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More Distress Ahead for Hotel CMBS

As cash flows dwindle, holders of CMBS debt backed by lodging properties are in for more pain.

By Maria Wood | Updated on September 10, 2009

MILWAUKEE-A recent study by Robert W. Baird & Co. Inc. paints a rather bleak picture of the hotel CMBS debt universe. The locally based firm found that 11.2% of outstanding lodging CMBS has a trailing 12 month (TTM) debt service coverage of less than 1.0x. On top of that, another 19.3% has a TTM debt service coverage between 1.0x and 1.5x.

“The volume of CMBS debt where the assets are not covering the debt service surprised me,” remarks David Loeb, senior research analyst and managing director at Robert W. Baird. “We expect there will be perhaps another six quarters, maybe more, of negative comparisons. So the trailing 12-month numbers are going to get worse, not just until RevPAR turns positive but until we see margins turn positive. That may take more than a point or two [increase in] RevPAR.” The firm maintains its underweight recommendation for the hotel sector in light of its analysis.

Another worrisome development is the amount of CMBS that is set to mature in the next decade. Nearly $30 billion of hotel CMBS debt is on track to mature through 2012, with another $35 billion set to mature between 2015 and 2017. Of those amounts, $7.7 billion carries a TTM debt service coverage under 1.0x, raising the potential of a surge of defaults.

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