“Defaults of S.D. Area Hotels on the Rise, Debt Issues Dog Operators”

Defaults of S.D. Area Hotels on the Rise, Debt Issues Dog Operators

Posted: 26 Jul 2010 12:10 AM PDT

California hotels remain under financial distress as owners cope with debt burdens, even as fundamentals such as room revenue continue to improve from the historic plunge of 2009.

Figures released July 14 by research and consulting firm Atlas Hospitality Group show that California had 478 hotels in default or foreclosure at the end of June. That was up 18 percent from the first quarter of 2010, and more than double the figure at the midpoint of 2009.

Of the state's distressed hotels, 100 had been foreclosed on by their lenders.

In San Diego County, Atlas reported, there were 40 hotels in default – nearly three times the year-ago level of 14 – and seven local hotels had been foreclosed on as of June 30.

The latest was the 258-room W Hotel in downtown San Diego, which remains open for business but was foreclosed on in late June by its lender, after its prior owner, Sunstone Hotel Investors Inc., stopped making payments on the remaining $65 million it owed on the mortgage.

Alan Reay, president of Irvine-based Atlas, said there is "still a lot of pain" in hotel real estate, despite the fact that operators are seeing improved occupancies and daily rates compared with the year that followed the nationwide economic meltdown of late 2008.

"The bottom has been reached and things are improving for revenue," Reay said.

Hotel Investors Bargain Shopping

However, many California hotel operators are still dealing with debt issues stemming from construction and purchases financed between 2005 and 2008.

Riverside County led in the number of foreclosed hotels with 11, San Bernardino County followed with nine and Los Angeles County had eight, Atlas reported. Of the 100 hotels that had been foreclosed on, only 12 had been resold to new investors as of June 30.

The San Diego market, while not as distressed as that of the Inland Empire, is still recovering from a significant overbuilding of new rooms just before the recession hit, particularly in the downtown area, Reay said.

The situation in the downtown area has contributed to the struggles of hotels such as Se San Diego. The 184-room hotel remains open for business, but its operators in late June filed for protection under Chapter 11 bankruptcy while it reorganizes its finances. Its operators, Fifth Avenue Partners, continue to negotiate with the hotel's lender, which is owed more than $70 million on a construction loan.

While the trend has yet to materialize locally, the research firm CoStar Group reported July 14 that there was a significant uptick in U.S. hotel acquisitions by investors in the first six months of 2010 compared with a year ago. The dollar volume, at $2.59 billion, was up 42 percent, though researchers noted many of the deals involved distressed assets.

Continuing Rough Ride

Atlanta-based PKF Hospitality Research projects that San Diego County's per-room hotel revenue will grow 8.9 percent in 2011. However, in 2010 the firm expects local lodging demand to rise just 1.1 percent from a year ago, partly because of new hotel rooms still coming online.

PKF says the county's hotel rooms have been about 64.5 percent occupied during the past year. Nationwide, lodging demand is up 5.3 percent from a year ago, but consumers remain price-conscious.

Reay said investors may be responding to the generally improving hospitality business climate. However, Atlas researchers estimate that the true number of distressed California hotels is "much higher" than the latest survey suggests, with more than 1,000 properties statewide operating under some form of forbearance agreement with their lenders.

As the second half of 2010 got underway, two national hotel operators with a San Diego County presence were signaling a continuing rough ride for the industry.

On July 19, Florida-based Innkeepers USA Trust, which owns interests in 73 hotels including a Residence Inn by Marriott in San Diego's Mission Valley, announced it had filed for Chapter 11 bankruptcy so it can reorganize.

A statement said Innkeepers has secured commitments for two debtor-in-possession credit facilities totaling approximately $67 million, which Innkeepers will invest in the improvement of its hotel portfolio if the bankruptcy court approves.

That action followed a June Chapter 11 bankruptcy filing by South Carolina-based Extended Stay Hotels Inc., with more than 680 properties including four in San Diego County, in what was the largest-ever bankruptcy filing by a U.S. hotel operator.

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