• Lenders fear postal jingles

Jingle mail is the new buzzword doing the rounds among property lenders right now.

For the biggest, who were active in the past couple of years up until the summer of 2007, envelopes containing the keys to properties where mortgagees have given up trying to make the repayment are an increasing fear.

Of course, for commercial property such as hotels, this is largely a metaphorical phenomenon. But the impact is no less financially painful.

This week saw a very public and high profile example of jingle mail when the owner of the W hotel in San Diego, the REIT Sunstone Hotel Investors, forfeited the 258-room property after failing to reach a compromise with its lenders.

Sunstone said that its $65m mortgage on the hotel equated to more than 30 times the EBITDA forecast for 2009. With debt service of around $4.0m and EBITDA of between $1.8m and $2.2m expected for this year, Sunstone said it has decided to default.

The debt was more than $250,000 per room where as the average in Sunstone's portfolio, primarily upper-upscale with brands from Marriott, Hilton, Hyatt and Fairmont as well as Starwood, is less than $130,000.

Sunstone said it was unlikely to default on many other mortgages. It blamed the particular circumstances at the W's location. This included the recent openings of a number of luxury boutique hotels in San Diego and other Starwood properties.

It said it would only default where the intrinsic value of the hotel was below the value of the mortgage; where cash flow could not service debt (which is the case in only a "handful" of Sunstone's 43 properties); and where the lender was unwilling to reschedule the loan.


HA Perspective: The latter aspect – the preparedness or otherwise of a lender to reschedule a loan – will be the key as to whether more defaults are forthcoming in the US or globally.

There are a number of hotel deals that are likely to be under stress right now. It is impossible to know exactly which deals are going to go unless you are privy to confidential financial information.

But as an outsider, it is possible to take a guess where there is going to be the most pain. Firstly, if a deal was struck in 2006 or 2007, a full price would have had to be paid and it is most likely highly leveraged.

Secondly, if the deal involves a segment of the market which has suffered disproportionately in the trading turn-down, debt service, even in the current low interest rate environment, is almost certainly an issue.

What are the most bombed out markets? In Western Europe, both Spain and Ireland are touted as prime candidates. Overbuilding and a crashing domestic economy are problems in both countries.

In the UK, good candidates for distress can probably be found among upscale conference hotels in the provinces, most of which changed hands in 2006 or 2007. If refinancing becomes due, will the backers put in more equity – almost certainly required – or will they walk away?

Generalities are dangerous, of course, as even within highly stressed segments there will be exceptions. But lenders will inevitably be more nervous when receiving padded envelopes with certain postmarks.


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