Hotel Owners Losing Their Grip

One real estate sector that is most susceptible to moves in the economy is the hospitality sector and this economic cycle has been brutal for hotels. Occupancy levels are around 55%, with the expectation that they will continue to decline through the end of the year. Additionally, very little growth is anticipated next year. As such, we are beginning to see more and more reports of hotels going back to lenders. For instance, in the WSJ alone, there are reports that the W San Diego and W Scottsdale are in big trouble. The W San Diego article is extremely telling:

Sunstone Hotel Investors Inc. intends to forfeit the 258-room W San Diego to its lenders after its efforts to reach a compromise on the luxury hotel’s $65 million securitized mortgage failed. Sunstone, a real-estate investment trust that owns 43 hotels, bought the W for $96 million in 2006 from a group led by developer Gatehouse Capital Corp. Since then, the slumping performance of the W San Diego and the broader hotel market has made supporting that mortgage a challenge for Sunstone.

…

A recent report by the special servicer of the W’s mortgage, Centerline Serving Inc., noted that the W San Diego since 2007 has failed to generate enough monthly income to cover both its operating costs and its interest payments. Sunstone has been covering the shortfall since 2007 to keep the loan out of default, but it opted this month to stop doing so.

Get that, the hotel’s management has been digging into its pockets since 2007, a time when real GDP growth was north of 4%. The CEO of Sunstone is a former JLL Hotels broker who I’ve spoken to in the past before he took up the job at Sunstone. He’s an extremely smart guy that saw first hand the run up in the hotel sector and valuations which got out of control, and simply one more example of how “the smartest guys in the room” continued to buy into the market at the peak. Prices had gotten out of control, as evidenced by both individual hotel sales and the LBO’s of Hilton Hotels, Four Seasons, and the Extended Stay Hotels.

The lack of financing, poor economic visibility, and beaten down ADR/RevPAR numbers though are laying the groundwork for some terrific opportunities. If you are of the school that thinks that the economy is in the process of turning or at least bottoming out, then I suspect that over the next several quarters there will be some great opportunities to invest in hospitality assets. And unlike other sectors which might continue to decline for some time, particularly if this is a jobless recovery, the hospitality sector is very cyclical so stabilization should come sooner.

While sales are down substantially, sales volume is anticipated to increase dramatically during the second half of this year, with much of it driven by lender sales and capitalization rates for hotels expected to be in the 10-11% range.

I’ve also embedded below some fairly recent (February 2009) metrics on California hospitality.

Similar Posts:

• Sunstone Checking Out of Another Hotel
• GI Partners Targeting Hotels
• Hawaii Uh-Oh: Hotels in Trouble
• HNN Compiling List of Funds Targeting Hotels
• Prudential U.S. Quarterly Report