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More Hotel Distress Signals

Delinquencies on hotel loans are escalating as cash-strapped owners and managers grapple with an unyielding slump. With rising unemployment, tight reins on business travel and the SARS health scare, few are predicting a rebound in occupancy rates anytime soon.

Industry-wide profits fell 10% in 2002, according to the American Hotel & Lodging Association. Hotel occupancy has declined every year since 2000, while RevPAR has dropped 0.7% so far this year alone. As a result, many properties aren't making enough money to keep up with their lending commitments. According to joint research by Trepp LLC and JP Morgan, the hotel loan delinquency rate is likely to jump by nearly 40%, from 5.1% at the end of 2002 to 7% by the end of 2003. That's still less than half of 1992's rate of 15%, but it's still troubling that delinquencies are climbing.

Loan defaults aren't the only fallout from the soft economy. In April, Hospitality Properties Trust, a REIT that controls 251 hotels nationwide, terminated Wyndham International's operations at 12 hotels. Then, in May, HPT terminated operations at another 15 Wyndham hotels.

Wyndham tried to renegotiate its lease terms with HPT, but talks fell through when Wyndham could not pay the rent — approximately $2.1 million per month for 15 Summerfield hotels and $1.5 million per month for 12 Wyndham hotels.

Starwood Hotels and Resorts also is facing credit troubles: Standard & Poor's cut Starwood's debt rating to junk status in May. Citing Starwood's “lack of progress” in boosting its credit measures in a rough economy, S&P cut $5.5 billion worth of Starwood debt from triple B minus to double B plus. Roughly half of Starwood's debt carries floating interest rates that might be affected by the rating cut.

The company is now trying to raise funds to pay down debt by selling 18 hotels, including some European properties. The White Plains, N.Y.-based company owns the Sheraton, Westin and W Hotel chains.

War, SARS Weaken Industry

Even though delinquencies are rising across the industry, Bjorn Hanson, global industry leader for hospitality and leisure at PricewaterhouseCoopers, says he is not alarmed.

“Given the challenges that the industry has faced this year, it's nothing short of spectacular that the delinquency rate isn't higher,” he says.

Still, Hanson projects that the war in Iraq and the SARS malaise collectively will push the loan delinquency rate to 5.5% by the end of the second quarter. But he does not concur with the Trepp-JP Morgan analysis of a steady rise in delinquencies for the remainder of the year.

Hanson insists that instances of outright foreclosure remain rare. “We've definitely seen more hotel foreclosures this year than we did this time last year. But I still haven't seen a lot of big hotels go belly-up,” says Tom McConnell, senior managing director at New York-based Insignia ESG.

However, he doesn't expect a quick turnaround. “I think we'll be seeing more foreclosures,” says McConnell.

Natural Selection

The Hospitality Research Group, a unit of PKF Consulting, reports that nearly 24% of U.S hotels were deficient in 1992 — meaning that almost one-quarter of them did not generate enough operating income during a certain time period to cover interest expenses. Last year, that number stood at 19.8%. HRG attributes this drop to greater lender forbearance today vs. the early 1990s.

HRG says the downturn has prompted a Darwinian revamp of the industry. Older, tired hotels — mainly independents — are dropping like flies as cash flow problems become too severe to ignore, the company says.

Mark Lommano, president of Nashville-based Smith Travel Research, writes that “slower room supply growth, combined with improved economic performance and improvements in the Middle East should contribute to improved industry operating performance for full year 2003.”

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