At the May 19th Senate Banking Committee hearing on CARES Act implementation, Treasury Secretary Steve Mnuchin and Federal Reserve Chair Jerome Powell were asked about their plans to shore up the hotel commercial-backed securities (CMBS) market. Although they did not commit to any specifics, it is a worrying sign that they entertained the possibility of taking steps that will not do anything to protect hotel worker jobs or healthcare.
It is no surprise that hotel debt broadly, and CMBS debt in particular, has suffered in the wake of the COVID-19 pandemic – only 76.3 per cent of hotel properties in CMBS deals were up to date on their mortgage payments in April, according to JPMorgan data reported by the Financial Times.[i] The hotel industry lobbies – including the biggest, the American Hotel and Lodging Association (AHLA) – have urged Mnuchin and Powell to shore up the $86B in hotel CMBS debt to avert “a potentially catastrophic prolonged impact on jobs and tax revenues.”[ii]
On Tuesday, Senator Thom Tillis (R-NC) cited numbers from the AHLA to say that only 15% of CMBS borrowers have received forbearance from services, which he described as ‘low,’ a characterization with which Secretary Mnuchin agreed. Senator Tillis further asked whether the Fed and Treasury would consider extending the use of their facilities to new-issue CMBS loans, including debt rated less than AAA. Both Powell and Mnuchin pledged to continue to look at expanding loan facilities for CMBS.[iii]
Sen. Tillis’s questions recall the dire warnings issued by the AHLA. In a call to help hotels stay open and save millions of jobs, the AHLA warned, “Without action to shore up debt servicing, including in the CMBS market, this crisis will lead to widespread foreclosures, snowballing into mass disruption and a critical lack of liquidity in the commercial real estate market.”[iv]
The reality is that rescuing hotel CMBS debt will do nothing to help hotel workers, who have suffered the most in the pandemic’s economic fallout. By the time the CARES Act became law in late March, hotels across the US had already laid-off 70% of their workforce.[v] The three largest US hotel employers -Marriott, Hilton and Hyatt – are sitting on $4.5B in cash, and have done little to assist laid-off workers.[vi]
CMBS debt relief would not even necessarily help hotels make it through the economic downturn. Without radical restructuring, many hotel loans are unsustainable given the near total collapse of the travel and tourism sectors. Many analysts believe it could take more than 2 years before hotel revenues approach pre-crisis levels. Why should US taxpayers support hotel-backed debt payments for such an extended period?[vii]
Most critically, hotel CMBS debt relief would only reward speculative real estate investing, not keep hotel workers employed. If current hotel owners default on their debt service, ownership of their properties will simply pass on to lenders or other buyers, primarily a handful of large private equity firms sitting on a pile of cash. Distressed debt sales, foreclosures, or transfer of ownership in general in the hotel industry have rarely if ever led to permanent shuttering of hotels. As the Wall Street Journal recently reminded us, cash-rich distressed debt investors are already salivating at the thought of pandemic-induced asset sales.[viii] And they won’t be buying hotel assets in order to turn them into parking lots. If anything, they’re likely to invest the capital needed to spruce them up and keep them operating so they can sell them once the hotel industry recovers and occupancy levels approximate their pre-COVID levels.
The Fed using a loan facility to assist hotel owners with CMBS debt will only assist hotel owners, many of them large tax-advantaged real estate investment trusts, their bank lenders, sophisticated real estate investors, and financial engineers – not workers.
At another point in Tuesday’s hearing, Senator Ben Sasse (R-NE) correctly countered the push to expand CMBS relief, quoting a Wall Street Journal editorial: “This means the Fed will in effect buy the worst shopping malls in the country and some of the most indebted companies.”[ix] Hopefully the Federal Reserve will recognize that this logic applies equally well if not more so to over-leveraged hotels, and not prop up the CMBS financing model, which has proven particularly untenable to even short business interruptions, not to mention the long-term crises unfolding in the hotel and retail industries.
[i] Joe Rennison, “Empty US hotels increase pressure on debt investors,” Financial Times, 5/5/20. https://www.ft.com/content/f7f19028-70f1-4243-b546-7ac8d7067d38
[ii] Letter to Steve Mnuchin and Jerome Powell, AAHOA and AHLA, 4/16/20. https://www.aahoa.com/docs/default-source/default-document-library/ahla-aahoa-cmbs-treasury-fed-submitted-short1.pdf
[iii] The Quarterly CARES Act Report to Congress, Senate Banking Committee, 5/19/20, beginning at 1.55.30 of video. https://www.banking.senate.gov/hearings/the-quarterly-cares-act-report-to-congress
[iv] “AHLA Supports Plan To Add Funds For Small Business Loans, Seeks Additional Action To Protect Hotel Jobs,” AHLA, 4/8/20. https://www.ahla.com/press-release/ahla-supports-plan-add-funds-small-business-loans-seeks-additional-action-protect
[v] Chip Rogers, CNN Interview with Julia Chatterley, 3/30/2020. (Transcribed from recorded video.)
[vi] BofA Global Research, Liquidity: How much room to navigate a travel shutdown? 3/25/20, p. 1
[vii] http://hotelnewsnow.com/Articles/301004/US-hotel-RevPAR-forecasted-to-drop-506-for-2020 2021 forecast does not reach 2019 RevPAR of $86.76.
[viii] Konrad Putzier and Peter Grant, “Real-Estate Investors Eye Potential Bonanza in Distressed Sales,” Wall Street Journal, 4/7/20. https://www.wsj.com/articles/real-estate-investors-eye-potential-bonanza-in-distressed-sales-11586260801
[ix] The Quarterly CARES Act Report to Congress, Senate Banking Committee, 5/19/20, beginning at 1.11.00 of video. https://www.banking.senate.gov/hearings/the-quarterly-cares-act-report-to-congress; see also “The Fed’s ‘Main Street’ Mistake,” Wall Street Journal, 4/9/20. https://www.wsj.com/articles/the-feds-main-street-mistake-11586474912