via wolfstreet:
The financialization of everything has let to a convoluted setup for hotels and their beaten-up investors at all levels. It goes something like this: The hotel properties are held by a publicly traded hotel REIT that leveraged them up with variable-rate interest-only mortgages during the era of ultra-low interest rates, that were then securitized into commercial mortgage-backed securities (CMBS) and, backed by overinflated property valuations, sold to institutional investors, such as pension funds and bond funds. The hotels themselves are operated by other companies, usually partnering in some way with a hotel brand, such as Marriott.
When the Fed hiked its policy rates, the variable rates of those mortgages – pegged to short-term interest rates, such as Libor – jumped, and so mortgage payments roughly doubled in a year, while hotel property valuations plunged back to earth.
So the hotel REITs have now started to walk away from the properties. They take a total loss on their equity. The CMBS holders take the remaining losses when they sell the properties, with the proceeds not anywhere near enough to cover the loan balance. The companies that operate the hotels continue to do so, and guests might not know the difference.
For CMBS holders, this has been a nasty deal for years. During the Great Recession, defaults topped out at 19%, according to Trepp, which tracks and analyzes CMBS. That was the first wave. During the early months of the pandemic, the default rate topped out at 24%; but in that second wave, as hotels reopened, many defaults were cured.
So now we have the beginning of a third wave of defaults in 15 years, this one driven by soaring interest rates, and property owners walking away instead of trying to work out a deal, as they’d often done during the pandemic.
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