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Getting a Grasp on Foreclosures

Fewer hotels are becoming distressed, but problems remain.

Tuesday, November 16, 2010
Ron Word
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The hotel foreclosure crisis that enveloped the industry with the nationwide recession appears to have spiked, although 1,539 hotels are still listed by Real Capital Analytics as troubled and the value of the outstanding debt on properties in default had grown to $34.3 billion at the end of the third quarter.

However, a development early in the fourth quarter will reduce the number of hotels in distress by 680 hotels in 44 states. Extended Stay Hotels filed for bankruptcy protection in June 2009 and emerged in October after an investment group, Centerbridge Partners, Paulson & Co. and Blackstone Real Estate Partners, purchased 100 percent of the company for $3.9 billion.

Lighthouse Group LLC had purchased the Spartanburg, S.C.-based chain in April 2007 for $7.4 billion in financing. When it filed for Chapter 11 bankruptcy, it listed $7.1 billion in assets and $7.6 billion in debt.

Hotels were hit hard in the economic downturn. Businesses cut back on the travel, forcing many hotels to cut their rates, lay off staff and deal with financing they couldn’t afford. Default, foreclosures and bankruptcy followed.

While the number of distressed hotels continue to grow, the number is trending down, said Ben Carlos Thypin, a senior market analyst for Real Capital Analytics.

In the first three quarters of 2010, 514 hotels were newly listed as being distressed, compared with 1,156 for the first three quarters of 2009, which included the bump from the Extended Stay Hotels bankruptcy.

Thypin said that could be positive sign for the industry, which is seeing some relaxation in credit and more investors seeking to buy hotels are bargain basement prices.

By the end of the third quarter, 223 hotels had their distressed status resolved by refinancing or sale to a financially stable third party. They represent a cumulative total of $5.1 billion. Another 210 hotels were taken back through foreclosure, representing a cumulative total of $4.2 billion.

A total of 78 hotels have restructured their debt or received an extension, creating a long term solution for a cumulative total of $5.05 billion. Ownership restructuring usually includes a mezzanine lender stepping into the equity position or a debt for equity swap. On the debt side, most involve modifications of the interest rate, loan balance, interest-only period or other terms, according to Real Capitol’s October Troubled Assets Radar.

Thypin and Scott Smith, an instructor and doctoral candidate at the Rosen School of Hospitality at the University of Central Florida agree that “Banks do not want to own hotels.”

Location, market and financing are key ingredients in the success of a hotel.

The West had the most number of hotels in distress, 466 hotels, representing about $16.6 billion in property, Chicago tops the list of distressed hotels with 65, followed by Los Angeles with 61, Atlanta with 53, Dallas with 52, Phoenix with 50 and Las Vegas with 48.

Other cities in the top 10 include Detroit with 43, Sacramento with 37, San Diego with 37 and Central California with 37, according to the Real Capital figures for the first three quarters of 2010.

Smith, who worked in hotel management for 25 years, said times remain tough for the industry.

“This is the worst I’ve seen it. Hotels are being squeezed at both ends. There’s no light at the end of the tunnel,” Smith said. “Everyone is waiting for things to get better.”
Ron Word
Hotel Interactive® Editorial Division
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