Empty US hotels increase pressure on debt investors

The owners of hotel buildings across the US failed to make payments on about a quarter of their mortgages that are bundled into debt deals last month, as measures to slow the spread of coronavirus caused a total collapse in revenues.

The travel and leisure industry has been at the centre of the fallout in the $1.3tn market for commercial mortgage-backed securities (CMBS), where property loans are used to create new bonds with varying levels of exposure to the risk of default.

As hotels have emptied out to contain Covid-19, it has put pressure on the property owners’ ability to service their mortgages, ricocheting through to CMBS deals backed by those loans. 

Only 76.3 per cent of hotel properties in CMBS deals were up to date on their mortgage payments in April, according to data tallied by JPMorgan. In March the share was 95.8 per cent.

Other CMBS sectors have seen borrowers struggle to make payments. In the retail sector, the number of up-to-date borrowers dropped from 96.3 per cent in March to 88.5 per cent in April, while office properties showed a less than 1 per cent decline.

Manus Clancy, New York-based head of research at Trepp, a CMBS data provider, said that if the trend held for another month, “it could surpass the worst we have ever seen in this market going back through the financial crisis or after 9/11”.

JPMorgan also noted that the amount of loans moving to “special servicing” status — where a loan is transferred from the company responsible for passing mortgage payments to investors, to a third-party chasing late payments — increased to $10.4bn in April, from just $800m in March, across the entire CMBS market.

Fitch Ratings expects this number to rise in May as payments due in April become more than 30 days past due, tipping them into delinquency.

According to DBRS Morningstar, a rating agency, one loan in special servicing status is a $329m loan on the Palmer House Hilton in downtown Chicago, which has been shut since March. The loan was transferred after the building’s owner, Thor Equities, said it would not make its April mortgage payment. 

The pressure on borrowers has hit lower-rated tranches of CMBS deals that are more exposed to the potential default of the underlying borrowers. The Hilton property is the sole loan underpinning a 2018 JPMorgan CMBS deal in which the triple B-rated tranche has fallen to 72 cents on the dollar, for example, from almost 100 cents on the dollar at the beginning of March. 

More broadly, the additional yield above a benchmark swap rate on 10-year triple B-rated tranches has risen to 9.8 percentage points, according to JPMorgan data. That is close to 7 percentage points higher than where they started the year. 

Some investors fear that even if the economy begins to reopen, with people allowed to go back to work, it could be some time before travellers begin to book rooms in hotels again. Many are also worried about the prospects for the retail industry, if shoppers stay away from crowded malls. 

“Retail and hospitality are a big cause of concern,” said Gunter Seeger, a portfolio manager at PineBridge Investments in New York. “It could have knock-on effects for a long time if people are afraid of going to shops, for example. A lot of tenants will fail and then you are left with empty, dark buildings.”

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