Highest Default Rate In Recorded History

On today’s show we’re talking about what is happening in the world of hospitality. The American Hotel and Lodging Association is an organization that represents the hotel industry in North America. The AHLA reports that since the public health issue began escalating in mid-February in the U.S., hotels have already lost more than $46 billion in room revenue.

This figure is devastating with hotels currently on pace to lose up to $400 million in room revenue per day based on current occupancy rates and revenue trends.

Earlier this year I attended a virtual conference of hotel owners. In that conference, the owners talked about their forecast for the remainder of the year and the measures they had taken to protect the solvency of their businesses.

Most hotel owners had assumed occupancy of 50% for the year, and had assumed that they needed enough cash to survive until September.

Well, here we are in the last week of August. Last week, financial analytics firm TREPP issued a report on the delinquency rate in hospitality industry for those hotels that have debt in the CMBS market.

The numbers are somewhat shocking. To be clear, we’re talking about hotels that have CMBS loans. We have no reason to expect that hotels with other forms of debt would intrinsically be in better or worse shape. They should be about the same, but we don’t have hard data on that aspect.

The report highlighted 10 metro areas across the united states.

The New York area had about $1.5B in delinquent loans representing 53 hotels and 39% of the market.

Second was Chicago with $976M in delinquent loans spread across 28 hotels representing 54% of the hotels in market being delinquent.

Houston has $664M of delinquent loans across 40 hotels representing 66% of the market.

As a point of comparison, the delinquency rate in December of 2019 prior to the pandemic was 1.34%. The overall lodging delinquency rate increased to 2.71% in April and to 19.13% in May.

The percentage of loans that are 30 or more days delinquent is 23.4% as of July 2020. This is the highest percentage on record. We have about $20.4B in hotel loans that are delinquent 30 days or more. At the height of the post 2008 financial crisis, there were $13.5B in delinquent hotel loans.

We have a serious economic crisis underway and governments the world over are busy fighting over votes. This is like re-arranging the deck chairs on the Titanic while the ship is sinking.

I was invited to attend a webinar tonight to discuss the investment opportunity for a new construction hotel in San Antonio.

The numbers in the projection were glowing. It’s as if they forgot there is a pandemic underway. They’re assuming it’s all over by the time the hotel is built and that travel patterns return quickly to pre-pandemic levels. That’s far from assured. Why? Because the airlines are shrinking their businesses as well. If there is less air travel, then there is less demand for hotel rooms.

The question is, why would an investor who wants to invest in hotels put money into a new hotel, when they can probably buy any one of several thousand distressed hotels for pennies on the dollar.

For those who truly understand the dynamics of the new travel industry, there will be opportunity to make some spectacular investments. But this will require some guts and some well placed bets before the outcome is obvious.