A Debt Millstone For Hotels?

Dubai world's debt "standstill" shocker is still reverberating around the world and could include hotel assets such as the (temporarily suspended) under-construction Trump International Hotel and Tower in the iconic Palm Jumeirah, one of the world's largest man-made islands and the Versace hotel by Australian  group Sunland. The (not entirely unwarranted) fear is that Dubai may go the way of its island frere, Iceland. Dubai's most famous hotel asset is the Burj-al-Arab, a structure that resembles a "dhow" or an Arab sailing vessel that remains the world's second tallest hotel. But Dubai World , the entity at the eye of the latest financial storm with the odd byline "the sun never sets", owns hotel assets at the other end of the spectrum (and world) such as Britain's Travelodge group. It would be unsurprising if the implications for the hotel industry are not widespread both geographically and across segments.

Within the US, a couple of days ago,  Fitch Ratings revealed in its October commentary that "Hotel delinquencies are leading defaults within commercial mortgage-backed securities (CMBS). The report went on to note that "Hotels are expected to continue to lead defaults as values continue to decline and borrowers will be unwilling or unable to continue to fund debt service shortfalls. The ongoing economic downturn continues to affect the luxury and resort properties, many of which are securitized in recent vintage CMBS.” And the Salt Lake Tribune notes that " Like many home owners, hotels are starting to drown in debt". The newspaper also rightly observes that "hotels have been enticing travelers all year with sweet deals: credits for in-house spas and restaurants, up to 50 percent off five-star rooms, even free nights. But all that discounting hasn't stopped occupancy from dropping an average of 10 percent. The result? Hotel loans have begun falling into delinquency faster than any other kind of commercial real estate debt."

Bucking the trend and, perhaps, recognizing that the downturn does have a bottom the Wall Street Journal reports that Hyatt Hotels "this month helped the owner of the 966-room Hyatt Regency Jacksonville in Florida avoid default on its $150 million securitized mortgage." The internationally renowned operator promised to "cover as much as $5 million in payments on the mortgage in the event Chartres (the owner of the Jacksonville hotel) couldn't. (and) also pledged to cut its management fee in exchange for an extension of the pact's term and to pay up to $1 million in future costs for furniture, fixtures and equipment." Those actions certainly speak to a belief both in the asset and the local economy. 

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.