Two San Francisco Hilton hotels add commercial mortgage-backed securities to the woes. CMBS hotel special service rate reaches 26%
Four of the six hotels owned by the hotel-REIT Park Hotels & Resorts in San Francisco are still closed because business and convention travel remains close to zero.
By Wolf Richter for WOLF STREET.
Two Hilton hotels in San Francisco – the Hilton San Francisco Union Square, the largest hotel in the Bay Area with 1,921 rooms, and the Hilton Parc 55, both located in the Union Square area – owned by the hotel-REIT, Park Hotels & Resorts [PK], have now been added to the huge pile of hotel properties seeking mortgage relief that have been bundled into Mortgage Backed Securities (CMBS). Both hotels are still closed, although other hotels in San Francisco have reopened.
Tourism remains a small fraction of its former glory. Leisure tourism, which has returned from almost zero, is only part of the problem for these hotels.
Convention tourism is a huge factor in San Francisco, and all conventions and in-person meetings have been canceled or converted to virtual events, including at the sprawling Moscone Convention Center. People with expense accounts do not come to the City to attend conventions. And the Hilton San Francisco Union Square is the city’s largest convention hotel, with 134,500 square feet of meeting space, ballrooms, and boardrooms.
When mortgages that have been bundled into CMBS have problems and borrowers request relief from the loan manager, they are added to the services watch list, and these two properties have now been added to that watch list, according to the San Francisco Business. Times. The mortgage secured by the two Hilton properties is still valid, but the borrower, Park Hotels & Resorts, has requested relief from the service agent, Wells Fargo.
If the borrower and the service agent fail to reach an agreement, the loan is sent to a third party, the special service agent, and thus added to the list of special services. If the mortgage becomes unpaid, then it is added to the list of delinquencies.
This special service rate for hotel properties hit a record high of 26.0% at the end of September, according to Trepp, in its October report on CMBS.
But the delinquency rate of hotel properties has fallen, to a still astronomical level of 22.9%, because some delinquencies have been “cured” because the delinquent loans were granted a forbearance and were therefore no longer considered to be. past due, although no payment was due. But forborne loans continue to be on the special service list, and the special service rate gives a more accurate picture of the state of hotel mortgage loans:
The CMBS special service rate for hotel properties has been steadily increasing each month since March, unlike the default rate, which has declined slightly over the past three months largely due to loan forbearance in pain.
The two San Francisco Hilton properties that have now been added to the Watchlist are backing a $ 724 million loan, underwritten by Park Hotels & Resorts Group, according to the San Francisco Business Times. In 2016, when the mortgage was incorporated into the CMBS, ownership of the Hilton San Francisco Union Square was valued at $ 1.02 billion and that of the Hilton Parc 55 at $ 540 million.
When the mortgage is sent for special service, it will be revalued under current conditions. According to a Wells Fargo report, the revaluations of hotel properties have been brutal. For example, a Crowne Plaza hotel in Houston was revalued 46% below its valuation in 2014 when the loan was consolidated into a CMBS. The Holiday Inn La Mirada in Los Angeles was depreciated 27% from its 2015 valuation. The Holiday Inn in Columbia, Tennessee was down 37%. This is the range or current markdowns of hotels: -25% to -50%.
Park Hotels & Resorts was created by Hilton Worldwide Holdings [HLT] in early January 2017, and began trading on the NYSE. Park Hotels lists 60 hotel properties in the United States, including six hotels in San Francisco (two Hiltons, one Hyatt, one JW Marriott, one Le Meridien by Marriott and the Adagio by Marriott). Four of those six are still closed.
Shares of the REIT, which peaked in the fall of 2018, began to fall seriously in May 2019 and by February 2020 they were already down 30% from their peak in 2018. Then the pandemic hit the accommodation industry. Right now, the shares are trading at $ 10.75:
Wells Fargo, the manager of the mortgage secured by the two Hilton properties, has already agreed to provide relief to Park Hotels. He granted a six-month deferral of regular contributions to the furniture and equipment modernization fund. This contribution generally amounts to 4% of Park Hotels revenues, according to the Business Times. Instead, the borrower uses these funds to service the mortgage in order to keep it up to date. Wells Fargo has also waived its obligations for a debt yield test until the end of June, according to the Business Times.
While there has been a slight increase in leisure tourism in cities – and an increase in tourism near national parks, state parks, and other wonders far from cities – convention tourism as well as business trips in general remain in slump mode.
These travelers on expense reports were a lucrative part of the accommodation business. Now they are gone. A considerable part may be permanent, even after the health crisis is more or less resolved. Companies have found over the past seven months that their employees and leaders can in many cases accomplish the same thing virtually, while staying at work rather than wasting time galloping around the world, which has enabled them to save a lot of money. Reducing costs is always a top priority. But the costs of one business are the revenues of another business – and hotels and airlines are bearing the brunt of this change.
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