• Hotels a dirty word?

Two major US-based private equity investors appear to be losing their appetite for hotels. Both Colony Capital and Blackstone have defaulted on debt payments relating to hotel assets recently, seemingly keen to be seen stepping away from the sector.
But seasoned observers suggest the moves are simply a fresh investor ploy to get lenders around the table – to strongarm further discounts in the face of lost coronavirus revenues.
Investor Colony Capital was first to default, failing to make debt payments on USD3.2bn of loans secured against a hotel and healthcare property portfolio. Founder Tom Barrack has been vocal in his demands that the US government support real estate businesses, as they struggle with shutdowns due to the coronavirus pandemic.
Among the properties potentially affected are healthcare facilities, plus a substantial number of hotels around the USA, many operating under Marriott, Hilton, IHG, Carlson, LaQuinta, and Choice brands.
According to The Real Deal, the group’s hospitality interests are split into seven portfolios, with the largest four dependent on financing by substantial, single-borrower CMBS loans. Unlike single lender finance, it can be difficult to renegotiate CMBS finance deals, with hired “special servicers” negotiating on behalf of bondholders.
In a May SEC filing, the company hinted at its preferred solution: “The company does not anticipate allocating material amounts of its own capital to these hospitality portfolios but reserves the right to participate on a limited basis alongside third-party capital.” The company is reported to have hired advisors Moelis & Co to consider its options.
Media reports suggest the apparent ambivalence towards the hotel properties is also driven by a strategic desire at Colony to move away from lodging assets. Instead, the firm is said to favour investments in physical assets with a connection to digital businesses, including mobile phone masts, fibre optic networks, and data centres.
Colony is no stranger to using debt structures and the US legal system to modify contracts. It is reported to have taken control of the 89-strong Tharaldson hotel portfolio, after an owner defaulted on payments for Colony’s mezzanine loan – enabling the group to ultimately claim ownership.
Barrack is reported to have said of the coronavirus shock: “This is a different kind of a crisis. We’re not concerned about the solvency of our business. We’re concerned about the liquidity of our business. Liquidity is the magic elixir to assure long-term optionality.”
Data analytics agency Trepp has reported a spike in CMBS delinquency rates, with its own monitor registering an overall 10.32% delinquency rate for June. A sectoral analysis shows the hotel sector is worst hit, with a 24.3% in June, up from barely 2% in March. The consultant’s Manus Clancy said there could be worse to come in July, but speculated: “Perhaps we have reached terminal delinquency velocity – meaning most of the borrowers that felt the need for debt service relief have requested it. Put another way, if a borrower didn’t need relief in April, May, or June there is a good chance the borrower won’t be needing it – although maturity defaults could still be an issue.”
At Blackstone, the default is on a smaller scale, relating to a USD274m loan taken out to cover the acquisition of four Club Quarters hotels. Blackstone acquired the properties in Chicago, Philadelphia, Boston, and San Francisco in 2016, in a deal which saw Club Quarters remain as operator.
Blackstone has dismissed the situation at Club Quarters as “a very small investment that had been written down prior to Covid-19 as a result of unique operational challenges.” It has also undertaken to “create the best possible outcome under the circumstances for all parties, including the employees.”
Blackstone, meanwhile, has said its focus is now on logistics and warehouses, which account for more than a third of its portfolio. But at the company’s Reit, hotels accounted for 26% of total real estate revenue in 2019, at USD441.8m, according to a report from the Financial Times.
One veteran financier told Hotel Analyst the moves were nothing to do with affordability – and everything to do with securing a better deal. “These guys think transactionally, they could afford to cover the loans, but have chosen not to. They want to negotiate to make debt more favourable.”
Barrack’s campaign for government support stands comparison against US government support for the airlines, which has received grants to solve cashflow crises. US businessman Monty Bennett, who is linked to hotel landlords Ashford Hospitality Trust and Braemar Hotels & Resorts, recently argued in a webinar for central support: “The industry needs grants along the lines of what the airline industry has received.” Research by hotel union Unite Here International suggests Reits – particularly those with CMBS debt – could benefit substantially from a federal loan programme.

HA Perspective [by Chris Bown]: While digital-related property assets may be the flavour of the moment, we’re hardly at the point where the big investors are falling out of love with lodging. Despite the big financial shock of the pandemic, the indicators are all pointing in the right direction for hospitality, medium and long term – who wouldn’t want to enjoy a part of that growth?
The depth, and sudden nature of the cashflow crisis that the covid-19 slump has delivered is now, clearly, resulting in a completely different set of circumstances from that of the financial crash. Corporations boxed into a corner with a large set of ongoing liabilities are kicking out in a variety of directions. In the UK, Travelodge has been the highest profile situation of a hospitality group seeking forgiveness from its landlords.
Colony and Blackstone are simply one step further down the chain, effectively demanding forgiveness in their loan contracts – contracts that, in the US, are sometimes structured in a less flexible way, so that negotiation is not so easy.
The centre of the storm is also a great time to clear out those troublesome projects that were starting to look a bit wobbly, even when things were going great guns. I’m not just thinking of hospitality here – there are plenty of examples across retail and other sectors, where poor performers are being thrown under the bus, and legacy contracts renegotiated to reflect a new, pared-down reality.

Additional comment [by Andrew Sangster]: Both Blackstone and Colony are emphasising areas other than hospitality right now but there is a difference in the messaging. For Colony it’s goodbye to hospitality but Blackstone remains a player and is actively looking for bargains.
Colony is going all-in on “digitisation”. This process was started a couple of years ago and, already, Colony is claiming that 40% of its assets under management are digital.
Digital real estate means telecom towers, datacentres, fibre and small cells (small mobile phone masts, particularly 5G). Legacy real estate means industrial, healthcare, hospitality plus segments including credit, other equity and debt (which includes the US-based Tharaldson portfolio of now 89 hotels); and investment management.
Colony’s plan is to monetise these exits where possible. Industrial has already raised USD5.7bn and Colony says it is “working with adviser to preserve good hotel portfolio, then monetise”.
Blackstone acknowledges that hospitality is, along with energy and location-based entertainment, among the “most challenged sectors”. But it adds: “As we have seen again and again through cycles, strong companies and properties recover and flourish given time.”
There is an emphasis on putting money down in “faster growing sectors over the past several years which are showing greater resiliency in this environment”. Key sectors are “logistics, life sciences, cloud migration and online content creation”.
Jon Gray, COO, during Blackstone’s Q1 conference call in late April, said retail and hotel were two of the most challenged sectors. But he believed that a benefit of the recession is a decrease in new supply. He expected that it would take a year for there to be much in the way of deals with “rescue capital”. At present the focus has been on buying debt at a discount and some public equities. In both 2001 and 2008 it took a year until owners had exhausted their reserves and needed to trade assets.
Gray added that the most impacted sectors, including hospitality, would be the first to see capital deployed at scale.
There were also interesting comments from Steve Schwarzman, Blackstone CEO, on how the firm viewed the timeline for a return to normality. He said that a vaccine was likely to take until next summer (2021) “as a reasonable case”. In the interim mass testing was the way forward but Schwarzman warned that this would be expensive (over USD25bn in the US alone). “The question is, how much as a society, do we really want to invest to ramp this up extremely high”.
Out of Blackstone’s USD152bn of dry powder, about USD30bn is dedicated to support troubled companies in its portfolio.
Colony may become a distress seller for some hotels but Blackstone looks set to keep hold of its portfolio of hospitality assets.

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