Hawaii Hotels in Foreclosure
Hawaii hotel owners are overdue on billions of dollars in debt
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Makena Beach & Golf Resort
Hawaii’s tourism industry blasted a sigh of relief as fierce as the strongest tradewinds as visitor counts rebounded and hotel rooms filled last year.
Yet for one group, the recovery hasn’t come fast enough.
Those are the owners of resorts and hotels who’ve been unable to pay their mortgages and are having to beat back foreclosure efforts. Banks and others have been at their doorsteps, while some owners have simply surrendered to financial realities and handed their keys to lenders.
“It’s one of those hidden issues,” says W. David Carey III, president and chief executive officer of Outrigger Enterprises Group, Hawaii’s largest hospitality company.
“There are huge numbers and there are huge financial consequences.”
During the past three years, some of the state’s biggest resorts have been deeded back to lenders, including the 858-acre Turtle Bay Resort and the 540-room Fairmont Orchid on the Big Island’s Kohala Coast. Others, such as Maui’s 463-room Ritz-Carlton Kapalua, are going through painful foreclosures, or have had to seek restructuring of their loans, as is the case with the Four Seasons Maui.
Hawaii is seen nationally as one of the troubled hotel loan hotspots, with no less than a dozen hotels in some stage of distress. Real Capital Analytics, a New York-based commercial real estate research firm, has identified $2.09 billion of troubled hotel loans in the Aloha State.
The average debt per property is $174.4 million, the highest nationally. The next highest state on Real Capital’s list is Nevada, where distressed loans average about $32 million less than in Hawaii.
Turtle Bay Resort
Ben Thypin, a Real Capital senior market analyst, says Hawaii’s status is a function of the value and size of hotels here, not because of the number of properties involved. Nevada, for example, has 59 hotels where financial woes have checked in, while California has 239.
Nonetheless, Hawaii hotels are on the list and are part of the $32.3 billion of distressed-hotel debt nationally. Thypin says it will most likely take years for the situation to resolve as owners, lenders, special servicing agents, receivers and lawyers huddle.
“We’ll continue to see some distress in the market,” says Joseph Toy, president and chief executive officer of Honolulu-based Hospitality Advisors and a receiver in two recent sales of distressed hotels.
It’s also expected that some banks and lenders will start selling off some of the distressed properties this year. A group of “vulture funds” and other buyers also are standing by hoping to acquire Hawaii properties at fire-sale prices.
Observers say the market may see more hotel sales this year as room rates rise along with the value of hotels.
“There’s a lot of money sitting,” says Thypin, noting private-equity money that’s been raised to buy problem-loan properties nationally. “There’s a lot more interest in hotels now.”
Roots of the problem
The current situation has its roots in far sunnier days for both hotels and lenders that occurred mid-decade.
At the time, Hawaii was several years into a comeback from the slump following the Sept. 11, 2001, terrorist attacks and the start of the Iraq War in 2003.
Hawaii’s hotels slashed room rates to entice visitors as occupancy plummeted. In 2002, average revenue per available room, a metric closely watched by hoteliers, fell to under $100 a night, while room occupancy was under 70 percent.
Tourism bounced back and eventually broke a record in 2005. Roughly eight out of every 10 hotel rooms were occupied during the year as revenue per available room jumped above $130 a night.
At the state’s deluxe and luxury hotels, some properties’ average rates were in the $300 range.
Some of the owners who bought during the late 1990s wave of foreclosures on Japanese investment properties took advantage of the spike in hotel values to flip their investments.
“There was a lot of turnover,” says Mark Bratton, vice president and division manager, Investment Properties Division for Colliers Monroe Friedlander and president of Bratton Realty Advisers.
“The simple way to look at it is that, at the peak of the market, people thought they could get $300 a night. That came down rather quickly.”
Perhaps more significant was what was happening in financing for hotels. In a change analogous to the easy money in subprime residential mortgages at the time, banks and others loosened lending practices for hotels.
Bratton says the distinct change in capital markets made more money available for such transactions. Some lenders originated first mortgages and then packaged them as part of commercial-mortgage-backed securities rather than keep them in their own portfolio.
“Money was easy,” says Bratton, noting some hotel owners also took out large loans to refinance or renovate.
A few years earlier, most lenders would cap loans at 50 percent of a hotel’s value, says Outrigger’s Carey. Then the loan-to-value ratio went as high as 90 percent, he says.
Moreover, the valuations were sometimes aggressive and based on room rates reaching cyclical highs.
“We had some offers on loans that I just couldn’t believe,” says Carey.
Then 2008 occurred. There were warning signs about the economy with problems at Bear Stearns early in the year, but alarms in the local visitor industry really started going off when Aloha and then ATA airlines folded in quick succession during the spring, reducing tourist-laden flights coming to Hawaii.
Lehman Brothers’ collapse in September sealed any doubts that the U.S. economy was in deep trouble. Dreams of maintaining $300 room rates at luxury hotels faded and Hawaii became one of the first markets where the distressed hotel problem cropped up.
Hotel owners who had bought at the top of the market with high loan-to-value ratios were quickly in trouble. Hawaii visitor arrivals fell from 2007’s peak of 7.63 million to 6.82 million.
“This was the biggest, sharpest drop I’ve seen in 30 years of being in the business,” says Keith Vieira, senior VP of operations for Starwood Hotels & Resorts. That hurt hotels’ bottom lines and some owners’ abilities to pay their debts, he says.
In effect, what’s happened is the greatest tumult in hotel ownership locally since foreclosures in the late 1990s on properties bought during the Japanese investment bubble.
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