Since the peak of 2008, hotel revenue has declined almost 20 percent. ""Fitch Ratings"":http://www.fitchratings.com says it's the largest decline among the major commercial mortgage-backed securities (CMBS) property types.
[IMAGE]In a CMBS market trends research note released Thursday, Fitch explained that cash flows from hotel properties should begin to increase during 2011. But given the current capital restrictions, the agency predicts defaults on hotel loans held by CMBS investors will double from current levels by 2012.
""Hotel defaults will be most pronounced in 2011 and 2012 when the largest concentration of loan maturities occur,"" Fitch said in analysis released to DSNews.com.
In addition to declining operating performance, capitalization rates have increased, and as a result, hotel property values have fallen as much as 50 percent from their peak in 2007, Fitch noted.
The magnitude of income and value declines in 2009 were a result of reduced travel in the corporate and leisure sector, capital constrained borrowers, and a frozen financing market for property trades, Fitch said. The agency explained that since hotels do not have long-term contractual leases, and rates can be re-set on a daily basis, they have been especially hard hit by the economic downturn. Also, given lower free cash flow from the properties, capital investments have been postponed, affecting future hotel operating performance, Fitch added.
[COLUMN_BREAK]Of the approximately $42 billion Fitch-rated hotel loans originated during 2006 and 2007, 45 percent were floating rate. So far, borrowers in many cases have been able to keep their loans current, despite lower operating cash flows, Fitch said, however, of the floating rate hotel loans originated during 2006 and 2007, approximately 78 percent mature in 2011 and 2012.
Many of these loans will have difficulty refinancing given their lower values and operating cash flows and higher debt yields required by the lenders, Fitch warned. As a result, the agency's analysts project that delinquencies on hotel CMBS will increase from 16.6 percent as of February 2010 to 25-30 percent in 2012.
Many of the initial delinquent loans and Fitch's ""loans of concern"" in the sector were destination and resort/casino hotels. As of February 2010, while all major commercial property types have experienced dramatic increases in delinquency rates, hotels lead the way with a 13-times year-over-year multiple in delinquencies.
The 16.6 percent February delinquency rate for hotels represents approximately $8.4 billion in total loan balance, and includes the $4 billion Extended Stay America loan, which defaulted after the property owner filed for bankruptcy.
Though U.S. CMBS special servicers are making some progress in working out distressed loans, they still have a sizeable backlog awaiting them, according to Fitch. Servicers resolved approximately $8.7 billion in 2009, but this number reflects only 11 percent of the amount in special servicing at the end of last year.
While financial performance for hotel CMBS continues to be negative, Fitch says the prospect for recovery is aided by a deteriorating supply pipeline which should allow the industry to better absorb new inventory and regain pricing power as demand returns. Project cancellations and declining new project announcements stem from both deteriorating market performance and the lack of available construction financing, Fitch said.