ATLANTA—The number of hotel loans going into special servicing is declining, panelists said last week during the 25th annual Hunter Hotel Conference.
Since the middle of 2012, there has been a slowdown in the number of defaulted loans, said Edward C. “Chris” Brown, director of hospitality at special servicer LNR Partners. One reason for the decline is because the financing market has come back, he said, meaning it’s easier for some of these loans to be refinanced.
“We’re not even seeing the maturity defaults we were getting six months ago,” Brown said. Losses on loans are also becoming less severe as the economy gains strength.
Bob Kline, president and CEO of R.W. Kline Companies, agreed with Brown’s assessment. “The market has changed tremendously,” he said, adding that today his firm is seeing only 20% of loans needing to be restructured compared with 75% a year ago.
Still, Kline said 2014 is likely to see a high volume of REO sales. An audience member questioned how the number of loans going to special servicing can be declining but a surge of REO sales can still be expected next year.
Steve Van, president and CEO of Prism Hotels & Resorts, answered by saying that most of the REO sales are resulting from balance-sheet loans, not CMBS. Two-year extension options are available for CMBS loans but not for balance-sheet loans. Because most of these balance-sheet loans were originated during 2009, their maturities would be coming due next year.
“Things are getting better, they’re just not getting better fast enough to make up for loans made in 2005, 2006 and 2007,” Kline said.
The workout process
For those loans that do need to be reworked, panelists explained how workouts work. “There are no two workouts that are identical,” Brown said.
For owners who want to keep their properties, panelists said it’s generally required of the owner to kick in at least 10% of additional equity. Kline said on average, owners typically contribute between 15% and 20%.
It’s relatively easy to work out maturity defaults, Brown said. He said in those cases, it is often the case the owner had been making payments. Payment defaults are a different story because those represent cases where the hotel is struggling and is not generating enough cash to cover loan payments.
Brown said he is loath to offer a discounted payoff, which can frustrate some owners. His rationale is that the hotel’s value might rise after the discounted payoff is executed.
Another thing that frustrates owners is the perceived long length of time it takes for a loan to wind its way through the special servicing process. Brown said special servicers have been accused of extending and pretending. He said that’s not the case.
“We were concerned about the loan,” he said. “We wanted to wait until the market improved.”