Among the biggest business casualties of the COVID-19 era are hotels. Can you imagine trying to keep a hotel afloat right now? Bad times are here. Bad times are ahead.
Business travel is at a trickle. Many conventions are on indefinite hold. The summer tourist season was a bust. Winter, traditionally slower than summer, is coming.
Given a choice between an Airbnb or a hotel stay, travelers may opt this year for the former to avoid sharing lobbies, elevators and air ventilation systems. That thought process actually played a role in my family’s choices of both vacation and staycation lodging this summer, twice.
You can assume everyone who owns or operates a hotel right now is suffering their worst business nightmare.
And yet, property taxes are still due. Utilities must be paid. Payroll Protection Program funds meant to keep hotel workers employed, worked for a time, but have now largely been spent. Hotel staff is being laid off.
On ExpressNews.com: Hundreds of San Antonio Marriott workers to be laid off
Speaking with hotel owners and industry experts, the conversation inevitably turns to their mortgages. The death blow for many hotels, whether it comes three, nine or 18 months from now, will be dealt by their lenders.
And here there is a potential split in hotel-owner outcomes, depending on whether they used traditional banks or Wall Street lenders. The split may also be understood as the difference between flexibility and inflexibility among lenders.
Traditional banks may be flexible, depending on their relationship with the borrower and his or her recovery prospects. On the other hand, Wall Street as a rule will be inflexible when it comes to mortgage payments. I’ll try to explain the different paths.
Smaller hotel owners mostly borrow from banks. The bad news for a bank borrower is that the lender typically will demand that the owner provide a personal guarantee on the loan. When things go south, as they have this year, borrowers have their entire personal net worth at risk.
The good news — if there is any — is that some banks may feel like it’s best to leave the current owner/operator in place, despite a loan default, because a new operator won’t be able to do any better in this environment. A mortgage foreclosure on the property, in other words, does not cure COVID-19.
Avinash Bhakta, a San Antonio-based hotel owner and investor, is suffering a 40 to 60 percent decline in revenues across the board. He asked his banks if they were willing to defer payments for three months.
He said some are working with him while others have just demanded repayment.
Bhakta sees this choice by banks to be flexible or not as an ethical one because the entire industry is suffering. Nonpayment of a mortgage can’t be understood as the result of mistakes by just a few bad operators.
The other major source of hotel financing — mostly targeted to large hotels and major hotel owners — are commercial mortgage-backed securities, or CMBS, from Wall Street investors. In normal times, this is the gold standard of hotel finance since the interest rates are attractive and owners are not generally personally liable for the debt. In this crisis, however, CMBS financing has become a huge problem for owners. (Personal note: I used to sell these types of bonds way back when dinosaurs roamed the earth, in the years 2002-2004).
The simplest way to understand the hotel owners’ current problem with CMBS is inflexibility. Unlike a local bank, which might see the value of a hotel for the regional economy and may work with an owner, CMBS debt is owed to bond investors who have no personal interest or stake in the ongoing success of the property.
A CMBS bond servicer is restricted in how it can treat a hotel owner. In this crisis, CMBS servicers have generally been inflexible in deferring payments. If the hotel owner can’t pay, a CMBS servicer typically has to foreclose.
To get a sense of how widespread hotel mortgage delinquencies have become, look at the national data.
In July, 23.4 percent of hotel CMBS bonds were delinquent, according to the market research firm Trepp. By way of comparison, just 1.34 percent of CMBS bonds were delinquent at the end of 2019.
Delinquencies are 53 percent higher right now than they were during the Great Recession.
On ExpressNews.com: Coronavirus slashes Texas hotels’ revenue more than the Great Recession did, report shows
Texas hotels are over-represented in the delinquency rates. Houston, Dallas and Austin all crack the Top 10 list of cities in the country with the largest number of delinquent hotel CMBS bonds. Trepp reports that Houston’s rate of hotel CMBS delinquency hit 66 percent in July. Austin’s rate is 35 percent.
Although smaller hotels do not get financed in the bond market, we would expect a similar spike in delinquencies among smaller hotel mortgages.
Remember, this is all after just five months of COVID. This is nothing short of catastrophic. Nobody knows how long the travel and tourism industry will suffer, so nobody knows how much worse hotel mortgage delinquencies will get. Without massive government intervention, we will see an extraordinary number of hotel foreclosures in the coming year.
Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules for New College Graduates.”
michael@michaelthesmartmoney.com |twitter.com/michael_taylor
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September 02, 2020 at 06:00PM
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