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It's been a very challenging year for the hotel industry as a whole. While hotels have seen vacancy rates and RevPAR bounce back from March, numbers are still far below pre-pandemic numbers. As of November 14, hotel analytics firm STR reported that occupancy was at 43.2%, down by 32.7% year over year. The average daily rate was $90.58, a drop of 28.6%, and RevPAR was off 52% from last year. With COVID-19 rising in recent weeks, many potential travelers may change their plans.
All of this is bad news for hotels. While multiple vaccines are in the offing, we may not be back to near-normal conditions until mid-2021 -- and that may be too late for some properties. Ashford Hospitality Trust (NYSE: AHT), a smaller hotel REIT, mentioned in its third-quarter earnings that it has given 13 hotels back to the lenders during that time period. Analysts fear this could be just the beginning of more delinquencies.
A recent report released by Trepp shows that more than 3,100 loans totaling $87 billion are backed by hotel properties. That represents about 16% of the total outstanding balance of all CMBS loans. According to the report, nearly $31 billion in outstanding CMBS hotel loans are set to mature in 2021, a fact that could put additional strain on this category. Nearly half of those outstanding loans are for hotels in the full-service sector. As Marc Rapport pointed out in a recent article, REITs such as Pebblebrook Hotel Trust (NYSE: PEB) and RLJ Lodging Trust (NYSE: RLJ) are heavily invested in full-service hotels.
Three main types of travel
The pandemic has impacted the various sectors of the hotel industry differently. There are three main types of hotel travel: leisure travel, individual business travel, and group business travel. Over the summer, more people began to take vacations, and the leisure sector began to improve. Individual business travel is still relatively limited, as many workers who might travel for work are still working from home.
With major conventions, like the Consumer Electronics Show in Las Vegas, already canceled for 2021, hotels that rely on group travel have been heavily impacted. This has been reflected in the revenues of hotel REITs such as Ryman Hospitality Properties (NYSE: RHP), which has seen its stock price drop even though it has rebooked 1 million group nights for 2021.
Big cites feel the hit
One of the hotels that Ashford Hospitality Trust returned to its lenders was the Embassy Suites by Hilton in Midtown Manhattan. Also in Midtown, the iconic Roosevelt hotel is set to close. These are just two high-profile examples of the troubles facing the Big Apple's hotels. New York City is the market with the biggest risk currently, and 44.7% of loans backed by hotel properties in the city have already been handed over to special servicers. In the Financial Times, Vijay Dandapani, chief executive of the Hotel Association of New York City, said that if half of the city's hotels survive, it would be a good outcome.
Chicago and Los Angeles join New York in Trepp's top three cities with the largest amount of loans coming due. Houston has 76% of hotel CMBS loans facing delinquency and has been heavily affected by the cancellation of conferences related to the oil industry. Portland, Oregon, has over 78% of hotel-backed loans in trouble, as fewer tourists have visited due to wildfires and civil unrest.
The American Hotel & Lodging Association (AHLA) released a survey last week indicating that 71% of hotels won't survive another six months without some sort of government assistance, and 77% could be facing more layoffs. With over one-third of hotels facing bankruptcy, the AHLA has urged Congress to take action. The HOPE Act has lingered in Congress since July, and the status of a broader stimulus package remains on hold. Without help, things could get worse far more quickly.
What's next as sharks circle
When the COVID-19 crisis began, many investors began to amass large funds to take advantage of distressed assets. So far, much of that capital has remained on the sidelines. Barry Sternlicht, CEO of Starwood Capital Group, said he's creating a $7.5 billion fund precisely to capitalize on hotels in trouble. Hotel REITs, such as Host Hotels & Resorts (NYSE: HST), have also indicated they're starting to watch the market for potential acquisitions.
For hotel REIT investors, it's more important than ever to know not only what type of hotels your REITs own but also what locations they're in. The third-quarter earnings reports represent an excellent time to review balance sheets and make sure the companies you've invested in have the available cash to make it for the long haul.
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