Hotel Property Rebound Faces Years-Long Slog

(Bloomberg) -- Distressed hotel owners may need to wait until 2024 to see a full rebound.

Hospitality property values are forecast to see swift improvements after 2022 though a full rebound for all types of hotels is years away, according to real estate data firm CoStar Group Inc. The sector has a lot of ground to cover as valuations on hotels tied to defaulted or distressed loans securitized in commercial mortgage-backed securities fell more than 20% last year from origination appraisals.

“This time around, economy and midscale properties, as well as extended-stay hotels weathered the downturn better than luxury and full-service hotels,” Xiaojing Li, managing director at CoStar Risk Analytics, said in an interview. “The opposite was true during the Great Financial Crisis, where the economy hotels performed worse.”

The data firm predicts distressed hotel asset values will recover at least 50% of their recent losses by 2023, and be back to pre-pandemic valuation levels by 2024. Retail, on the other hand, had already been distressed pre-Covid and property valuations tied to defaulted loans dropped nearly 40% last year, the data show.

Read more: Debt investors step up hotel lending in bet on life after Covid

“But even there, there still will be outperformers in the retail sector,” Li said. “In fact, there will be winners and losers across all property types and geographies this time around. Regional malls, of course, have been struggling the most. But industrial and apartments will likely be among the winners.”

CoStar's projections, which applied average property-sector growth rates to valuations over the next nine years, showed industrial and warehouse properties faring the best of all property types. Valuation declines were shallower last year and the sector is already recovering rapidly, having benefited from the need for cold storage warehouse facilities as people sheltering in place ordered food online for delivery.

Bifurcation

Commercial real estate has struggled over the last year as Covid-19 kept shoppers out of malls, travelers away from hotels and workers home from offices.

The downturn pushed about $146 billion of commercial real estate into a serious risk of bankruptcy or default at the end of last year, with the pain concentrated in hotels and retail, according to data compiled by Real Capital Analytics, a commercial real estate data firm.

Recoveries will be especially mixed for the hotel sector, depending on chain, location, and type of hotel.

“As the vaccine is rolled out to a larger portion of the population and as air travel picks up again, we do expect an uneven recovery,” analysts led by Gunes Kulaligil said in a Wednesday research note from Methodical Valuation and Advisory, a securtization-focused valuation firm. “Business travel is unlikely to return to pre-pandemic levels soon, so drive-to type hotels and destination hotels are likely to fare better than hotels in business districts in the short term.”

Despite the pain realized by property owners, we haven't seen the distressed-sale wave yet for the current recession, Li said. These stressed sales may arrive soon, likely starting with New York City hotels, which relied on tourism and are in a particularly difficult situation.

Last last year, there were already distressed sales for Vornado Realty Trust's Crowne Plaza Times Square Manhattan, as well as for the Surrey Hotel and the Hilton hotel in Times Square.

In the case of the Crowne Plaza, Argent Ventures will pay roughly $90 million to buy the $195 million senior mortgage on the hotel, a significant haircut in value, Li said.

Relative Value: Securitized Debt

• Spreads for senior bonds in legacy RMBS, reperforming-loan and non-performing loan RMBS, credit card, auto, and most CMBS are at pre-pandemic levels or tighter, analysts at Methodical Valuation and Advisory said
• RPL whole loans are also at the tightest levels that the analysts have ever seen
• However, “there remain pockets of bonds where spreads have not fully retraced in aircraft, mezzanine CMBS, and private student loan subordinate tranches”
• Parts of the rental car market and some franchise bonds also have not fully recovered, and hence may offer relative value
• While aircraft ABS was the last sector to rally, ‘A' tranches are back to pre-Covid levels, ‘B' tranches are lagging slightly, and ‘C' tranches are yet to fully recover

Quotable

“It is such an interesting market, because the options (to refinance or reset) a CLO really need to be analyzed on a deal-by-deal basis,” said Deep Maji, head of CLO investing at Oxford Funds. “For example, if you can extend the life of a CLO that is approaching the end of its reinvestment period by 3 to 5 years, that's substantial optionality for you to hold as an equity investor. You have the potential to create an additional multi-year runway for the CLO manager to add value and to generate additional equity cash flow while potentially enhancing the arbitrage of the deal and resetting the relevant tests and terms of the indenture.”

What's Next

ABS deals in the queue for next week include Solar Mosaic (solar ABS), North Mill (equipment loan), CNH Industrial (equipment loan), Dell Financial Services (equipment loan), Mercury Financial (credit card), Westlake (subprime auto), Wyndham Destinations (timeshare), and Global Lending Services (subprime auto).

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