NEW YORK— Despite forecasts that 2002 will likely be a year of recovery for the battered hotel industry, a more telling prediction might be: How many hotels will still be around to reap the fruits of this anticipated rebound come 2003? A recent Reuters report on CoServ Realty Holdings’ foreclosure of the Westin Beechwood in Dallas signaled a wave of hotel failures occurring this month and next. As noted by George Roddy, president, Foreclosure Listing Services, there has already been an uptick in such activity in the Dallas/Ft. Worth area. While the Reuters dispatch noted a growing number of hotels unable to make their mortgage payments post-Sept. 11, it also stressed those properties most likely to fail were already struggling financially before the attacks. It further contended hotel failures should peak at levels far below those at the height of the last recession in the early 1990s. It would seem proof of this prophecy is reflected in recent headlines decrying one hotel-segment fiscal failure after another, among them: • Federal Bankruptcy Court Judge Clive Jones ordering the $80 million sale of the troubled Regent Las Vegas to Hotspur Resorts, a Canadian investment firm and subsidiary of Larco Investments Ltd. Following a predicted “short ramp-up” period, the hotel will re-open as the second JW Marriott-branded facility in the western U.S. • Hyatt Hotels of St. Lucia, manager of the Hyatt Regency St. Lucia, being notified by Pigeon Point Hotel Ltd. (the hotel’s owner) and Royal Merchant Bank and Finance Co. Ltd. (the primary lender) that PricewaterhouseCoopers (PwC) has been appointed receiver for Pigeon Point Hotel Ltd. • A report in the Lancaster (PA) New Era stating a Boston bank filed a lawsuit to take over ownership of the 221-room downtown Ramada Inn Brunswick Conference Center because the hotel’s owner has fallen behind on debt payments. • Even entire companies are not immune to the economy’s vagaries, as evidenced by Atlanta-based Lodgian’s voluntarily filing for protection under Chapter 11. Higher Expectations Expectations of further defaults are similarly evident in PwC’s “U.S. Macroeconomic Outlook and Lodging Forecasts.” In its look at “Measures of Financial Stress,” PwC analysts explained: “Extraordinary measures being taken by the industry to cut costs are mitigating the effect of the downturn on industry profitability and [its]ability to cover debt service. Many hotel properties have cut back between 15% and 25% of their workforce, including some positions that had been part of the fixed-cost structure of hotels, and cut pay for some remaining employees. Closures of entire floors and F&B outlets, [and]reduction of amenity levels, have also been instituted at some hotels. In addition, several lodging chains have postponed capital expenditures and reduced corporate headcount.” Indeed, Sheldon Hirshon, attorney with Proskauer Rose LLP and a veteran of the “hotel-workout” wars, said the first sign a hotel is headed for trouble “is often a fall-off in revenues, caused by sagging occupancy levels and/or declining room-rates or… a sharp and unexpected increase in operating expenses [energy costs, insurance premiums, etc.]. “The hotel owner might fall behind on loan repayments or other expense items such as FF&E replacement, and could then look to various cost-cutting actions [like personnel lay-offs, service cutbacks, etc.]. However,” Hirshon stressed, “payment of taxes [and other payroll-deduction items]have to come before repaying the lender, or else the hotel owner can face significant personal liability.” According to him, if these measures don’t work, the next step is to “seek relief from the lender— who would much prefer getting paid over foreclosing on the property.” This might mean re-scheduling the loan, lowering and/or stretching out payments— in general, restructuring the existing debt load. Chapter 11 “And if that can’t be done, then the hotel owner would look into filing unde
Previous ArticleAnalysts Paint A Brighter Picture For Lodging REITs
Next Article Great Lakes May Get Mega-Hotel Deal