A recent string of high-visibility hotel chapter 11 filings has led investors and lenders to wonder what to expect for 2021. Recent filings include:
- Martinique Hotel, a 165-key property in Brooklyn – September 2020
- Tillary Hotel, Brooklyn, a 174-key boutique property in Brooklyn – December 2020
- Holiday Inn Resort Orlando Suites, a 777-key property in Orlando, Florida – January 2021
- Wardman Park Hotel, a 1,152-key property in Washington, D.C. – January 2021
- Eagle Hospitality REIT, filed chapter 11 petitions for 18 properties, including the Queen Mary Hotel in Long Beach, California – January 2021
In New York City, there have been many hotel closures in addition to bankruptcy filings. According to the New York Post, 2020 data released by the Department of City Planning showed 146 of the city’s 705 hotels have closed —20%. The closures account for 42,030 of the city’s 128,000 hotel rooms. Analysts cited by the Post said the hotel industry won’t fully recover to pre-pandemic levels until 2025.
Industry consultant PriceWaterhouseCoopers has said that if vaccine distribution proceeds smoothly, the industry may see a much-needed surge from pent-up leisure demand in the second half of 2021, but it could be years before business travel returns to 2019 levels, if at all. PWC noted that, so far, investor commitment remained strong, and lenders have hesitated to pursue foreclosures. But PWC warned that if the vaccine rollout stumbles or demand doesn’t materialize in the second half of 2021 as hoped, the industry could face a liquidity crisis and a surge in foreclosures, especially among noninstitutional hotel owners.
Where Do We Go From Here?
We are at the very beginning of the financial restructuring that must occur. Three forces will drive the industry’s restructuring:
- Owners will eventually tire of working on their underwater hotels. If the value of a hotel is less than the debt, it may take years to grow the value past the debt. In the meantime, all value improvement from the owner’s work will benefit the lender—the owner is working for free. If the loan is nonrecourse, then the owner will begin to wonder why he is doing so.
- Owners will run out of money and will default. Even though interest rates are artificially low, many hotels still have insufficient revenues to cover debt service. Many owners have been funding the deficits by using reserves or contributing money from other sources. Eventually, these sources will be exhausted, or owners will tire of throwing good money after bad. When a monetary default occurs, most lenders will have to reevaluate the loan and take a loss. Then the lenders wake up and act.
- Owners will run out of time and will default. Many loans are coming due. When market values and market interest rates are confronted, the hotel owner may not be able to refinance. Recent poor performance will hurt borrowers’ ability to refinance. Although an “extend and pretend” mentality has persisted, reality will take hold, either because lenders will employ insist on more rigorous valuation and accounting methods or bank regulators will require them to do so.
As more loans go into default, more workout negotiations will occur. Lenders will ask their borrowers to provide more equity. The borrowers may temporize, find new equity, or offer the lenders the keys. Some may try their luck with a bankruptcy filing. At this stage, there are likely to be some distressed sales prior to bankruptcy. Most hotels that file chapter 11 will either be sold or close; few will reorganize.
Next, for those loans that aren’t brought back into balance in the first stage, lenders will begin foreclosure, move to appoint a receiver, change managers, get into possession, and ultimately find out what it’s like to be a hotelier. In the third and final stage, the lenders who have become hoteliers will want to sell the hotels. They will want to begin selling hotels as soon as they believe the properties have been stabilized. For investors, those sales by lenders will likely represent the best opportunity to acquire bargain properties.