Custer’s Last Stand – Vanishing Replacement Loans will cause Emerging Defaults… and Opportunities

Billions in ten-year hotel loans originated in 2006 and 2007 are coming due… and they will need replacement loans to keep from defaulting. So what is that looking like?

Remember the pre-politically correct Cowboy and Indian movies? Right at the last, as the Indians are about to overrun the fort and slaughter the depleted soldiers… on the horizon appears the US Cavalry! Well this movie today is a lot more like Custer’s Last Stand.

Surely you have seen “The Big Short” and recall that hotel underwriting standards in ’06 and ’07 were similar to housing standards – in other words, the standards were substandard. Things like 1.0 coverage on the first year’s projected numbers….

In 40% of the markets where those loans were made the NOI in adjusted dollars still has not recovered to what it was when originated. We all know how drastically underwriting standards have changed to conservative. And the majority of these hotels have not had a capital improvement update as required by the brands and are in danger of brand-default. But that’s not the worst of it:
Originations of hotel loans in the CMBS world have plunged just at the time when replacement loans are most needed. United States overall CMBS issuance is way down from this time last year ($13.6 B vs $20.0 B).

So the winners will be opportunistic buyers, brokers (they always win both ways) and special loan servicers (and the Indians). The losers will be hotel owners who are sitting on the ten-year loans and the lenders and bondholders holding the paper.


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