Tucson is about to embark on a public financing agreement to build a 500 plus room hotel adjoining the Tucson Convention Center. Is it a smart move for a city with our track record in financing and getting projects completed on time and on budget to embark on a risky hotel? The room construction cost is projected as $318,000 per room.

Taking an aggressive 10% CAP rate (maybe 2007 values), even with the projections set forth in the hotel feasibility study, the value of this hotel on the open market is $100 million. The projected cost to build the hotel…..$168 million.  Good enough for government work.

By Sean P. Smith

Last night, Sunstone Hotel Investors (SHO) announced that the company would turn over its W San Diego hotel property to its lenders, as opposed to making its June 1st debt service payment on the property’s mortgage. This move speaks volumes about the deterioration of the hotel operating environment in recent months, and in turn, the value of hotel properties.

Sunstone, a hotel REIT, acquired the W hotel in San Diego in 2006 for $96 million, or roughly $370,000 per room. At the time, the purchase price equated to a multiple of 12x projected 2006 EBITDA.

In conjunction with the purchase, the company closed on a $65 million first mortgage, bearing an interest rate of 6.14%.

The local hotel operating environment has weakened to the point that the company has decided to simply hand over the keys to the lender, as opposed to making another debt service payment, as management now believe that the property is worth “meaningfully below” the principal amount of the debt.

While there have been many hotel defaults in recent months, this is a high-profile transaction, involving a publicly held hotel REIT and a premium hotel brand. The W hotel brand is owned by Starwood Hotels & Resorts (HOT), which also manages the W San Diego property. There are currently only 29 W hotels worldwide, although the company has an additional 22 W hotels in its pipeline.

As the hotel operating environment remains weak, we expect that more hotel owners will come to the conclusion that they would be better off walking away from properties that are now worth less than their outstanding debt balances. This would in turn put additional pressure on hotel values, just as a residential foreclosure or short sale negatively impacts all the houses in the vicinity.

From Zack’s.com

Despite the continuing deterioration in operating fundamentals, hotel stocks have rallied in recent months, including Marriott, Starwood, Intercontinental Hotels Group (IHG – Snapshot Report) and Wyndham Worldwide (WYN – Analyst Report). We believe that these moves have been overdone, and are unwarranted. The sector has a history of false starts, as investors prematurely bid up shares in hopes of a quick recovery in the group. We expect that this will again be the case in this situation, and believe that hotel stocks are due for a correction.

We project that the current steps being taken by hotel companies to lower room rates in an effort to fill rooms will have long-lasting negative repercussions. In the short-term, the reductions to room rates are unlikely to be offset by occupancy gains, thus resulting in lower overall profitability.

More importantly, however, is our belief that the reductions in ADR will result in depressed room rates even after the economy stabilizes and begins to improve. This may in turn extend the downturn in the lodging industry.

From San Francisco Business Times:

Millennium Partners is in default on its two-year $90 million loan for the 277-room Four Seasons Hotel San Francisco, according to the developer.

The luxury condo and hotel developer and operator has purposefully stopped making debt payments as a strategy to jump start renegotiating the debt with the special server, LNR Property Corp. The Four Seasons is the second luxury hotel to default on its debt payments in recent weeks. The owners of the 393-room Renaissance Stanford Court Hotel in Nob Hill, funds controlled by JER Partners, defaulted on a $89 million loan, according to lender Barclays Capital.

……. “To see the caliber of hotel like Renaissance Stanford Court and the Four Seasons going into default in the early stages of this downturn is not a good sign,” said Reay. “It means this is going to be deep, it’s going to be long, and this is going to effect everybody.”

In the last 60 days 213 hotel owners have defaulted on their loans in California, a 184 percent jump over the previous 60 days, Reay said. Reay predicted that the vast majority of hotels that were financed with loans that tapped the commercial mortgage-backed securities market between 2005 and 2007 will end up in default, a number that could top 2,000 in California alone.

“We’re in a deep recession and hotels are suffering the most of any real estate class right now,” said Reay.

A report by Atlas Hospitality estimates that room revenues in California are down 21.5 percent in 2009 and that values are 50 to 80 percent lower than they were at the market’s peak from 2005 to 2007.

From Bloomberg – 2009

Sept. 24, 2009 (Bloomberg) — Luxury hotel owners risk defaulting on their debt as the recession cuts occupancies and the credit crunch constrains refinancing.

Loans secured by more than 1,500 hotels with a total outstanding balance of $24.5 billion may be in danger of default, according to Realpoint LLC, a credit rating company that tracks commercial mortgage-backed securities. Some of the biggest loans, put on the company’s watch list because of late payments, decreasing occupancies or cash flow, were made to luxury properties where rooms can cost more than $850 a night.

“All segments are showing signs of distress but the luxury segment carries much higher loan balances and is more clearly affected,” Frank Innaurato, managing director of CMBS analytical services at Horsham, Pennsylvania-based Realpoint, said in a telephone interview.

 

San Francisco – A $90 million loan secured by the Four Seasons San Francisco, a 277-room, five-star property, is 90 days delinquent and foreclosure proceedings have begun, according to Realpoint. A notice of default has been filed, according to Bloomberg data.

The borrower was Millennium Partners LLC, a real estate firm founded in 1990 by Christopher Jeffries. The company controls 1,860 residential units, more than 2,000 hotel rooms and 1 million square feet (93,000 square meters) of office space, Realpoint said.

Nicola Blazier, a spokeswoman for Four Seasons San Francisco, didn’t respond to e-mails and phone calls for comment. Millennium principal Jeffries didn’t return a call.

The Dream Hotel, a 220-room hotel on West 55th Street in New York City that features 300-thread count Egyptian bed linens and iPods, is collateral for a $100 million loan taken by Surrey Hotel Associates LLC that’s at risk of default, Realpoint said.

Occupancy Decline

Phoenix - A $190 million loan secured by the 640-room Arizona Grand Resort is 90 days delinquent, according to Realpoint. If the loan is liquidated it may lead to a $111.9 million loss, the credit rating company said.

The property’s occupancy rate fell to 64 percent as of December 2008 from 70 percent a year earlier, Realpoint said. The borrower was Pointe South Mountain Resort LLC, a Grossman Company Properties affiliate. Pamela Kerner, a spokeswoman for Phoenix-based Grossman, declined to comment.

Realpoint also is monitoring a $1 billion loan taken by CNL Hotels and Resorts, a company acquired by a Morgan Stanley real estate fund. The loan is secured by five properties with 14 golf courses, including the Arizona Biltmore in Phoenix and the Grand Wailea Resort Hotel & Spa in Maui, Hawaii.

.

Westin Aruba

The Westin Aruba Resort & Spa, managed by Starwood Hotels & Resorts Worldwide Inc., was foreclosed on in May, according to Realpoint. The property is controlled by Wachovia Corp., the ratings company said.

The property’s occupancy rate dropped to 41 percent in May from an average of 63 percent in 2008, the report said. Servicers are used when a loan is in or near default and needs to be reviewed or modified, according to Innaurato.

The Westin Aruba has been hurt by competition from a 450- room luxury resort built next door, Realpoint said.

Another property on Realpoint’s watch list is the Four Seasons New York, where a standard room with a king-sized bed starts at $855 a night. The hotel is among four used as collateral for a $344.6 million loan, Realpoint said.

The properties’ occupancy rate fell to 57 percent in the 12 months through June. At the end of 2007 and 2008 it was 73 percent and 69 percent, respectively, Realpoint said.

‘Moderate’ Risk

New York – Four Seasons New York’s net cash flow “is well below historical trends,” the credit rating company said, without being more specific. While the property’s revenue per available room and net cash flow have jumped since bottoming in 2003, the hotel “is more recently showing signs of New York’s weakening economy,” Realpoint said.

The property is owned by Ty Warner Hotels & Resorts.

“We consider this loan a moderate default risk based on declining performance along with the lower expectations on the lodging-resort industry given the current economic conditions,” Realpoint said in its report. “Our analysis of the collateral suggests that the combined value of the assets are below the current loan amount.”

Donna Snopek, chief financial officer of Ty Warner Hotels, said in an e-mail that the loan “is performing well.”

‘No Impact’

“Moreover, the properties in the pool are all performing at the top of their respective markets,” Snopek said. “We are fully committed to our loan and can assure you that there is no impact to the current high standard of services at this property.”

Los Angeles – Lowe Enterprises Inc. of Los Angeles, the operator and developer of a 582-room resort on the Pacific Coast, said in August it’s trying to restructure a mezzanine loan after defaulting two months after the hotel opened.

The Terranea Resort in Rancho Palos Verdes, California, a $480 million property, opened June 12 with a golf course, three pools and eight restaurants. Lowe is among a group of investors in the property and is in negotiations about restructuring the loan, spokeswoman Jann Diehl said.

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

Last Updated: September 24, 2009 18:29 EDT

From Rueters:

Resorts International is latest hotel default-Fitch

Thu Sep 3, 2009 12:51pm EDT

Sponsors on the Resort International loan are Colony Investors VI, Colony Investors VII and RIH Coinvestment Partners, Fitch said. The loan is collateral for the JPM 2007-FL1 commercial mortgage-backed security.

NEW YORK, Sept 3 (Reuters) – Borrowers have defaulted on a $227.9 million loan for three Resorts International hotel-casinos in New Jersey and Mississippi, according to Fitch Ratings, in one of the largest transactions hit by the real estate crisis.

“Properties directly tied to consumer spending such as hotels are the first to exhibit signs of performance declines,” Adam Fox, a senior director at Fitch, said in the statement.

The loan on properties in Atlantic City, New Jersey, and Tunica, Mississippi, was transferred on July 23 to a servicer specializing in troubled loans after the borrower failed to make a payment, Fitch said in a statement. The borrower said cash flow had declined significantly, Fitch said.

Hotels have been among the hardest hit sectors as the recession cuts down on travel and the credit crisis choked off credit on commercial properties, especially those laden with debt made under easy conditions. Since May, Extended Stay Hotels filed for bankruptcy protection and Red Roof Inns Inc. defaulted on $361 million in loans.

From the Wall Street Journal -

By KRIS HUDSON

For the past two years, Phoenix has wrestled with the fallout from the most severe housing bust in decades. Now comes the hotel bust.

Since January, when the luxury W Scottsdale Hotel & Residences received a notice of foreclosure related to a $73 million construction loan just a few months after it opened its doors, the list of troubled hotel properties in Phoenix has continued to grow.

In March, German lender Eurohypo AG sued the developer of Phoenix’s 293-room InterContinental Montelucia Hotel, alleging default on a $180 million construction loan. In April, the 640-room Arizona Grand Resort, formerly known as the Pointe South Mountain Resort, became delinquent on its $190 million securitized mortgage. Two weeks ago, Kabuto Arizona Properties LLC, owner of the 331-room Wigwam Golf Resort & Spa, filed for Chapter 11 bankruptcy protection to thwart Citigroup Inc.’s efforts to foreclose on the resort.

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Anton Troianovski/The Wall Street Journal

The W Scottsdale Hotel & Residences got a notice of foreclosure tied to a construction loan just a few months after it opened last fall.

In all, at least six major Phoenix-area hotels, five of them resorts, have gone delinquent on their loans or sought bankruptcy protection since last fall. Two of those had opened in recent months, and two others had recently completed renovations. All told, the six encompass nearly 1,900 rooms, or roughly 3% of the area’s total of roughly 58,000 rooms.

“Phoenix suffers from the dual challenges of overbuilding and shrinking demand due to the national drop-off in corporate conferences,” said David Loeb, a hotel-industry analyst with Robert W. Baird & Co. “All of this means that Phoenix’s hotel market has experienced one of the steepest downturns among the big markets.”

Of all the commercial-property types, hotels arguably have fared the worst in this recession as travelers cut back, companies curtail conferences, and hotels slash rates to haggle for the business that remains.

Nationwide, occupancy at hotels in the top 25 U.S. markets was 62.8% in April, down nearly eight percentage points from a year earlier, according to Smith Travel Research. Revenue per available room, a key measure of the industry’s sales, fell more than 22% in the same span.

The problems are more pronounced in Phoenix, where construction activity was more robust than for the nation as a whole because of plentiful land and relatively low construction costs.

The area is now experiencing a bigger decline in vacation and conference travel than most other places, in part because it is a “fly-to” resort area beyond easy driving distance from larger metropolitan areas.

Hotel occupancy in Phoenix was 58% in April, and revenue per available room declined 28% from April 2008 to April 2009, according to Smith Travel Research. Phoenix’s occupancy for the first four months of this year was the lowest the market has reported in the first third of any year since Smith Travel began tracking the figures in 1987.

Meanwhile, Phoenix has added 4,196 rooms since 2006, ranking it as the 10th-fastest-growing U.S. market by number of rooms added. Another 15,748 rooms are in planning and development, representing a potential 26% expansion of Phoenix’s existing inventory, according to Lodging Econometrics.

The problems have ignited battles between borrowers and lenders. Among the most contentious is the fight between the owners of the W Scottsdale, Los Angeles-based Triyar Cos. and German lender HSH Nordbank AG. Triyar, a closely held real-estate company, owns 40 properties in several states, including malls, office buildings and apartment complexes.

In December 2005, Triyar, which is controlled by brothers Steven and Shahrod Yari, took out a $73 million construction loan from Nordbank to build Phoenix’s first W hotel. They planned a trendy hotel fitting Starwood Hotels & Resorts Worldwide Inc.’s profile for the brand: a luxury hotel complemented by contemporary restaurants, spas and nightclubs.

To the W’s 224 rooms and 18 penthouse residences, the Yaris added a Bliss spa and Sushi Roku, a popular eatery in Los Angeles and Las Vegas. The hotel’s exterior features white brick and, on its top floors, floor-to-ceiling windows. 

But construction of the W dragged on longer than planned, resulting in the hotel opening a year late last fall. A bevy of lawsuits ensued.

General contractor Hunt Construction Group Inc. in October sued the project’s architect, engineers, interior designer and others, alleging they delivered work that was “incomplete, uncoordinated and contained multiple errors and omissions.” Triyar sued Hunt in November, accusing Hunt of failing to complete the hotel on time and on budget.

In February, Nordbank, the lender, sued the Yaris, alleging they failed to make payments on the now-$82 million construction loan, which came due in December. Nordbank also claims, despite the loan’s requirements that Triyar sell at least nine condos at the W by last June, that no sales had occurred by the time the bank filed its lawsuit.

Triyar responded by suing Nordbank in March, arguing that Nordbank didn’t meet its funding commitments even as Triyar ponied up more capital for the project.

Steven and Shahrod Yari didn’t respond to messages seeking comment. Michael Mahoney, chief executive of Triyar’s hotel division, said the parties in the lawsuits “are in negotiations to resolve the issues.”

A Nordbank representative didn’t return messages seeking comment. Hunt’s attorney didn’t return calls seeking comment.

Write to Kris Hudson at kris.hudson@wsj.com