Two Virginia Hotel Loans Foreshadow Maturity Wave

WASHINGTON, DC—Two Virginia hotel loans had their appraisals reduced by a significant $21 million total, Trepp reports. Both properties are part of a CMBS that originated in 2007 and how these loans will fare until their maturity in June 2017 is unclear.

To be clear, these loans are not anywhere near default right now -- but they are part of the long-anticipated $300 billion in debt maturities expected over the next three years. A few years ago there was widespread nervousness about whether the capital markets could handle the influx. Now there is sense of equanimity that most of the debt will be able to recapitalize with no problem. But not all -- after all these loans were originated in an era where capital flowed freely and underwriting was on holiday for all intents.

Some version of the story of these two loans, in short, will be told many times over the next few years.

That said, in many ways these two loans are outliers, Trepp Research Analyst Sean Barrie tells GlobeSt.com.

"In general we have seen good numbers in terms of the maturing loans so far this year -- especially in the hotel market. Also, valuations have increased a lot."

Let's dissect.

As of right now, all that has happened is that appraisals on the two Northern Virginia hotel loans behind MLMT 2007-C1 were reduced significantly this month.

The Radisson-Alexandria, which had been appraised for $69.6 million in 2007, saw its appraisal lowered to $25.5 million. The note saw its appraisal reduction jump from $10.625 million to $21.7 million. Holiday Inn-Alexandria had been appraised for $47.8 million in 2007, and was lowered to $11.2 million this month. Its $30.5 million note saw its appraisal reduction jump from $7.625 million to $21.5 million.

A look at the properties' declining fundamentals explains much of the trouble, namely the stark decline in the loans' debt service coverage ratios over the years. In the case of the Radisson-Alexandria, it was 82x in 2014, down from 1.52x at securitization. The DSCR for the Holiday Inn-Alexandria hotel was 0.42x in 2014, down from 1.53x at securitization. In other words, for every dollar in debt these hotels were generating 82 cents and 42 cents respectively to pay it off.

The bigger question is why? It is little secret that DC area hotels have been posting lackluster growth for a number of reasons. Barrie says, though, this has not translated into that much distress. There are occasional issues with hotels, here and there, in Virginia, he says, but there is no discernable pattern.

So maybe why isn't that important. As Barrie put it, sometimes hotels just fail to attract the right people. A question of greater interest, then, is what's next? They could receive a modification, as one borrower is requesting, to split up the remaining amount of the loan. There could be a foreclosure. In other words, stay tuned.

But with more than $300 billion in debt coming due over the next 36 months, some debt will fail. If not these two loans, then surely others.