What happened to San Francisco hotels ?

San Francisco used to be a great city. We visited several times. I drove  rental car down that famous winding street until we were dizzy. Had a great Chinese chicken salad prepared at our table in the Imperial Palace restaurant. The last time we visited was over 20 years a ago. Our one day in Sausalito was ruined by aggressive panhandlers who must have thought we had $100 bills hanging out of our pockets. And that was over 20 years before the bums who live on the streets of San Francisco became a national headline.

There has been some improvement in leisure tourism in cities. there has been a surge of tourism near National Parks, state parks, and other natural wonders away from the cities. Urban convention tourism, and business travel in general, has collapsed.

Business travelers on expense accounts are gone. Companies discovered employees and executives can usually accomplish the same thing virtually,
at much less expense. But one company’s costs are another company’s revenues – and hotels and airlines are catching the losses.

Four of the six hotels that hotel-REIT Park Hotels & Resorts owns in San Francisco are still closed as convention and business travel is near-zero. The Hilton San Francisco Union Square, the Bay Area’s largest hotel with 1,921 rooms, and the Hilton Parc 55, both in the Union Square area – owned by hotel-REIT, Park Hotels & Resorts [PK], are seeking relief on their mortgages that were packaged into mortgage-backed securities (CMBS).

Some other hotels in San Francisco have reopened. All in-person conventions and meetings have been cancelled or converted to virtual events. People on expense accounts are not coming for conventions. The Hilton San Francisco Union Square is also the City’s largest convention hotel, with 134,500 square feet of meeting space, ballrooms, and meeting rooms.

The mortgage backed by the two Hilton properties is still current, but the borrower, Park Hotels & Resorts, asked the servicer, Wells Fargo, for relief. If the borrower and the servicer can't work out a deal, the loan is sent to a third party, the Special Servicer, and added to the Special Servicing List.  This Special Servicing rate for hotel properties spiked to a record of 26.0% at the end of September, according to Trepp, in its October report on CMBS.



But the delinquency rate of hotel properties ticked down, to a still huge 22.9%, as some delinquencies were “cured” because the delinquent loans were granted forbearance (aka "extend and pretend"), and were no longer considered delinquent, though no payments needed to be made.

Mortgage koans granted forbearance continue to stay on the Special Servicing list, so the Special Servicing rate reflects the sad state of hotel property loans.

The CMBS Special Servicing rate of hotel properties increased every month since March, unlike the delinquency rate, which has edge down for the past three months, mainly due to forbearance to delinquent loans.

The two Hilton properties in San Francisco are on the watch list, backing a $724 million loan, taken out by Park Hotels & Resorts Group, according to the San Francisco Business Times. Back in 2016, when the mortgage was packaged into the CMBS, the property of the Hilton San Francisco Union Square was valued at $1.02 billion and the Hilton Parc 55 at $540 million.

They will be reappraised. Wells Fargo says reappraisals of hotel properties have been brutal. A Crowne Plaza hotel property in Houston was reappraised 46% lower than its appraisal in 2014 when the loan was packaged into a CMBS for one example. The Holiday Inn La Mirada in Los Angeles was marked down by 27% from its 2015 appraisal. The Holiday Inn in Columbia, Tennessee, was marked down by 37%. The range of current hotel valuation markdowns is -25% to -50%.

Park Hotels & Resorts was spun off by Hilton Worldwide Holdings [HLT] in early January 2017, and started trading on the NYSE, as Park Hotels (PK). They own 60 hotel properties in the U.S., including six hotels in San Francisco (two Hiltons, a Hyatt, a JW Marriott, a Le Meridien by Marriott, and the Adagio by Marriott). Four of these six are still closed.

The REIT’s shares peaked in the fall of 2018, started heading seriously lower in May 2019. At the moment, shares trade at $10.75:



If the mortgage becomes delinquent, it will be added to the Delinquency list.