High-End Workouts, Low End in Doubt

IRVINE, CA-Rising RevPAR is helping high-end hotels work their way out of distress, but the rising revenue may be too little too late for low-end properties. That's one of the trends that Atlas Hospitality has spotted in its latest survey of distressed hotels in California, Atlas president and founder Alan Reay tells GlobeSt.com.

The latest Atlas survey, for the first quarter of 2011, shows that the number of hotels that have been foreclosed upon jumped 87% over the first quarter of 2010 (from 78 to 148) and the total number of rooms foreclosed on it was up over 102% from the first quarter 2010 (from 5,437 to 10,987). On the other hand, the number of hotels that entered default during that same period rose much more slowly. The number of defaulted hotels increased only 7%, to 350, while the number of rooms in default rose only 2.3% to 34,080. “We're definitely starting to see a slowdown on the default side, and an increase in foreclosures, which makes sense because the hotels have already gone through the default process,” Reay explains.

Rising RevPAR is a mixed message for hotels. As the Atlas survey points out, “Despite the fact that California is enjoying increasing RevPAR in almost every market, the hotel industry continues to experience high levels of distress, especially in the secondary/tertiary markets. This is due in large part to the high levels of debt that many hotels are carrying.”

In addition, despite the increase in foreclosures, Reay points out that, “The actual number of hotels that is being foreclosed on is a small percentage of the total world of distressed hotels.” One reason is that lenders generally prefer to dispose of distress via note sales if they can. Among those that were foreclosed on and later sold to new owners was the 469-room Downtown L.A. Marriott.

One the lenders sell the notes, many of the note buyers work out restructurings with the borrowers, especially in the case of higher-end properties where rising RevPAR is having the most positive impact, Reay says. “Many if not most of those who buy notes are getting them at a good enough discount that―if they think the distress is not an operator problem―they can restructure and get a good return without foreclosing,” Reay explains.

For hotels in secondary and tertiary markets, however, the rising RevPAR in most cases “is going to be too little too late,” Reay says. “The RevPAR fell so quickly and so far in those secondary and tertiary markets that, even with a 10% to 15% increase, it's still off of a very low base so it's going to be difficult for them to cover debt service and the costs of operating the hotels,” Reay says. “Unfortunately, the revenue won't increase fast enough, and they're going to run out of time, so we will still see foreclosures or note sales in those secondary and tertiary markets.”

Among other highlights of the latest Atlas report, it showed that Los Angeles County led California with 40 hotels in default in the first quarter, followed by San Bernardino County with 33 and Riverside County with 29. San Bernardino County leads the state in the number of hotels foreclosed with 18, followed by San Diego County with 17 and Riverside County with 14. Statewide, between year-end 2010 and the end of the first quarter, the number of foreclosed hotels rose by 7.2%, from 138 to 148; during that same time, the number of foreclosed hotel rooms increased by 8.3%, from 10,144 to 10,987.

Atlas is predicting that the number of hotels in default and foreclosure will continue to increase through the first half of 2011 and then defaults will start to level off, but the foreclosures will continue to increase at least through the end of 2011.