Towering 47 stories over Times Square, the Hilton hotel on West 42nd Street was already operating on the knife’s edge before the coronavirus pandemic ground New York City to a virtual standstill.
The 476-key hotel had started to see expenses for its rooms and food-and-beverage component spike early last year. Cash flow got so tight that nearly every dollar of income as paying the debt service on the property’s $92 million mortgage.
And that was when times were good, with the Hilton reporting occupancy of 99 percent.
Now, two weeks after New York state recorded its first coronavirus case — and with New York City on the verge of a possible “shelter in place” order — some hoteliers are saying occupancy has nosedived to 15 percent.
And hotels, especially those that were on shaky ground to begin with, are facing a crisis.
“Hotels that have low debt service ratios were already vulnerable,” said Anne Lloyd-Jones, a senior managing director at the hospitality consulting firm HVS. “They have a very thin layer of protection.”
When the Hilton’s debt service coverage ratio (DSCR) — a metric commonly used in the hotel industry to measure a property’s ability to pay its mortgage and interest expenses — dipped dangerously low last year, the servicer ordered the owner to conduct what’s known as a cash sweep. The idea would be to place any excess cash flow into a special account to pay down the loan’s balance.
The Hilton’s loan had been underwritten assuming net operating income would be 2.16 times its debt service, but by late last year the DSCR dropped to 1.18 times.
The Hilton, however, was not alone.
New figures from real estate data firm Trepp shows there were more than half a dozen hotels in New York City that had a debt service ratio below 1 before the coronavirus pandemic hit, meaning cash flows weren’t sufficient to service the debt, and owners had to reach into their pockets to make payments. And still more were dangerously close to that threshold, according Trepp, which provided the data to The Real Deal.
These hotels could be among the first to try and renegotiate the terms of their loans or, in the worst case scenarios, default.
Others include the 240-room Le Méridien, the European-inspired hotel under the Marriott International umbrella that reopened near Central Park last summer after a renovation and rebranding. The hotel’s owner, Philadelphia-based Arden Group, paid just $41 million to buy the ground lease on the hotel two years ago — a fraction of the $143 million price tag seller New York REIT paid for the property in 2013.
The reason for the steep discount is that the hotel, formerly known as the Viceroy, was facing serious challenges, including escalating ground payments and pricey termination fee to switch hotel managers.
“After covering high fixed costs primarily from the ground lease and union labor, the hotel is basically breaking even,” New York REIT CEO Wendy Silverstein said when the property went up for sale.
On Park Avenue South, the 249-room Royalton Hotel similarly underwent a rebranding from the Gansevoort flag in 2017. The hotel at the end of last year reported a DSCR of .52 due to fewer bookings as a result of increased competition, according to notes from the loan’s servicer.
The trendy Gansevoort hotel in the Meatpacking District similarly had a low debt service ratio caused by some “amenity struggles” and was in the midst of repositioning its amenities right before the virus hit, according to the server.
Other hotels with precarious financials include those under budget flags like the Best Western President on West 48th Street, the Holiday Inn Express in Gowanus and the Holiday Inn in Chelsea.
Eric Orenstein, an attorney at Rosenberg & Estis who specializes in hotels, said that in the best scenarios lenders will be willing to work with borrowers to renegotiate loans so that they can make it through the crisis.
“The problem is, for hotels that were performing marginally to begin with, lenders might not be so willing to pursue workouts,” he said.
Begging for a Bailout
Executives from big hotel chains like Marriott, Hilton and Hyatt met with President Trump on Tuesday to seek a $150 billion bailout for the hotel industry.
“We have a president that used to own hotels,” said Alan Tantleff, head of the hospitality group at the financial advisory firm FTI consulting. “I’m sure he understands the issues they’re facing.”
Tantleff said travel and tourism make up 15.6 million jobs nationwide and 7.8 percent of gross domestic product. That is larger than other industries highly touted as essential to the U.S. economy like the auto industry, which he said accounts for 3 percent of GDP and 1.7 million employees.
“You can see the impact of the tourism industry on the United States economy,” he said. “Clearly, we’re one of the largest employers.”
Marriott has already begun to furlough tens of thousands of employees. Hotel experts said laying off workers is tougher in markets like New York City where hotel unions have a strong presence.
Representatives for the New York Hotel Trades Council and Hotels Association of New York City did not respond to requests for comment on potential talks.
Douglas Hercher, a principal at the hospitality investment bank RobertDouglas, said he’s spoken to clients who are talking about closing hotels.
He said those with larger portfolios are working out plans to consolidate workers in a few properties, and that most everybody is having conversations with their lenders about what to do when things get worse.
“This has gone from a headache to a problem to a catastrophe in two weeks,” he said. “People who thought they had a smart plan two weeks ago are now on version 3.0.”
Contact Rich Bockmann at [email protected] or 908-415-5229.