Moody’s downgrades $725M loan on two SF hotels 

Hilton-branded properties meet operating costs but face debt maturity in November

Park Hotels' Thomas Baltimore with Hilton San Francisco Union Square and the Hilton Parc 55 San Francisco
Park Hotels' Thomas Baltimore with Hilton San Francisco Union Square and the Hilton Parc 55 San Francisco (TripAdvisor, Virginia.edu)

New York-based Moody’s Investor Service, the credit rating company, has downgraded the $725 million CMBS loan on San Francisco’s two largest Hilton hotels, another indication of San Francisco’s distressed commercial market.

The CMBS loan is broken down into seven classes and each one was downgraded, with the highest rating falling from Aaa to Aa2 and the lowest going from B3 to Caa2. 

“The ratings on the seven P&I classes were downgraded due to an increase in Moody’s LTV [loan to value ratio] resulting from the decline in performance,” the report said.

Park Hotels and Resorts Group Inc. is the owner of the Hilton San Francisco Union Square and the Hilton Parc 55 San Francisco. The Virginia-based REIT hasn’t missed any regular debt payments on the loan. The Moody’s analysis states that Park has met its debt obligations and maintains funding for operating costs.

But Moody’s doesn’t believe that Park will be able to meet its obligations by the maturity date, which is in November. 

“Despite the distressed financial performance over the last three years, the properties benefit from its Union Square submarket location and flagship property status within the Hilton franchise,” the report said. “However, the properties will require more time to recover their financial performance and are unlikely to generate enough cash flow to cover operating costs and debt obligations by the loan maturity date.”

The interest-only loan was originated in 2016 by JP Morgan Chase and sold into the CMBS investor market. Currently Wells Fargo is the master and special servicer for the loan, which was placed on a Trepp watchlist in 2020 for mortgage-backed securities at risk of default. 

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The Moody’s analysis noted that the loan has remained current through February due to Park funding all operating and debt service shortfalls since the coronavirus outbreak. A reason why the hotels have maintained their payments could be that Park is in strong standing.

“Park Hotels are in very good shape financially,” Alan Reay, president of consultancy Atlas Hospitality, said. “They have $1.9 billion in cash liquidity and their stock is way up 18.3 percent year to date.”

Reay went on to say that he doesn’t expect Park to default on the loan if the company decides to let go of the buildings; it would sell into the high-demand San Francisco market.

“In order to replace those two hotels, you wouldn’t be able to build them for less than $2.2 to $2.5 billion,” he said. “The Hyatt Place in San Francisco sold for $344 million, so if this seller decided ‘we wanted out of the deal,’ they would not be giving it back to the bank. There would be a lot of interest from investors, despite the fact that the cash flow isn’t there.”

One trend that is positive for the San Francisco hospitality market is that the price of deals have remained steady compared to other markets such as Chicago and New York.

“We just are not seeing that in California,” Reay said. “In the markets that have been the hardest hit since COVID, San Francisco was the hardest hit, and we’ve seen almost nonexistent distress sales going on.”

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