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Hotel-Sector Distress Just Ain’t What It Used to Be
In recent installations of the TreppWire podcast series, Trepp team members have spoken about how much cash is waiting for deployment into the distressed hotel market. Evidently it’s still waiting, at least when it comes to the fire-sale prices that distress implies.
Sales in the lodging sector since the onset of the pandemic have thus far represented “very modest markdowns,” writes Trepp’s Manus Clancy. That’s even after the pandemic walloped many operators’ occupancy and RevPAR even harder than in the previous downturn.
To get a sense of why this is the case, Clancy compares losses on CMBS loan resolutions since March 2020 to those that were incurred between 2010 and 2019. Looking at the earlier period, he writes, “the numbers are staggering,” with an average realized loss of 50.1%.
Why so high? Clancy cites a number of reasons.
“First, many of the loans that suffered losses were originated from 2006 to 2008, meaning the loans were made during a period of inflated values and high leverage,” he points out. “Some of these loans were resolved in 2010 to 2012 when liquidity was limited, an explosive combination when it came to driving up realized losses.”
Additionally, due in part to the short supply of liquidity, “the time between loan default and loan resolution often spanned many years which led to large accumulations of servicer advances, fees, and (frequently) deferred maintenance to the collateral. This also helped drive up realized loss percentages.”
Fast-forward to the fourth quarter of 2021, and loss severities on hotel CMBS have been much smaller. “In fact, realized losses have averaged less than half of those from 2010 to 2019,” Clancy wriutes. Trepp puts the average realized loss at 23.6%, with losses on single-property limited service loans coming in about 190 basis points higher—still not much more than half the loss on loans from 13 or so years ago.
Today’s numbers are so much smaller, Clancy writes, largely because “everything that was true in the period from 2006 to 2008 was not true over the last 10 years. Loans were underwritten much more conservatively in recent years, with lower loan-to-value ratios, and values were not nearly as inflated as they were before the Great Financial Crisis.”
In addition, the loans resolved over the past 18 months were closed out in a period of heightened liquidity. “Lastly, the loans resolved thus far – only a few dozen in total – were resolved quickly, so fees and advances did not have nearly as much time to accrue,” Clancy writes, adding that loss percentages may tick upward as time goes by.
- ◦Financing
