It tried to sell two of these mortgage pools but did not receive any bids above the loan balances. The interest rate of the three mortgage pools that it intends to walk away from has jumped to 8.8%, and the 19 hotels “were not covering debt service,” the company said.īy walking away, the company will save the $255 million down-payment plus it will save $80 million in capital expenditures at these hotels through 2025, it said. The company decided to make the down-payments totaling $129 million on the other three pools to extend loans for the 15 hotels in those pools. Those three mortgage pools are part of six mortgage pools, with a combined balance of $982 million, that matured in June. To extend the loans, the REIT would have to pay down the balance by $255 million. The mortgages of the 19 hotels are in three mortgage pools that had an initial maturity date in June but could be extended. It said on Friday that it intends to walk away from 19 hotel properties in cities across the US. The latest was Ashford Hospitality Trust, a hotel REIT headquartered in Dallas. In June, the default rate of lodging CMBS jumped to 5.3% – worse even than the default rate of office mortgages. So now we have the beginning of a third wave of defaults in 15 years, this one driven by soaring interest rates, and property owners walking away instead of trying to work out a deal, as they’d often done during the pandemic. During the early months of the pandemic, the default rate topped out at 24% but in that second wave, as hotels reopened, many defaults were cured. During the Great Recession, defaults topped out at 19%, according to Trepp, which tracks and analyzes CMBS. The companies that operate the hotels continue to do so, and guests might not know the difference.įor CMBS holders, this has been a nasty deal for years. The CMBS holders take the remaining losses when they sell the properties, with the proceeds not anywhere near enough to cover the loan balance. So the hotel REITs have now started to walk away from the properties. When the Fed hiked its policy rates, the variable rates of those mortgages – pegged to short-term interest rates, such as Libor – jumped, and so mortgage payments roughly doubled in a year, while hotel property valuations plunged back to earth. The hotels themselves are operated by other companies, usually partnering in some way with a hotel brand, such as Marriott. It goes something like this: The hotel properties are held by a publicly traded hotel REIT that leveraged them up with variable-rate interest-only mortgages during the era of ultra-low interest rates, that were then securitized into commercial mortgage-backed securities (CMBS) and, backed by overinflated property valuations, sold to institutional investors, such as pension funds and bond funds. The financialization of everything has let to a convoluted setup for hotels and their beaten-up investors at all levels. Investors in hotel REITs have gotten totally crushed.
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