Months of empty rooms and discounted rates are catching up with hotel owners in Denver and across the country. Unless Congress steps in with more financial assistance or travel spending finds a way to surge, a big shakeout looms next year, industry insiders warn.
“The lockdowns are having a devastating effect on the hotel industry,” said Eric Holtze, co-CEO at Denver-based Stout Street Hospitality, which recently modified $51.3 million in loans on the Magnolia Hotel Denver. “This has gone on way longer than we had hoped.”
In 2016, Holtze and his sister Sarah Treadway, co-CEO and president, took over the family business. Their father, Steve Holtze, purchased the American National Building on 17th Street in 1993, converting it into the Magnolia Hotel Denver. That hotel served as a model for five other boutique urban hotels.
At the start of the year, the Magnolia hotels were running 75% full and operating ahead of budget. By April, occupancy was down to 10%. Staffing was cut deeply and managers were asked to take on day-to-day chores. For a brief period, Treadway was making beds, Holtze was folding laundry and the general manager was running the front desk.
“Everyone was doing what we could to take care of the few guests we had,” Treadway said. “We feel blessed because our team of people is so loyal and so dedicated. People were willing to jump in and work in every department.”
Loans under the Paycheck Protection Program provided relief this summer. By October, occupancy had crawled back above 40%, raising hopes the worst was behind. And then another surge of cases gripped the country, forcing tighter restrictions on the wedding receptions, business gatherings and other events that the Magnolia relies on.
Metro Denver hotels on average were only filling one out of three rooms on Dec. 5, which is down from an occupancy rate of 62.1% a year ago, according to STR, which tracks hotel statistics. The average rate hotels made per room rented was $76.89 a night versus $116.17 a year ago, which represents a decline of 34%.
Hotel owners can turn down the heat, lay off employees and even shutter a property. But sooner or later, lenders must receive their due. The longer occupancy rates stay low and room rates remain depressed, the harder that becomes.
“In March, from the minute COVID-19 began, you saw demand for hotel rooms completely collapse. While it has come back, it has been de minimus,” said Manus Clancy, a senior managing director at Trepp, which tracks commercial real estate debt.
Denver-based Sage Hospitality Group, which oversees around 55 properties, closed about 70% of its hotels during the first wave, said Walter Isenberg, president and CEO. Over the summer, bookings rebounded, but 90% of it was coming from leisure travel, not the business travel many downtown hotels rely on. About a quarter of the company’s revenues come from its restaurants and food service, and limits on indoor dining have shut those off.
“We are putting capital into our company. We have to,” Isenberg said. “We have been able to stay current on all our properties. It is painful, but we are going to get through it.”
Stout Street Hospitality and other hotel owners undertook extensive renovations just before the pandemic. Work on the Magnolia Hotel in Denver, for example, was completed in May of last year. That spending soaked up capital that would have otherwise been available to help weather the storm.
“We are big believers in Denver. We had no idea that COVID was coming,” Holtze said.
As it sought a loan modification, the company stopped making payments, resulting in the largest block of hotel debt to go delinquent in Denver so far, according to Trepp. Holtze said the company is now current on its loan and plans to stay that way.
When property owners get behind on loan payments, they usually enter what is known as a special servicing agreement. With patience and a rebound in demand, some loans get back on track, while others will go down the path to foreclosure.
Before the pandemic, about 2% of lodging loans required special servicing, similar to other categories of commercial real estate, outside of retail, which was running around 5%, according to Trepp. Since the pandemic started in March, the rate of distress for hotels has surged closer to 25%, the highest category in commercial real estate. After stabilizing this summer, problem loans are rising again alongside COVID-19 case counts.
Clancy said the rate understates the stress borrowers are facing. Many lenders have allowed borrowers to draw down reserves set aside to replace furniture, fixtures and equipment. With fewer guests, things aren’t wearing out, so there is a logic to it. But those reserves are essential to preventing properties from running down and must be restored at some point. And they won’t last indefinitely.
“What a lot of lenders have done is allow the borrower to tap the reserves so the delinquency rate is artificially suppressed right now. These loans are showing up as current,” he said.
Lodging properties in metro Denver that Trepp tracks carried $571.1 million in loans last month, of which $78.6 million was delinquent and $96.8 million under special servicing agreements. That works out to a special servicing rate of 17%. That’s historically high but doesn’t look so bad compared to Houston at 74%, Chicago at 60% and New York City at 47.%.
Last month, three Denver area hotels were more than 60 days behind on their loans, including the Magnolia, two were in foreclosure and one hotel in Colorado Springs had failed to pay a debt that had matured, according to Trepp.
The two hotels in foreclosure were the Ramada by Wyndham Denver Downtown and the Sheraton Denver West Hotel in Lakewood. The Ramada property, 150 E. Colfax, went under contract in October to a Texas developer who has plans to tear it down and redevelop the land.
The Sheraton Denver West is still accepting reservations at its 242 rooms, but like many conference hotels, it has found few takers.
“This has been a tough time for all hotels. We have been working with the lender to renegotiate the terms of our mortgage over the last couple of months and are hopeful that an agreement will soon be reached,” according to a statement from RDA Hotel Management Company, which manages the property.
Absent additional financial assistance for the industry from Congress, the American Hotel & Lodging Association estimates that 635 of the state’s 1,295 hotels could end up in foreclosure and that 868 could close in the months ahead.
Even allowing that those estimates might be inflated to help sway Congress to provide more support, conditions are direr than any ever experienced in the hospitality industry.
Colorado’s largest hotel, the Gaylord Rockies Resort & Convention Center in Aurora, appears especially vulnerable if business bookings don’t rebound. The property has 1,501 rooms and more than 500,000 square feet of meeting space devoted largely to the kind of business meetings that aren’t happening and will likely be among the last segment of the travel market to return.
“They’re still struggling to try to figure out how to reinvent themselves. They’re trying to figure out how do we attract the leisure traveler. That’s the other side of the tale of two cities,” Chad Brue, CEO of Denver-based developer Brue Baukol Capital Partners, said during a recent University of Colorado real estate panel. Brue’s company owns land near the hotel.
But the property appears to have favorable financials. The Gaylord Rockies ran at 19% occupancy in the third quarter and lost $1.5 million given the added expenses tied to the pandemic, like enhanced cleaning, according to an update last month from Ryman Hospitality Properties, an investor in the hotel.
Absent those extra expenses, the property would have still pulled down about $200,000 in operating income, which is a remarkable achievement for having fewer than one in five rooms occupied.
Under an optimistic scenario, Isenberg thinks Sage’s hotels won’t recover the occupancy levels they had before the pandemic until 2023. Under a darker scenario, where Zoom meetings stay in vogue and business travel remains depressed, it could take until 2026.
But the rollout of vaccines offer a hope that wasn’t there in the spring, and so does another round of federal assistance, which is stuck in the U.S. Senate.
“At the moment, there is light at the end of the tunnel. If owners haven’t thrown in the towels, if they can get by these next three months, they should be OK, and I think that is what they are all waiting for,” Clancy said.
And for those that don’t make it, investors with lots of money are circling and ready to step in. Clancy doesn’t see most cities losing hotel capacity, including Denver, although overbuilt markets like New York may see properties converted to other uses.
As for trophy properties ending up in the bargain bin, he calls that “wishful thinking.”
The vaccine is a game-changer, but properties will need to be adept at snagging the leisure travel that is likely to rebound first and strongest.
Holtze said Stout Street will do what it takes to get through the crisis, and saving their father’s legacy is a personal mission. Reworking the Denver loans has bought time, but he also realizes banks have their breaking points and the guests need to show up.
“If people want to help us out they can come and stay at the hotel. And they can call their representatives in Congress,” Treadway said.
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