(Bloomberg) -- A hotel company that ran into trouble during the financial crisis is shaping up to be one of the biggest losers in the pandemic lodging bust, as property owners who delayed debt payments grapple with impatient lenders.
Columbia Sussex Corp., the closely held Crestview Hills, Kentucky-based owner of 49 lodging properties, is in foreclosure on three hotels, and is prepared to surrender two others to lenders, loan documents compiled by Bloomberg show. At least 25 properties that the company has financed with loans packaged into commercial-mortgage backed securities are in special servicing or on servicer watch lists.
The company, which has at least $1.3 billion in debt outstanding on CMBS loans, is running into trouble at a precarious time for the hotel industry. While there’s optimism that vaccines will eventually reinvigorate travel, surging Covid-19 outbreaks have squelched demand. And with business travelers and tourists stuck at home, many hotels can’t generate enough revenue to cover debt payments.
“Most lenders have been through one to three rounds of forbearance,” said Jonathan Falik, chief executive officer of JF Capital Advisors. “They’ll say, ‘We can continue to work with you, but you need to bring something to the table.’ Some borrowers can’t, and some borrowers won’t.”
A representative for Columbia Sussex declined to comment.
Columbia Sussex has lost hotels before. It bought 14 hotels from Blackstone Group Inc. in 2005, then surrendered them in 2010 after the private equity giant bought up debt on the properties.
In many ways, the lodging industry’s current problems make past crises look tame by comparison. U.S. occupancy rates fell to 44% in 2020, well below the previous low of 55% in 2009, according to data provider STR.
Vanishing demand, meanwhile, has translated into late loan payments. Nearly 19% of hotel CMBS loans were delinquent in December, compared with 7% for all types of commercial real estate, according to a report by S&P Global.
Government efforts to prop up business owners and real estate lenders have slowed the pace of foreclosures. Private equity funds have approximately $200 billion in dry powder to spend on commercial real estate, according to Preqin, but opportunistic investors have had a hard time finding owners willing to sell at distressed prices.
Instead, investors are looking to prop up struggling real estate owners with short-term financing at high interest rates. In one such deal, Ashford Hospitality Trust arranged a $450 million in rescue financing from Oaktree Capital Management at rates ranging from 14% to 18.5%.
Those loans can help many owners make it through the pandemic, at a price.
“I think people will be able to keep most of those assets but they’re going to have to borrow some expensive money for a while,” said Matt Salem, head of real estate credit at KKR & Co.
Columbia Sussex appears to be especially vulnerable to the pandemic. The company’s portfolio mainly comprises full-service Marriotts and Hiltons, hotels that are expensive to operate and which are often dependent on corporate bookings. Roughly 20% of its hotels are airport properties, which are struggling under the weight of diminished air travel.
The company’s holdings also include the Marriott Albany in New York and the Marriott Saddle Brook and Woodcliff Lake Hilton, both in Bergen County, New Jersey. All three hotels are in foreclosure, according to loan documents. The company has also informed lenders that it is prepared to surrender a Courtyard by Marriott in Harrisburg, Pennsylvania, and a Marriott in Quincy, Massachusetts.
Some of the Columbia Sussex properties have been marketed by brokers. Those include the JW Marriott Santa Monica Le Merigot in California, and the Hyatt Regency Tech Center Denver, according to a marketing document obtained by Bloomberg.
Columbia Sussex took loans from the federal Paycheck Protection Program, an initiative to provide loans to small businesses that use the money to keep staff employed. That effort drew the ire of the Unite Here hotel workers union in Los Angeles, which questioned whether the funds were used to rehire workers.
The company’s most effective tactic has been negotiating forbearance with servicers. It has modified more than a dozen CMBS loans, often receiving permission to use reserve funds intended to make repairs or update furnishings, to make debt payments.
That comes as lenders are reluctant to take possession of cash-burning properties, and amid optimism that vaccinations will spark a travel recovery later in the year.
“If I’m a property owner, and I know that some time in next six to 12 months I’m going to be in a cash flowing situation, I’m going to fight tooth and nail to hold onto this thing,” said Jim Costello, senior vice president at Real Capital Analytics Inc. “Some hotels, there’s no hope.”