Hotel loans and portfolios can't seem to get enough of bad news with the latest being Barron's downgrading Starwood Hotels to underperform from Neutral. In doing so, Barron's analyst noted that it was "in conjunction with our industry note in which we are lowering estimates across our hotel coverage. We are updating our view and now
expect the hotel recovery to manifest itself in the second half of 2010
versus our previous assumption of late 2009." Somewhat scathingly, if unfairly, the downgrade opines that "Starwood's former strengths are now weaknesses. During the boom
Starwood's world-class real-estate holdings, higher-end brands and
international growth allowed significant multiple expansion. Today,
each of these former positives exposes the company to
higher-than-average risks, for which we do not believe investors are
compensated at present levels."
The news on the debt front for hotels also seems unremittingly bad with a spate of announced defaults that began with Extended Stay of America's Chapter 11 bankruptcy filing last month followed by the technical default of Red Roof Inns on its conduit loans. Days later, the Washington Post reported that the owners of the landmark Watergate hotel in Washington D.C. "defaulted on a $70 million loan that came due this week, another fallout from the real estate crash and the collapse of Lehman Brothers, a partner and equity investor in the property." San Francisco Business Times reported yesterday that the Millenium partners, owners of the Four Seasons in San Francisco treaded the path taken by Red Roof Inns and "purposefully stopped making debt payments as a strategy to jump start renegotiating the debt with the special servicer."
The spate of bad news on hotel assets and their debt does have a silver linging. Reading between the screaming headlines of distressed debt Red Roof and the Four Seasons in San Francisco, it is obvious that both owners resorted to a deliberate strategy of default with a view to renegotiating their debt for what are evidently cash flowing assets in these troubled times involving CMBS loans. With no go to loan officer as in traditional debt, it seems as if the best way to get the attention of the servicer.
But even in traditional debt that is in default the FT reports that there is a resumption of debtor-in-possession (DIP) financing, heretofore shunned by investors and lenders. DIP financing has historically played a key role in repositioning hotels in bankruptcy with the "new" lender" getting to supercede all prior (defaulted) debt in hierarchy thereby providing much needed funds for cash flow and FF&E upgrades necessary to reposition the hotel. That may be particularly critical for smaller single asset bankruptcies involving hotels that are likely to come up in the near term.