Hilton Times Square owner: “Take my hotel, please”

Struggling owner opted to walk away from 478-room hotel

Hilton Hotel in Times Square (Google Maps)
Hilton Hotel in Times Square (Google Maps)

The owner of the Hilton Hotel in Times Square has given the keys to the hotel back to its mortgage holder.

The hotel’s owner, California-based REIT Sunstone Hotel Investors, surrendered the 44-story property to Torchlight Investors, the special servicer. The lender and the borrower signed a lease in lieu of foreclosure, which allows the hotel owner to hand the keys back to its lender, according to property records filed in December.

Torchlight and Sunstone did not immediately respond to requests for comment.

The 478-room hotel, located at 234 West 42nd Street, was one of the biggest casualties of the pandemic-driven downturn in the hospitality sector. In September, Sunstone notified the state of its plan to lay off 200 employees because of the facility closing, and in October, it permanently closed its doors.

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But the hotel was in trouble before the pandemic hit. Its debt service coverage ratio, a metric that indicates a property’s ability to cover its mortgage and interest expenses, had dropped to perilously low levels as of late 2019.

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As The Real Deal previously reported, the hotel’s loan had been underwritten assuming net operating income would be 2.16 times its debt service. By September 2019, it had dropped to 1.03 times.

Then came the pandemic and its related lockdowns, which caused hotel occupancy in New York to plummet. By April, Sunstone had stopped making payments on its mortgage, which is securitized in a CMBS deal. The loan’s current balance is $75.8 million, according to Trepp.

The REIT also stopped paying rent on its ground lease as of March, according to the company’s most recent quarterly filing with the U.S. Securities and Exchange Commission. In the filing, the company said the REIT was considering a “negotiated transfer” of the hotel to either its lender or the landlords.

The hotel is now valued at $61 million, less than 25 percent of its 2010 valuation of $246 million.

Struggling hotels are increasingly turning keys over to lenders as the pandemic continues to ravage the hospitality industry. A November report from Trepp found that the proportion of hotel loans in special servicing has remained above 25 percent. Meanwhile, hotels that have been reappraised since March have on average seen their values sliced by nearly 30 percent.

“Major players in the hotel segment have been forced to reassess the value of their properties and have shown an increasing willingness to give up ownership,” according to the Trepp report.