Although hotel property values have dropped as much as 50% from their peak in 2007, ratings agency Fitch forecasts that over the next 12-18 months there will be an increase in distressed asset sales, leading up to the largest concentration of CMBS hotel maturities in 2011 and 2012.
“Within U.S. CMBS loans, hotels currently have the highest default rate of all the major commercial property types at 6.8%,” said Fitch analyst Eric Rothfeld during a teleconference this week. The New York-based firm presented a special report on hotel securities, commercial mortgages and real estate investment trusts.
“That’s almost double the average default rate for all CMBS property types, which is still less than 4%. It’s almost 10 times the default rate for hotels just one year ago,” said Rothfeld.
Fitch-rated hotel loans are most concentrated in floating-rate CMBS transactions, accounting for 46% of the collateral, according to the firm. In contrast, hotel loans generally make up less than 10% of large fixed-rate CMBS pools secured by a variety of property types.
The most recent vintage floating-rate hotel loans were based on future values that were dependent upon property repositioning plans that now are unlikely to come to fruition due to economic conditions. Indeed, over the past year, Fitch has downgraded 67% of floating-rate transactions.
Hotel REITs raise cash
Since February of this year, REITs raised approximately $20 billion in capital through common stock offerings. About $10 billion of senior unsecured debt has been raised since the beginning of the year and about $6 billion of that has been raised since August, according to Fitch analyst Steven Marks.
“What the equity capital raisings have done is created a positive feedback where the equity offerings have essentially taken default risks of those issuers off the table,” says Marks. That ability to improve access to capital and liquidity has resulted in higher stock prices. “Capital raises have . . . caused most companies that we look at to have pretty substantial liquidity surpluses between now and 2011.”
In 2008, Fitch downgraded its ratings outlooks for Marriott, Starwood, and Host Hotels and Resorts Inc. to negative. If, however, as the broader economic recovery gains traction and lodging demand stabilization trends continue, the firm projects that it could upgrade its ratings outlooks for REITs to stable.
Cash is king
Indeed, revenue per available room (RevPAR) is still trending downward, currently in a range of 10% to 15%. “That’s been better than the mid-20% declines that we saw earlier this year,” says Fitch analyst Michael Paladino.
“Fitch broadly expects a slow economic recovery with U.S. unemployment remaining at very high levels through 2011. RevPAR trends are highly correlated to unemployment and GDP and corporate profits,” he says.
From the supply side, currently the hotel sector is at a cyclical peak with 3.2% growth. “That should go down to the mid-1% range in 2010 and 1% or below in 2011,” says Paladino. “The supply-demand balance should be improved in 2010 relative to 2009, and even in 2011 relative to 2010.”