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Foreclosures of hotels in California quadrupled in 2009

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IRVINE, CA -- Hotel foreclosures in California more than quadrupled last year as business travelers and vacationers cut spending and commercial real estate values plunged, forcing owners into default, according to a survey released today.

There were 62 foreclosures on hotels in the state last year, compared with 15 in 2008, Atlas Hospitality Group said.

Properties in default jumped almost six-fold to 307, said Atlas, which specializes in selling hotels.

The survey only covered California.

In San Diego County, the Atlas Hospitality survey had three bank-owned (REO) properties totaling 77 rooms foreclosed upon in 2009.

A year ago, it was two lender-owned properties with 20 rooms.

The three 2009 REO properties are the 46-room Pacific Coast Inn & Suites on Mission Bay Drive in San Diego, the 20-room El Camino Motel in Imperial Beach and the 11-room Harbor House Inn on Hawthorne in San Diego.

The Atlas report showed 29 San Diego properties in default last year, totaling 4,139 rooms. A year ago, there were six properties in default totaling 493 rooms.

Five of the properties in default last year are the 316-room Mission Plaza Hotel on Sports Arena Boulevard, the 202-room Mission Valley Resort and the 182-room Ramada Plaza Hotel, both in Mission Valley, the 88-room Holiday Inn Express in Mission Bay, and the W San Diego downtown.

Lodging owners are struggling to make debt payments after adding rooms and properties from 2004 to 2007, when financing was easy to come by because banks bundled the loans into mortgage-backed securities and sold them to investors.

"In California and nationwide, a lot of owners are dipping into their own pockets to fund the negative cash flow, and they are running out of money," Alan Reay, president of Atlas Hospitality, said.

"Hotels are being foreclosed on and reselling at very low, low prices. A lot of people question if they should keep paying. As bad as the numbers look right now, it's going to get a lot worse," Reay said.

About 1,200 loans totaling $28.2 billion and backed by 1,800 U.S. hotels were included on a performance watch-list by Realpoint LLC as of the end of December.

The list includes loans in default or at risk of default, according to the Horsham, Pa.-based credit-rating company.

The largest hotel to be foreclosed on was the 469-room Marriott in downtown Los Angeles, Atlas said.

The Marriott International Inc. (NYSE: MAR) hotel may be sold to an unidentified Chinese investor for $60 million in cash, industry newsletter Real Estate Alert said last month.

LA Hotel Venture LLC, which bought the property for $115 million in March 2007, filed for bankruptcy in April to stave off foreclosure.

The petition listed as much as $100 million in assets and as much as $500 million in debt.

About 81 percent of troubled California hotel loans originated between 2006 and 2007, Atlas said.

Occupancy in the top 25 U.S. travel markets fell to 61 percent through November from 67 percent a year earlier, according to Smith Travel Research in Hendersonville, Tenn.

Average daily rates slumped 12 percent during that period compared to the prior year and will likely drop 3.4 percent in the U.S. in 2010, according to Smith Travel.

"We're not going to hit bottom until we stop seeing revenue declines," Reay said.

"The latest November numbers still show double-digit declines in many of the top 25 markets. That's a problem. We were looking at November as the bottoming out month. Unfortunately, this was a bad surprise," Reay said.

Riverside, outside of Los Angeles, had 10 hotels in foreclosure last year.

San Bernardino was home to seven and Los Angeles had six, Atlas said.

Los Angeles had 33 hotels in default and San Bernardino had 30, Atlas said.

In mid-2009, real estate investment trust Sunstone Hotel Investors Inc. (NYSE: SHO) of San Clemente turned its 258-room W Hotel in downtown San Diego back to the lenders.

Sunstone paid $96 million, or about $370,000 per room, for the hotel in June 2006 and the property carried a $65 million loan. The property remains open.

In its 2009 third quarter earnings announcement, Sunstone said it did not make a November debt service payment on a $246.3 million mortgage loan from Massachusetts Mutual Life Insurance Co. for 11 hotels consisting of 2,587 rooms, including three in San Diego, according to Atlas Hospitality's Web site.

The San Diego properties included the Courtyard by Marriott San Diego Old Town, Holiday Inn Downtown and Holiday Inn Express San Diego Old Town. They are still open.

Sunstone still owns San Diego properties; the Hilton Del Mar, Marriott Del Mar and the Embassy Suites La Jolla.

Also last summer, Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT), the third-largest U.S. lodging company, sold the 404-room W San Francisco hotel for $90 million to Keck Seng Investments (Hong Kong) Ltd. At that time, Keck Seng owned three Starwood properties.

In 2009, the Atlas Hospitality survey showed:

  • The number of hotels that were foreclosed on rose 313 percent, from 15 to 62.
  • The number of hotels in default increased 479 percent, from 53 to 307.
  • The largest hotel to be foreclosed on is the 469-room Marriott in Downtown Los Angeles.
  • California has 4,468 rooms that have been foreclosed on, up 792 percent.
  • There are 32,951 California hotel rooms in default, a 522 percent increase.
  • 81 percent of all the hotels that are in default have loans that were originated in 2006 and 2007.
  • 53.2 percent of foreclosed hotels filed bankruptcy.
  • 4.8 percent of all foreclosed hotels were CMBS Loans.

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