Upper upscale clouds loan performance

With significant revenue per available room (RevPAR) growth, CMBS 2.0 conduit lodging delinquencies in the United States declined to 6.5% as of February 2023 compared to 23.7% in February 2021, when the rate was near all-time highs due to the pandemic, according to Kroll Bond Rating Agency (KBRA). Delinquency rates stood at 1.9% in February 2020.

However, KBRA today has observed meaningful diversion in the delinquency figures by chain scale, hotel chain, and company brand.

Key takeaways from the KBRA report:

* The upper upscale chain had both the highest delinquent amount ($806 million) and rate (8%).

* For the larger balance upper upscale chains, Sheraton had the highest delinquency rate at 21.7%, with 16 of the 22 chains posting delinquency rates in the double-digits.

* The midscale chain had the lowest delinquency rate of all the segments at 3.1%, as well as the lowest delinquency balance ($22.6 million). Best Western, Candlewood Suites, and Extended Stay America Suites accounted for 60% of the delinquent balance.

* By company brand, Shilo Management Corp. had the highest delinquency rate of 83.8%, with seven of its nine underlying collateral properties being delinquent.

* The New York, Houston, and Chicago metropolitan statistical areas (MSA) accounted for almost one-half of the delinquent balance, aggregating $1.2 billion.

In addition, KBRA reported, while there are still positive fundamentals and forecast growth for the upper upscale chains, which account for about one-third of the delinquent population, nominal RevPAR growth, a slowing economy, and the age and status of these delinquencies limit meaningful improvement in the overall lodging delinquency rate.

Chain scale delinquencies

                    % delinquent   Delinquent      Outstanding     Delinquent     Properties
                     by balance      balance ($M)   balance ($M)    properties  

Upper upscale    8%               805.8            10,067.4              20                 251

Economy          6.7                   26.7                 398.1               8                 112

Independent     6.5                 339.5               5,221               15                 210

Upper midscale 6.4                 589.7               9,236.5            75               1,175

Luxury              6.1                137.9               2,254.6              3                    32

Upscale            5.4                 599.3             11,047.8            36                  749

Midscale           3.1                  22.6                  724.8              6                  171

Source: KBRA, Trepp, STR

“While we don’t expect to see an immediate improvement in the lodging delinquency rate, continued strong demand from leisure travelers should keep them at manageable levels provided we don’t hit a prolonged recessionary period,” said Larry Kay, senior director, CMBS Surveillance, KBRA. “Upper upscale hotel performance reliant on business travel is still expected to remain under pressure, particularly in urban centers.”

Editor’s note: KBRA’s analysis focused on delinquent lodging loans among CMBS 2.0 conduit securitizations issued through February 2023 to determine how they were distributed among the different chain scales, individual chains, and company brand. In doing so, it used loan and property names to identify the name of the chain. The delinquency data included all outstanding 2.0 conduits as of February 2023, sourced from Trepp and KBRA Credit Profile (KCP), a division of KBRA Analytics. As the primary objective was to understand conduit lodging performance, KBRA included whole loans and/or only those loans with note participations within the conduit universe, and it excluded defeased lodging loans. For chain scale segments, it leveraged STR’s classifications, which have become ubiquitous in the industry. The classifications are grouped primarily by actual average room rates and include Luxury, Upper Upscale, Upscale, Upper Midscale, Midscale, Economy, and Independent. An independent hotel, regardless of average room rate, is included as a separate chain scale category.