Are Hotels Headed for Distress Sales and Foreclosures in 2009?

Is 2009 the year for hotel foreclosures and loan work-outs? At least one company seems to think so and may profit from the situation. 

San Francisco-based PKF Capital has launched its Distressed Hotel Solutions Program, aimed at helping hotels in trouble with refinancing, bankruptcy, asset sales and other services for hotel owners “entering a crisis mode.” PKF Capital’s executive managing director, Bob Eaton, claims that a 7.8 percent decline in revenue per available room for 2009 and more restrictions in credit will create “stress-inducing factors” for owners. (While PKF forecasts a RevPAR drop of 7.8% in 2009, PricewaterhouseCoopers, using data from Smith Travel Research, projected a 5.8% drop. Either way, it means times haven’t been this tough since 2001-2002, the last time there was a two-year decline. )

But the biggest problem for hotels may be the high loan-to-value ratios that can’t be easily refinanced. ”A 25 percent (net operating income) drop indicates a 25 percent decline in value. If you have an 80 percent LTV, you could be underwater,” Rich Conti, president of the Plasencia Group, told GlobeSt.

So if falling RevPAR means a decline in hotel values and NOIs, that means an 8 percent drop could be dire for highly- leveraged properties. Many won’t be able to make payments and fall into foreclosure.

However, rampant foreclosure doesn’t seem to be happening yet. So far, PKF has worked on only two deals that would qualify as distress sales: the $12.4 million sale of the foreclosed 86-room Hotel Montgomery in San Jose, Calif. for Gramercy Capital Corp. and the 44-unit Rosario Resort and Spa in Eastsound, Wash. which sold at auction for $5.9 million.

While PKF’s data may be skewed for their own purposes, there is some truth to the declining RevPAR that will likely hit hotels and resorts in 2009. It’s hardly a surprise to anyone already working in one – their hours are being cut, there are layoffs and travel is down. But how the financial crisis plays out is still a mystery.

Will corporate owners may have more leverage in dealing with lenders, while small boutique hotels  lack the cachet and the cash to hold off foreclosure? Or will corporate owners be more likely to cut losses and move on, while smaller owners try harder for a work-out? Eaton said lenders can also change the scenario because community banks are less likely to foreclose on a hotel than a corporate bank with the necessary resources to start foreclosure.

Hotel owners will have to fight through the next year because unless lenders become less conservative with credit, the financial crisis is likely to linger.