In November, Barry Sternlicht touted Starwood Property Trust’s stash of dry powder and the strength of its hotel business.
Turns out there was trouble in paradise.
Weeks earlier, the firm’s parent company Starwood Capital, had seen an $800 million loan backing 138 hotels go into special servicing.
Starwood, listed as the portfolio’s institutional sponsor, had failed to make the balloon payment due when the mortgage matured in October, according to Fitch Ratings.
Starwood has since worked out a repayment plan with its lender. But the default points to the looming distress in a sector that still has not fully recovered from Covid’s hit to travel and hotel occupancy.
The Starwood Lodging Hotel Portfolio’s troubles stem from the early months of lockdown.
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Occupancy at the hotels, which span half the country and operate under the Marriott, Hilton and Best Western brands, among others, dropped to 30 percent during 2020, below the nationwide average of 44 percent, according to Statista.
In October of that fateful year, Starwood’s lender extended Covid relief via a standstill agreement, Moody’s reported. The deal gave Starwood a six-month break on the deposits hotels must make to cover the depreciation of furniture, fixtures and equipment.
Starwood was also allowed to use reserves to cover debt service payments, according to Trepp.
By the end of 2021, the portfolio’s occupancy had recovered to 62 percent, about five percentage points above the national average. As of March, Moody’s had determined the portfolio’s debt-to-service ratio was relatively healthy at 2.15. The metric signals whether a firm has enough revenue to cover its debts.
But come June, Starwood had contacted its lender about modifying the loan so it could sell off underperforming assets, pay down its balance and eventually refinance, according to Fitch.
Starwood finalized that modification agreement the month after the loan went into special servicing. The deal extended the repayment through February 2024 and applied all net proceeds from sales, plus any reserves, to the loan’s principal.
Starwood went on to unload 41 properties from the portfolio — nine in October and 32 in November. Six more are in contract, with sales to close this month or next. The firm also made a $15 million equity payment in January.
Those moves have cut the balance on the firm’s A-note to about $138 million from $332 million.
But all told, the firm’s unpaid balance still stands at $606 million, according to Trepp.
A spokesperson for Starwood Capital did not return requests for comment.