A surge in coronavirus cases on the cusp of winter has hotel operators and their lenders on high alert.
Banks that lend to hotels — as well as motels, resorts and other lodging establishments — had hoped that six months of loan forbearance would be enough to usher the hospitality sector from crisis to recovery and ward off defaults and lofty charge-offs.
But most initial deferral periods ended in October, and others will expire in a matter of weeks, leaving hotels to resume payments just as the pandemic enters a new phase.
STR, a hotel industry data firm, said average U.S. national occupancy was 43% for the week that ended Nov. 13, down more than 32% from a year earlier and, notably, off from 48% during the third quarter, when travel and hotel bookings had started to rebound.
“I don't think we, as an industry, are out of the woods,” Kessel Stelling, chairman and CEO of Synovus Financial in Columbus, Ga., said at recent conference hosted by Bank of America. “I think we've got a tough couple of months” ahead.
The $53 billion-asset Synovus was an active hotel lender before the pandemic. Hotel loans accounted for 70% of the $865 million increase in criticized and classified loans during the third quarter, executives said during the company’s third-quarter earnings call.
Nearly 9% of Synovus’s hotel portfolio, or $125 million in loans, had principal and interest deferrals on Sept. 30. Those credits accounted for three-fourths of commercial loans on deferral, demonstrating the outsize pain that hotels had endured.
The latest health data bodes poorly for the hospitality sector. The pandemic has intensified, topping 100,000 daily cases since Nov. 3 and putting the month on track to be the worst yet, according to Johns Hopkins University’s running tally. The U.S. reported more than 170,000 cases on multiple days in November, a level that had not been reached in prior months.
States such as New York, Illinois and California have imposed new restrictions to slow the spread of the virus, and the Centers for Disease Control and Prevention has advised against Thanksgiving travel. And hotel bookings are falling again.
Financial satisfaction of people in the U.S. bounced back strongly in the third quarter, reversing the lows brought on by the coronavirus.
Before the pandemic, accounting and finance professionals actively searched for better opportunities. Once the pandemic hit, employees worried about company layoffs and hesitated to seek new opportunities.
Democrats on the House Ways and Means Oversight Subcommittee want the agency to reverse the automated revocation of status for tens of thousands of nonprofits.
Amid all that, bankers will have to start making hard decisions on loans coming out of deferment. Regulators let banks offer deferrals and modifications without labeling them as troubled debt restructurings, which would normally signal charge-offs ahead. Most of the deferrals started in April and May.
Barring new government intervention — either from regulators or Congress — hoteliers face the possiblity of default. And banks may have to start charging off substantial amounts of loans during the fourth quarter, said Matthew Anderson, a managing director at Trepp.
Trepp, a commercial real estate data firm, said the total delinquency rate on commercial mortgage-backed securities made post-2009 — where payments are more than a month past due — was 7.43% in October. CMBS delinquencies are much higher for lodging loans: 19.2%.
Delinquency rates on hotel loans held on bank balance sheets have hovered near zero, Anderson said, but that is largely because of deferrals. He said the CMBS rates, while not a precise indicator, point to what lies ahead for banks that hold hotel loans in coming months.
That is, he said, unless a coronavirus vaccine is introduced soon and efficiently distributed to inoculate enough people to end the pandemic — and jump-start travel by mid-2021.
“It may come down to a race against time,” Anderson said. “At least at this point there’s a light at the end of the tunnel for both borrowers and lenders.”
Pfizer and German partner BioNTech SE said this month that their vaccine proved 95% effective in a late-stage trial in preventing mild and serious forms of the virus. Moderna also said test results showed its vaccine to be highly effective in protecting people from the virus. The University of Oxford and AstraZeneca PLC on Monday also reported successful trial results for their vaccine.
U.S. public health officials said vaccines could be made available by the end of 2020, but they cautioned it could take months to inoculate enough Americans to end the pandemic and the economic restrictions associated with it.
The American Hotel & Lodging Association said this month that a survey of its members found that, absent new federal assistance, 47% would be forced to close down by next summer.
“Without action from Congress, half of U.S. hotels could close with massive layoffs in the next six months,” said Chip Rogers, the association’s president and CEO.
Executives at Western Alliance, another prominent hotel lender, said during the Phoenix company’s third-quarter earnings call that total classified assets of $326 million amounted to only 1% of total assets. But those assets rose by 9.4% from a quarter earlier, driven by hotel credits.
Special mention loans at the $33 billion-asset company increased by $81 million, primarily because of loans tied to hotel and travel.
Western Alliance said that 44% of its hotel loans were in deferral on Sept. 30, down from 83% three months earlier.
Anderson said that, barring substantial government intervention, banks almost certainly will have to restructure loans for hotel borrowers to help them survive until vaccines take root.
This will mean lowering interest rates — to lower payments — or getting creative by dividing hotel loans. For instance, a bank that holds a loan backed by a hotel that is losing value might restructure the loan into one part that is likely to be repaid and another that poses higher risk.
In that scenario, Anderson said a bank might have to charge off the risky part of the divided loan — and hope to recoup it later if the hotel survives. If this happens with any regularity, hotel charge-offs could mount over the next two quarters. Banks may also choose to sell off troubled loans, take charge-offs and clean up their books ahead of an expected recovery.
Foreclosures are less likely because they are costly and time-consuming — and because vaccines present midrange hope, Anderson said.
“There will be charge-offs, that’s almost for sure,” Anderson said. “And I think hotels will be the sector banks spend the most time on the next couple quarters.”