A wave of hotels is expected to be taken over by banks and other lenders in the coming months, and some hospitality industry players are looking to build up management arms in hopes of operating those properties for their new owners.
Hotel management companies are getting ready to see a wave of foreclosures and new business for them.
Highgate Hotels, Chesapeake Hospitality and Hospitality Ventures Management Group are among the firms ramping up hiring in anticipation of an influx of hotel management contracts by banks and CMBS bondholders.
“We’re spending time with banks and we’re in active dialogue around a number of different opportunities,” Highgate principal Richard Russo said. “We certainly are anticipating that volume to increase.”
Hotel owners have faced an extreme drop in business due to the coronavirus pandemic and various lockdown orders around the world. U.S. hotel occupancy fell from an average of 66% in 2019 to 42% last year, according to STR. The average revenue per available room — the hotel industry’s leading performance indicator — dropped from $86.67 to $43.76 year-over-year.
There is no V-shaped recovery projected for the hospitality industry as the financial pain for some hotels is expected to deepen in the months ahead. The industry isn’t expected to recover its pre-pandemic demand and revenues until 2024, according to recent predictions from STR and Tourism Economics. By the end of 2021, the industry could recapture 80% of pre-pandemic demand and 70% of 2019’s RevPAR.
By the end of 2020, at least 19 CMBS loans backed by hotels totaling nearly $495M in value had fallen into foreclosure, according to the credit rating agency DBRS Morningstar. Another 635 loans backed by hotel properties are in special servicing due to the pandemic’s impact on their performance. Those troubled loans add up to $18.5B in debt, according to Morningstar.
“I do expect [foreclosures] to get worse,” Chesapeake CEO Chris Green said. “What’s coming up, quite frankly, is real estate tax payments. And hotels have been running negative cash flows for six to nine months.”
Interstate Hotels CEO Jim Abrahamson and Chesapeake CEO Chris Green speaking at a Bisnow event.
In a foreclosure, the lender takes full ownership of a commercial property when the borrower can’t make payments. But at that point, the property is on the books of that financial organization. Typically, banks and other lenders then turn to management companies to operate the properties for them and attempt to turn them around.
The management firms are paid on a percentage of the hotel revenues, and they can collect the extra incentive of a percentage of the revenue growth. Taking over struggling hotels poses a variety of challenges for the new operators, Green said, depending on what drove the hotels into foreclosure.
Companies could rehire staff or spruce up the property. At times, they may come in and rebrand the property. Sometimes the answer to struggling hotels, even during a pandemic, may be improved marketing efforts, Green said.
“Listen, people are still traveling,” Green said. “The question is, are you capturing the travelers who are in your market? And how fast will you identify the new travelers as they enter the market?”
But far fewer are traveling than during past recessions because of the pandemic, which threw hotels that were performing well into sudden distress. Hotel operators will still be at the mercy of the economic recovery, vaccine distribution and the confidence of people willing to travel again.
“The industry is where it’s at because of a pandemic that has absolutely nothing to do with the industry and how people bought hotels and built hotels,” HVMG Senior Vice President Mary Beth Cutshall said. “This isn’t an issue about people being overleveraged. This is just a shutdown in demand.”
Hotel management companies already are seeing new business.
Peachtree Hotel Group has taken over the management of four hotels for banks since November, CEO Greg Friedman told Bisnow.
Maryland-based Chesapeake’s management division will likely enter into more contracts than it did during the Great Recession, Green said. Chesapeake typically enters into longer-term contracts with banks and lenders to manage and turn around ailing hotel properties in the eastern U.S., including replacing the brands and operators. That growth could prompt Chesapeake to hire more than 500 employees in the coming months, Green said.
“I could see that division doing 15 hotels over the next couple of years,” he said.
In early December, HVMG announced that it was ramping up its lender-owned real estate management division, starting with contracts to operate two foreclosed hotels in Texas. Now, the firm is positioning itself to take on even more management contracts with banks.
Other hotel companies see opportunities to take advantage of distress outside of managing properties for banks and special servicers.
Peachtree Hotel Group has been buying first mortgages at a discount from banks that would rather not take ownership from struggling borrowers. In 2020, Peachtree purchased 50 mortgages from regional and community banks for around $400M combined, Friedman said.
Instead of foreclosing on those properties, Friedman said Peachtree is looking to work with the borrowers to improve operations.
“We expect that over 90% of the loans we acquired will end up getting paid off by the borrower,” he said.
Even though HVMG is ramping up its bank-owned management division, Cutshall said the latest round of stimulus passed by Congress is leading her to moderate her prediction of a large deluge of foreclosures. The package, which includes another round of Paycheck Protection Program payments, may have given banks and special servicers the incentive to delay taking back properties a little while longer.
HVMG executives saw evidence of that recently after the firm was awarded management contracts for a handful of hotels tied up in CMBS loans, Cutshall said. The special servicers have yet to foreclose on the property, which has delayed the start of those contracts, she said.
“[Lenders would] rather work with a good borrower, recognizing the loss of business is not due to poor performance but is because of a pandemic,” she said. “A lot of us are starting to think there will not be an avalanche.”