Second Budget Hotel Bankruptcy in One Week; CRE Getting Monkeyhammered

by: Tyler Durden

First it was Extended Stay, which filed for bankruptcy last week (and whose unexpected filing may make life for CMBS participants very complicated as the law of unintended consequences strikes again). Today, it is budget hotel chain Red Roof Inn. The company, which owns 210 hotels, defaulted on $367 million of mortgage debt, has a total of $1.2 billion in total debt, including mezz loans and other notes.

The company was purchased a mere 2 years ago by Citigroup (yep, the same phenomenal deal makers who wouldn't know how to find their gluteus maximus with a magnifying glass, bought a 79% stake in yet another toxic piece of garbage) from Accor SA for $1.3 billion. From the WSJ:

"As a result of the extraordinary stress in the hospitality industry and the economy overall, we have entered into some restructuring discussions with our lenders," said Andrew Alexander, an executive vice president of Red Roof. "It has had no effect on our company operations or our franchise operations."

[The] drastic deterioration of hotels' business has led to a spike in defaults on securitized mortgages with hotels pledged as collateral. This month, defaults stand at 5% of the total of such mortgages, compared to 0.55% in June 2008, according to Trepp LLC. When a mortgage is securitized, it is chopped up and sold to dozens or hundreds of investors as bonds.

"Cash-flow performance issues and default concerns in 2009 have extended themselves to that of budget-priced, limited-service hotels," said Frank Innaurato, a managing director of Realpoint. "We would expect to see more instances of this type of default as borrowers continue to struggle with diminished cash flow from their properties in the not too distant future."

The combined Red Roof/Extended Stay defaults alone will cause hotel CMBS default rates to go stratospheric, and hapless investors may finally realize just why it is that subordinate CMBS were recently trading as if the apocalypse was about to occur. Of course, then Obama stepped in and gave everyone the impression that TALF would save the day and some other idiot (i.e. taxpayers) would be happy to purchase their toxic securities, resulting in a massive tightening in CMBS spreads of all classes and vintages. Of course none of that will happen, and just as CMBS will retrace their recent record wides, so will REITs whose business models are so closely intertwined with the stability of the securitized market will soon get reacquainted with their 52 week lows.

And in other Commercial Real Estate news, Bloomberg reports that Deutsche Bank's deal to sell its Manhattan Worldwide Plaza office tower has fallen apart.

The bank notified potential bidders that the property is back up for sale after deciding not to complete a June 3 deal with RCG Longview and George Comfort & Sons, said the people, who declined to be identified because they weren’t authorized to speak publicly.

Deutsche Bank will change the terms of the transaction with the new buyer, the people said. While it will still finance the sale, the bank will no longer retain an equity stake in the 47- story tower at Eighth Avenue and West 49th Street, the people said. Worldwide Plaza was one of seven Midtown skyscrapers Germany’s biggest bank took possession of 16 months ago when developer Harry Macklowe defaulted on about $7 billion in debt.

The CRE picture is atrocious and only now are people apparently starting to realize just how bad it truly is. Zero Hedge hopes that any retail fools who bought into the REIT upgrade by BMO's Paul Adornato were properly hedged as analyst after analyst completely lose any and all credibility in their attempt to ride the REIT short squeeze train until it is derailed and ends up a burning heap of aluminum and securitzations.