NATIONAL REPORT—The avalanche is most assuredly coming. But most savvy hotel owners and operators have known that for quite some time now as they await the opportunities—or anguish depending on their positions—that will emerge when the landslide of defaulting, bankrupt or foreclosed hotels crashes down around the hotel industry.
This avalanche, of course, is the byproduct of the real estate and economic tsunami that began to shake the world back in the summer of 2007—the summer of the infamous subprime mortgage meltdown—and continued through the financial sector fallout and the subsequent current recession. And now is just the Or, as Steve Van, president of Dallas-based Prism Hotels & Resorts, put it, it’s the time before what will comprise the “largest involuntary transfer of hotel ownership in history. And it’s coming sooner than anyone thinks.”
Van and his company would seem to know this better than most since over the years Prism has made the operation of distressed hotels its specialty. Consequently, in recent times, and with the pressure of the recession as a catalyst, the company has handled 155 distressed hotel assignments of all varieties, in most cases taking over a distressed asset’s operations for the lender and repositioning it for sale.
“Beginning in 2000, we made distressed hotels a real specialty of ours and, in particular, properties involving the [commercial mortgage-backed securities]special servicers. We’re the most experienced team from receivership to takeover to rehab to sale and we’ve probably done more of this than anyone else. So we’re one of the few management companies that are actually hiring people now. The best way to put it is we’re not the plastic surgeon, we’re the emergency room surgeon. But we really like this business. It’s helping people in trouble.”
And, as Van alluded to, the trouble is only beginning for hotels. “We believe it’s just the tip of the iceberg now because soon the lenders will be calling and the borrowers will be handing back the keys,” he said. “Within the next 90 to 120 days it will really start to happen. And the reason it will happen is this recession is worse than the one in 2000 and the ones in the early 1990s and 1980s. It’s actually a simple formula. The average hotel loan in 2007 was 75% [loan to value]. And everyone agrees that hotels have lost at least 30% of their value since then. That means anyone who bought then is no longer the owner. The asset is not worth the loan. It’s simple math.”
Also gearing up its distressed hotel management operations of late has been Schaumburg, IL-based Hostmark Hospitality Group, which in recent times has been selected to provide its services in more than 130 hotel bankruptcies, foreclosures and receiverships, including for such properties as the historical ship-turned-hotel the Queen Mary in Long Beach, CA, and the former Renaissance in Springfield, IL. But like Van at Prism, Hostmark’s executive vp of development, Jerome Cataldo, asserts it’s only the beginning.
“The floodgates have not opened up yet. And we began preparing for this type of event because we could see the handwriting on the wall economically back in September and October,” he said, noting firms like Hostmark with distressed asset management experience are among the few firms capable of dealing with such properties. “It’s obviously been far worse than anyone ever envisioned. But up until now the floodgates have not opened because many of receiverships and foreclosures have not really taken place. The lenders have been patient, giving owners extensions instead of taking harsh actions—at least until they get a better lay of the land. But it’s everybody’s belief that the pace of distressed hotels will pick up further into 2009.”
Just the beginning
In the mean time, the current trickle of distressed hotels is primarily involving owners that are just beginning to default on their debt payments, according to Bruce Stemerman, the managing director of strategic advisory and asset management at Jones Lang LaSalle Hotels, which has been playing an increasing advisory and asset management role for owners of distressed properties and the lenders for such assets. “As the realities of the RevPAR declines come in, the level of the defaults are increasing substantially,” he explained. “And at the same time you’re beginning to see the transfer of ownership. It can be quiet with deeds being exchanged in lieu of an actual foreclosure. But the problem with some of these assets is the value is less than the outstanding debt, which wipes out an owner’s equity position. But the lenders are being careful, trying to understand all the risks and rewards of ownership they’ll be taking on through foreclosure. It’s not a rush to the courthouse steps.”
Unfortunately, however, those steps are being ascended by lenders at an increasing rate, including in a recent case in St. Louis that required Stemerman and his team’s expertise. There, following a public auction, UMB Bank, N.A., the bond trustee for the foreclosed St. Louis Renaissance Grand & Suites hotel, obtained ownership of the asset with the intention of stabilizing it and recovering the value of the bondholders’ investment in the property over time. Jones Lang LaSalle Hotels was hired to provide investment advisory and asset management services on behalf of the hotel’s bondholders.
According to published reports and sources, Housing Horizons and Historic Restoration, Inc. were the owners of the 1,083-room St. Louis Renaissance Grand. The owners defaulted on a December loan payment, which then caused the bondholders’ to seek foreclosure status for the asset.
Marriott International continues to operate the property now and Jones Lang LaSalle Hotels is attempting to position the hotel for a recapitalization and eventual disposition.
Of course, like in the example of the St. Louis Renaissance, every distressed asset has its own unique story as well as related challenges for the management company hired to rehabilitate or reposition it. But for the most part, the three primary food groups of distressed real estate now are bankruptcy, foreclosure—like in the case of the Renaissance—and receivership.
In explaining hotel property bankruptcy, Cataldo noted that it is usually “filed by a borrower to stave off a lender’s foreclosure.” In White Sulphur Springs, WV, a rather high-profile hotel bankruptcy just recently occurred involving the historic Greenbrier resort, which is owned by the Greenbrier Hotel Corp. (GHC), a subsidiary of CSX Corp. GHC sought Chapter 11 bankruptcy protection to help ensure the viability of the resort and asked for approval of financing from CSX to help the resort operate normally in the short term.
In the long-term, GHC has signed an asset purchase agreement with Marriott International, which will acquire the resort based on certain conditions. The agreement with Marriott assumes that CSX will provide, over a two-year period, $50 million that will be used to operate the resort after the sale’s completion. In turn, Marriott will pay GHC between $60 million and $130 million within approximately seven years for the asset, with the actual amount depending on the timing of the payment and the Greenbrier’s financial performance.
Meanwhile, the foreclosure avenue is the often long, winding route lenders will initiate to take back a hotel once the owner’s in default with its debt payments. According to Van, this process can take as little as 30 days in some states like Texas. But in other states, like California and Florida, the process can take up to six months, meaning a distressed hotel continues the bleeding process. That’s where receivership comes into play, Van said.
“Receivership is a way for the lender to take control over the asset without going through foreclosure,” Van explained. “It let’s them stop the bleeding of the artery and get the patient to the hospital. It’s court-appointed.”
Cataldo echoed that statement, adding, “In many instances [a hotel management company]can become a court-appointed receiver. And then the solution is often to move the asset quickly, but sometimes it also makes sense to hold on to an asset to maximize the value. And we’ve been involved in all of those scenarios.”
Pole position
Of course, having a reputation for successfully operating and repositioning distressed hotel assets, like in the case of Prism and Hostmark, puts such firms in a rather popular position now as receiver, especially in the eyes of special servicers, the firms that are currently unraveling the enormous mess related to the widespread defaults in the CMBS realm. “There are other good management organizations out there, but a lot of them have not operated in this environment. This is not their forte,” Cataldo asserted. “There are a lot of different legal aspects involved that if your not familiar with and don’t have the resources to deal with them, you can find yourself in a real quagmire. They’re time-intensive management assignments and if you’re not prepared you can find yourself with a difficult situation on your hands to the detriment of the rest of your business.”
But Cataldo along with Van also admit that the distressed hotels obviously present lucrative opportunities for management firms in the short term as well as the long term if they’re kept on as operators upon stabilization and/or sale.
Indeed that is why other operators are poised to capitalize on the tidal wave of turmoil that now lies ahead. “Six weeks ago I told my people to get in position because while the fruit on the tree is not ripe yet, we are identifying people that will need help with hotel assets as the real estate issues start getting worse,” noted Drake Leddy, president and CEO of San Antonio-based Presidian, which has significant distressed asset experience considering Leddy worked in concert with the Resolution Trust Corp. in the late 1980s. “So we’re just getting into that mixing bowl right now. I would be disappointed if we don’t have 10 or 12 by end of the year. We’ll start seeing more later in the summer and fall. And that’s when the fruit will be ripe.”