Fitch: Hotel Term Defaults Push CMBS Delinquencies Higher

The reprieve is over for U.S. commercial mortgage-backed securities, as delinquencies resumed their upward trajectory to end the month at 3.58%, according to the latest Loan Delinquency Index results from Fitch Ratings. The hotel sector now leads as the property type with the largest proportion of delinquencies, at 5.83%.

‘The recent surge in hotel defaults is consistent with Fitch's view that hotel property values will decline by as much as 50 percent from peak levels,’ says Fitch's managing director and U.S. CMBS group head, Susan Merrick. ‘While budget hotels have fared best during the downturn, continued pressure on the luxury, resort and gaming subsectors will likely push lodging delinquencies to approximately double that of the other property types."

Newly delinquent hotel loans in September included 26 loans totaling $1.1 billion, of which 92% by balance defaulted during the loan term. The largest of the new defaults was a $587.7 million note corresponding to the $4.1 billion Extended Stay America portfolio loan, collateralized by 681 financed and leased hotels located across 42 states. The borrower filed for chapter 11 bankruptcy protection on June 15, and court-ordered adequate protection payments have been remitted since approval of the cash-collateral order.

Similar to loan-status classifications made at the outset of the General Growth Properties bankruptcy, Fitch anticipates that the loan may be reclassified as "current" in future remittances; however, a potential correction of the loan is unlikely to reverse the rising CMBS and hotel-specific delinquency rates, the firm adds.

September hotel delinquencies also included the $207.9 million Resorts International – Casino Portfolio loan, which comprised three hotel and gaming properties located across two states.

The loan became delinquent due to a significant decline in cashflow at the properties. Though it is classified as a mixed-use property due to a land component in its collateral, the declining performance and default on the $192.5 million Maui Prince Resort also exemplify weakness in hotel performance fundamentals – particularly in those loans underwritten to a stabilized cashflow at issuance, Fitch says.

For the month of September, recent-vintage loan defaults were instrumental in pushing the index higher. Loans securitized in 2007 accounted for approximately 51% of all new delinquencies. Registering a month-over-month increase of 35%, 2007 vintage loans now underperform the index, with a vintage-specific delinquency rate of 3.61%, compared to 2.68% in August.

Because certain property types are more prevalent in CMBS transactions and constitute a disproportionate percentage of the universe of rated loans, Fitch says relative performance by property type is best measured on a sector-specific basis.

When ranked by delinquencies within their individual property types, the hotel sector last month surpassed multifamily with the highest percentage of late pays, at 5.83% versus 5.72%. Delinquency rates within the retail, industrial and office sectors are as follows:

  • retail – 3.65%;
  • industrial – 2.96%; and
  • office – 1.97%.

By dollar balance, retail loans continued to lead the index with $4.9 billion of delinquent loans, compared to $4.3 billion the month before. The delinquency volume for multifamily loans rose only slightly to $3.9 billion from $3.7 billion, while hotel loans posted a 53.9% increase to end the month at a total volume of $3.0 billion.

Loans collateralized by office properties comprise $2.9 billion of the total, while industrial loans ended the month with $719 million in delinquencies – a 22.6% month-over-month increase.

Fitch's delinquency index includes 2,092 loans totaling $16.6 billion that are at least 60 days delinquent or in foreclosure. The index excludes Fitch-rated loans that are 30 to 59 days delinquent, which currently total $3 billion, compared to $3.6 billion the month before. The Fitch-rated universe of loans consists of approximately 42,000 loans comprising $465 billion.

SOURCE: Fitch Ratings


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