Moody's: Hotel Values Could Tumble 30% or More This Year

Moody's: Hotel Values Could Tumble 30% or More This Year

Feb 18, 2009 - CRE News

Hotel values could tumble more than 30 percent this year, according to Moody's Investors Service.

The rating agency bases its prediction on an expected free-fall in hotel fundamentals. That is exacerbated by rising capitalization rates that are the result of the difficulty in accessing debt financing.

It further said that the hotel industry's current drop in fundamentals has already exceeded the industry's previous decline, in 2001-2002, and that it will last longer. It noted that the industry's 10 percent drop in revenue per available room during 2008 compares to a 7 percent drop during 2001. It used data from Smith Travel Research for its projections.

PricewaterhouseCoopers' hotel practice has predicted that RevPAR would drop another 11.2 percent this year, while PKF Hospitality Research has predicted a 9.8 percent drop.

Using a hypothetical full-service hotel with a 22 percent net cash flow margin as its benchmark, the ratings agency said that an 11.2 percent drop in RevPAR this year would result in a 25 percent drop in net cash flow. That would translate to a 25 percent value drop if cap rates for hotel sales do not change. It further predicted that an 11.2 percent RevPAR drop would result in a 32 percent value drop if cap rates increased 100 basis points and a 37 percent drop if cap rates climb 200 bp.

A 7 percent drop in revenues, according to Moody's, would result in a 16 percent drop in values if there was no change in cap rates. But values would drop 24 percent if cap rates rise 100 bp and they would fall 30 percent if cap rates climb by 200 bp.

Meanwhile, cap rates for hotel investment sales rose 91 bp to exceed 9 percent in the fourth quarter and continue on an upward trajectory, according to Real Capital Analytics. But the New York research firm's data is based on what amounts to a near-dearth of transactions. Investors might actually be looking for substantially higher cap rates.

Moody's warned that its projected drops in hotel values would obviously further cripple investors' ability to finance properties.

The issue would be especially thorny for properties with loans placed between 2006 and 2008. Many of those hotel loans were underwritten based on projected financial performance, which has yet to materialize.

Moody's also warned that CMBS with high or exclusive concentrations of hotel loans may be subject to cash-flow volatility. That issue would be particularly troublesome for loans underwritten with low debt-service coverage ratios.

The Plasencia Group previously projected that revenue drops of just 7.8 percent in 2009 would likely result in debt-service shortfalls for hotel loans underwritten with coverage levels of 1.4x or less.

The CMBS universe includes 957 hotel loans with a balance of $18.9 billion that have such coverage levels, according to Realpoint's Lead Generator. Of those, 616 loans with a balance of $15.3 billion were originated between 2006 and 2008.

Plasencia used a 7.8 percent drop as its benchmark because that had been PKF Hospitality's original prediction for RevPAR this year. It later revised that prediction to 9.8 percent.

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