St. Regis Foreclosure: Sign of More Troubled Times for Hotels

Like other high-end properties, the St. Regis Monarch Beach resort has suffered low occupany as business and leisure travelers opt to stay close to home.

Hotel owners are under enormous economic pressure, especially those carrying a lot of maturing debt. The St. Regis Monarch Beach Resort in Orange County, CA, this week became the latest luxury hospitality property to be taken over by its lender when Citigroup Inc. seized the 400-room hotel after it fell into default on a $70 million mezzanine loan.

The takeover is only the most recent in a series of misfortunes to hit hotels, already reeling from sharp recessionary declines in revenue and occupancy due to the lengthy slump in leisure and business travel.

The 5-star Regis hotel in Dana Point, CA, rose to notoriety last fall as the destination of a retreat by executives and top sales producers of American International Group Inc. (AIG), which had accepted an $85 billion government bailout just a week earlier. The $440,000 in expenses, including $150,000 for drinks and meals and $23,000 dropped at the resort spa, was outlined in embarrassing detail in receipts made public in October by Rep. Henry Waxman, D-CA, at a House committee investigating the AIG bailout.

A CoStar News editor noted few visitors and an abundance of empty parking space at the St. Regis Monarch Beach during a walk of the property on Saturday, July 18 during the height of the Southern California summer vacation season.

Less than 15% of the St. Regis Monarch’s rooms have been rented this summer and a foreclosure auction scheduled for Monday was scrapped after Citigroup found there would be no serious bidders, persons familiar with the talks between the bank and the former owners, Farallon Capital Management LLC and Makar Properties, told the Los Angeles Times.

The St. Regis brand of Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT), which manages the resort built in 2001, announced Monday it would continue to operate business as usual following the "consensual transfer" of ownership. In a statement, Citigroup affirmed that the St. Regis brand will continue to manage the hotel and "the acquisition will have no impact on the hotel, golf club or beach club, which will continue to operate at the highest standards of service seamlessly and without interruption for guests and employees."

Hotel Occupancy Woes Are Broad Based

Although the pain is particularly acute in the luxury end, budget and extended-stay providers are also increasingly falling into default, foreclosure and bankruptcy.

Last month, 13 hotel loans totaling $596 million defaulted across all price points of properties, including the $190 million Pointe South Mountain Resort in Phoenix, the $117 million Loews Lake Las Vegas and the $100 million Dream Hotel in New York, according to Fitch Ratings, which expects hotel delinquencies to balloon by an additional $608 million as Fitch-rated hotel loans become 30 days past due as of June 30. The latter includes three notes totaling $293.8 million that correspond to portfolios of Red Roof Inns Inc. properties, which Fitch expects will move into the delinquency index next month. Late last month, the budget inn provider announced talks to restructure its debt. It was owned by Motel 6 owner Accor North America Inc. before being spun off to two private investors last year for $1.3 billion.

Here is just a sampling of other ominous hospitality news from the last few days and weeks.

• The Watergate Hotel in Washington, D.C., which housed the burglars in the infamous 1972 burglary of the adjacent Democratic National Committee in a scandal that brought down President Richard Nixon, failed to sell at a foreclosure auction Tuesday. None of the 10 bidders made an offer above the opening $25 million price. Ownership reverted to PB Capital Corp., a unit of Deutsche Postbank AG, which holds a $40 million note on a $70 million loan to previous owner Monument Realty LLC, which bought the property in 2004. Monument hoped to renovate the dilapidated 251-room structure into a luxury hotel or condos, but a 30-day notice of foreclosure expired this week.


• This week, United Capital Corp. in Great Neck, NY, purchased a mortgage note encumbering the DoubleTree Miami Mart Hotel and Convention Center in Miami, FL. The mortgage has a total outstanding balance of approximately $60 million and is secured by a 12-story, 334-room hotel, as well as a 166,000-square-foot convention center and 24,000 square feet of retail space, known as the Plaza Shops. The property is at the Miami International Airport. The note is currently in default and United Capital expects to take title to the property at the foreclosure sale, currently scheduled for July 30.


• The Columbia Gorge Hotel in Hood River, OR, will remain in the hands of its mortgage lender, Illwaco, WA-based Shorebank Pacific, after a foreclosure auction this week failed to turn up a single serious bidder. The historic inn built in 1921 has been closed since January.


• The 680-property Extended Stay Hotels chain filed for Chapter 11 protection June 15, citing $7.1 billion in assets against $7.6 billion in liabilities, along with the need to restructure $3.3 billion in mezzanine debt that lenders such as Wachovia were threatening to take into foreclosure.


• Sunstone Hotel Investors Inc. let its 258-room W Hotel in San Diego, CA go into default last month. San Clemente, CA-based Sunstone did not make its June 1 debt service payment and the company said it does not intend to negotiate any further with the special servicer, and that it was prepared to convey the hotel to the lender in lieu of repayment.

'Plenty of Room at the Hotel California'

California hotels and resorts have been especially hard hit in the current cycle. Alan X. Reay, founder and president of Atlas Hospitality Group in Irvine, CA, revealed to CoStar senior editor Mark Heschmeyer on July 1 that the number of California hotels in default or foreclosed on had jumped an astonishing 125% in the last 60 days, with the state now having 31 hotels that have been foreclosed upon and 175 in default as of the beginning of the month.

"Initially, the wave of distress in California was seen by the smaller, non-flagged hotels in secondary and tertiary markets," Reay said. "As the hotel economy worsened, we have seen it impact all property types."

The hotel loan defaults nationally outlined by Fitch contributed to a record $2.2 billion net increase in U.S. commercial mortgage-backed securities (CMBS) delinquencies in June, according to the rating agency’s latest U.S. CMBS delinquency index released last week.

"Hotel performance has continued its expected sizable decline, with revenue per available room levels down 20% to date and cash flows expected to decline by at least 35% from peak levels," says Susan Merrick, managing director and U.S. CMBS group head. "With no immediate revival of demand in sight and recent-vintage hotel loans unlikely to meet projected performance levels, loan sponsors are increasingly depleting reserve accounts or are being forced to come out of pocket to service debt shortfalls, each of which are a precursor to potential future default."

The U.S. economy and the weakness of the dollar abroad have hurt earnings for Marriott International. Revenue per available room (RevPAR) across Marriott’s Ritz-Carlton brand in North America was off most significantly in the global company's portfolio, down 31%, the company disclosed in an earnings call last week.

"Unfortunately we aren’t yet seeing more corporate travelers and business meetings returning to our hotels. Instead, our mix of business remains skewed towards price sensitive, leisure travelers. For the Marriott brand, room nights sold to corporate travelers defined as those paying corporate or above rates declined 18% year-over-year in the second quarter," said Arne Sorenson, Marriott president and chief operating officer. With occupancy levels stabilizing in the low to mid 60% range, "pricing has become a greater challenge. Everyone is price sensitive today, not just vacationers. We expect pricing power to return only as occupancy recovers," Sorenson said.

St. Regis owner Starwood Hotels and Resorts Worldwide Inc. is set to report its second-quarter numbers Thursday. The global company announced the sale of its W Hotel in San Francisco earlier this month to a Hong Kong firm for $90 million, a reported 50% discount to the hotel investment sales peak of 2007.

Starwood said during a previous earnings release in April that its luxury properties and strong presence in markets like destinations especially hurt by the recession like New York and Hawaii have dragged down results. The swine flu outbreak has hurt its Mexico resorts. Although hoping that advance bookings are starting to pick up and RevPAR declines have flattened, "We still have several months of challenging comparisons and rate declines left in front of us," acknowledged CEO Frits van Paasschen in April. "Our group business remains soft as planners hesitate to plan events, especially at luxury and resort properties."