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CRE Finance World, Winter 2012

Lodging Sector in CMBS: Outlook for 2012 Figure 7 Modification rates on hotel properties are comparable with those Hotel resolutions for other CRE sectors, with 5% of the outstanding balance reporting some sort of modification. At a subtype level, 6% of full service hotels received a modification from the special servicer, compared with 3% for limited service. Intuitively, this makes sense. Since full service hotels typically respond strongly to broader economic trends, special servicers often extend loan terms with the expectation that loan performance will improve dramatically when the business cycle turns. In the meantime, overleveraged loans could receive rate modifications and/or A-B splits to ensure that their cash flow is sufficient to cover debt service. Typical modifications could involve an extension (in some instances for up to five years) with a 20-25% carve-out for the B-note. At the same time, modifications could be more difficult to justify in the limited service sector where performance could remain middling for a considerable time. As such, special servicers often look to liquidate and take losses instead of extending terms with little expectation of a significant improvement in performance. One of the high profile recent examples is the Red Roof Inn portfolio (see Source: Trepp, Barclays Capital Red Roof Inn liquidated, Sep 13, 2011). Delinquency and resolution strategies Figure 8 Of the $46 billion hotel concentration in conduits, about 58% CMBS Hotel severity are categorized as full service properties, with another 33% in the limited service sector, and the rest listed as uncategorized. As Figure 6 shows, both full- and limited-service sectors have been significantly underperforming the broader CMBS conduit universe, with more than 15% of outstanding lodging loans reported as 30+days delinquent versus 9.4% for the rest of the CMBS property types. While delinquency rates for limited and full service hotels are somewhat similar, resolution strategies for the two categories of hotel properties diverge significantly. Although overall cumulative liquidations for the hotel sector are close to 4% of original balance (second only to multifamily properties), limited service hotels are a bigger contributor to this trend, since they are twice as likely to be liquidated as a limited service property securitized in a CMBS conduit (Figure 7). Source: Intex, Barclays Capital CRE Finance World Winter 2012 52


CRE Finance World, Winter 2012
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