Colony Credit Real Estate has been trying to sell the defaulted loan on the Row Hotel near Times Square in New York City.
Photo: Sarah Blesener for the Wall Street JournalHotel owners with heavy debt loads are grappling with the prospect the industry could fall into a tailspin from the spread of the coronavirus, leading to a potential uptick in defaults.
The U.S. hotel industry overall had about $300 billion of mortgage debt as of the third quarter of last year, up 7.8% from a year earlier and 14.2% from two years earlier, according to data firm Trepp LLC. New York, Los Angeles, Las Vegas and other cities that count on foreign visitors could be especially vulnerable, analysts say.
Some investors who seized on low interest rates and took out big loans could be at risk, said Neil Shah, president and chief operating officer of Hersha Hospitality Trust, which owns more than 120 hotels across the U.S. His firm recently sold four hotels in New York, Boston and Miami, reducing its debt by about $100 million.
“It really depends on how far and deep this virus and its containment run,” he said. If the impact on the economy and hotel demand lasts until the end of the year, he predicted, there could be more defaults.
In New York City, where a supply glut has pressured room rates and weighed on hotel revenue, at least 21 mortgages backed by hotels were on a watch list for potential default as of February, according to Trepp LLC, a real-estate-debt analytics firm.
Some bank executives say they are now charging higher rates and imposing tougher conditions on borrowers, while others have stopped lending to hotel owners in certain markets.
These moves follow a sudden rise in corporate travel restrictions and a number of conference organizers canceling annual events. Companies like Hyatt Hotels Corp., Hilton Worldwide Holdings Inc. and lodging owner Sunstone Hotel Investors Inc. withdrew their 2020 guidance due to uncertainties around the virus outbreak, and as share prices for hotel owners and operators have been hit hard.
Still, hotel executives say there is no sign of panic in the debt market. Deals are still getting done and many properties could withstand months of revenue decline, especially if they have floating-rate debt that enables them to benefit from recent declines in interest rates.
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Elliot Eichner, a principal at mortgage brokerage Sonnenblick-Eichner Co., said last month his firm brokered a 10-year mortgage on a hotel in Austin, Texas, with a fixed interest rate of 3.49%. He noted a similar scare in the hotel industry occurred after the terrorist attacks of Sept. 11, 2001, and he expects hotel market conditions to stabilize after a few months, like they did then.
On Friday, White House economic adviser Larry Kudlow said the Trump administration may provide some aid to the hospitality sector, giving many hotel shares at least a temporary boost.
Yet even before the spread of the virus, the hotel-debt market was showing some strain. At the end of the third quarter of last year, 1.33% of the hotel loans made by banks were delinquent, more than any other property type, according to Trepp.
Banks and credit-rating firms have started to stress-test individual hotels and hotel portfolios to see how they would withstand declines in revenue. KBRA Kroll Bond Rating Agency found the Four Seasons Resort Hualalai in Hawaii might not generate enough income to pay its debt service if it were hit with just a 15% decline in cash flow.
The property’s owner, MSD Capital LP, didn’t respond to a request for comment.
Some hotels that continue to pay their debt could face problems if their mortgages come due during the crisis. At that point, if the property’s value has fallen below the amount of debt, owners will either have to put in more cash or face the risk of default.
An estimated $50 billion worth of U.S. hotel mortgage debt comes due every year, according to Jade Rahmani, an analyst with Keefe, Bruyette & Woods. If debt comes due during a tumultuous period for the market, he said, “that owner will not be able to get a refinance or if they were planning to sell the property before maturity, they may not be able to sell the property.”
Some investors are already contending with defaulted loans on major properties. Mortgage REIT Colony Credit Real Estate Inc. has been trying to sell the defaulted loan on the 1,331-room Row Hotel near Times Square. The loan had a principal balance of $260.2 million in 2018 but could now sell for as little as $50 million, according to people familiar with the matter.
U.S. markets are also suffering revenue declines, especially those that serve as airline hubs. In the last week of February, revenue-per-room, Denver and Chicago was down more than 10% from the same period one year ago, according to hotel data tracker STR.
Corrections & Amplifications
The Sept. 11 terrorist attacks occurred in 2001. An earlier version of this article incorrectly stated they occurred in 2011. (March 10)
Write to Peter Grant at peter.grant@wsj.com and Konrad Putzier at konrad.putzier@wsj.com
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