More than two-thirds of the loans due this year and last were extended or else they would have defaulted.
1. Hotel defaults will exceed 50% in 2012
2. The can we have been kicking will turn into an oil drum
3. PIPs (if you don't know this term you must learn it) will cause 25% of defaults
4. Hotel Forecast gurus will lower their growth projections this month
5. Premature demobilization of workout staffs will cause increasing loan losses
Current CMBS hotel delinquency rates are around 15%. So how will we get to 50% in 2012? Well if we just take the lipstick off the pig we have been kissing we will see that defaults are ALREADY over 50%. More than two-thirds of the loans that were due this year and last have been extended or they would have defaulted. Let's call them functional defaults. And the functionally underwater credit kidding loans are being extended to what will be the worst year to refinance imaginable- 2012.
Simple addition: 2007 plus 5 equals 2012. Does anyone remember the quality of loans made in 2007? The beauties were 85% to 97.5% leverage with no amortization and coverage projected to GROW in 2008 and 2009 to 1.25. Next year the pig in the python will be triplets.
So? ... its all about PROCEEDS. Billions are needed to replace the five-year 2009 and 2010 loans extended into 2012 and added to all those 2007 emaciated loans coming due then. During the three-year period of 2005-2007. approximately US$14 billion in CMBS hotel loans with five-year terms were originated, and almost each and every replacement loan will be way short of proceeds. Where in today's hotel loan market will US$14 billion in new capital come from? Proceeds shortfall will be 25% to 50% because IF one can find them, current new loans are 55-60%, based on trailing 12 results, with lower property NOI than when originated, and they finally will require major additional capital for the PIPs (to be discussed) that Marriott, Hilton, Starwood et. al. are forcefully demanding.
The combination of stacking all those functionally defaulted loans onto the biggest year ever for loans coming due in what will be a very restrictive hotel lending market and with most hotels needing capital for renovation will make vultures happy and bondholders sad.
Steve Van has 33 years of hospitality experience. He is President and CEO of Prism Hotels and Resorts which he founded in 1983. Prism manages all major brands including Marriott, Hilton, Doubletree, Westin, Crowne Plaza, Holiday Inn, Radisson and Preferred Hotels and Resorts. Mr. Van was Hilton Doubletree Developer of the Year and serves on the Doubletree Owner’s Advisory Council.
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