $5.6 billion a year ago.

“There is an insufficient amount of debt available to replace all [the maturing debt],” says Bruce Lowrey, a managing director for RockBridge Capital, a boutique investment banking firm based in Columbus, Ohio. For that reason, he believes some lenders will continue to extend loans.

RockBridge owns 36 hotels and aims for a 50-50 split in debt and equity investments through its hospitality funds and mortgage program. Lowrey says debt is available for strong borrowers with cash-flowing properties in top markets. In those cases, borrowers can typically get terms at 65% loan-to-value at a 6% to 7% interest rate.

Joe Epstein, president and founder of Fairfield, N.J.-based First American Realty Associates, is seeing the same trends. The hotel mortgage broker has been able to secure loans for new construction and refinancing, but money for acquisitions “is a much tougher sell.”

Both Epstein and Jones Lang LaSalle Hotels’ Calhoun believe the CMBS market is returning. Sunstone Hotel Investors last week secured a $92.5 million senior loan for the 460-room Hilton Times Square. The 10-year, fixed-rate loan at an interest rate of 4.97% came from Bank of America Merrill Lynch. The proceeds were used to refinance an existing loan that had a balance of $81 million and was due to mature in December.

Gap narrows among buyers, sellers
The recent wave of trophy assets selling at top dollar has boosted not only sales prices, but also the confidence of sellers who have been waiting out the recovery. With revenue per available room up 4.5% this year and projected to climb another 5.3% next year, according to Smith Travel Research, buyers’ confidence has soared behind the belief the cycle is finally on the upswing.

As transactions trickle down from the top, providing an influx of even more distressed assets hitting the market, the increase in deal volume will better establish value, fueling even more asset sales. “It's a self-fulfilling prophecy,” says Epstein. “Anything that helps us determine values helps us all do more deals.”

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