The COVID-19 pandemic, which took hold in March 2020, triggered an unprecedented decline in U.S. lodging demand. Travel virtually came to a halt due to government travel restrictions, the need to socially distance, the closure of various venues, and the cancellation of events that spur travel. Prior to the pandemic, the U.S. lodging industry had been in its 10th consecutive year of RevPAR growth after rebounding from the 2009 economic recession. By year-end 2019, U.S. RevPAR surpassed the 2008 peak by over 30%. But these gains were wiped out by the onset of the COVID-19 pandemic; the industry experienced its largest RevPAR decline on record in 2020.
With the sector in the early stages of recovery, we're sharing our views on the ramifications for the CMBS market. Below we examine the latest performance data for U.S. lodging properties, update CMBS exposure totals and trends, outline our current approach to analyzing loans to arrive at our view of sustainable cash flow and value, and dive more deeply into recent performance data on our rated single-asset, single-borrower (SASB) transactions.
- Revenue per available room at U.S. lodging properties has broadly improved this year, but the recovery has not been uniform across locations and property types.
- Our approach to deriving sustainable net cash flow and value will depend on recent monthly performance trends, hotel-specific demand generators, and performance trends prior to the pandemic.
- CMBS exposure to lodging properties has decreased in recent years and throughout the pandemic, but issuance is starting to increase; the majority of loans backing the single-borrower deals we rate are now current, though performance metrics have not been uniform.
Performance Of The U.S. Lodging Sector
In 2020, U.S. hotel occupancy declined by 33.3% to 44.0%, while the average daily rate (ADR) dropped 21.3% to $103.25. This low occupancy level, coupled with the ADR decline, resulted in a RevPAR decline of 47.5% in 2020, the largest such decline recorded. Generally, hotels cannot profitably operate below an occupancy level of about 40.0%, and as a result, many hotels closed. While most of these hotels have since reopened, some--mainly in urban areas--remain shuttered (see Chart 1).
This year, RevPAR continued to decline in January (48.2% compared to the same month in 2020) and February (44.8%). However, the sector's performance started to rebound in March, with RevPAR increasing by 34.4%. This was partly due to the rollout of the COVID-19 vaccine sparking an uptick in leisure travel. In addition, year-over-year comparisons became easier given 2020's steep declines. RevPAR has continued to increase since then, by 256.8% in April, 165.1% in May, 118.4% in June, 107.0% in July, and 73.2% in August (see Chart 2).
Year-to-date (YTD) through August 2021, RevPAR was up 44.3% over 2020 levels, but it remains 22.8% below that of the same period in 2019. In fact, we don't expect RevPAR to recover to 2019 levels until 2023 at the earliest. Although the RevPAR haircut to 2019 levels continues to lessen each month, and it actually exceeded the 2019 level in July, this trend is unlikely to continue. The pace of the recovery will depend more on occupancy than ADR. This is because ADR has been more sustained and resilient, and it already exceeds YTD August 2019 levels for the luxury, midscale, and economy chain scales as well as for resorts, interstate hotels, and hotels in small town/metros.
However, occupancy levels are expected to lag in the coming months. One reason is that leisure travel will subside as children go back to school. Meanwhile, corporate and meeting/group demand, which is typically very strong in the fall months, remains significantly depressed and will not fill midweek guestrooms. Corporate demand is recovering very gradually as companies return to offices at different rates depending on region and size. Furthermore, although some larger group meetings have resumed, attendance has been weak. While many hotels are reporting an uptick in group bookings, booking windows remain short, and because of changing pandemic conditions, hotels have generally been flexible with respect to cancellations. If the Delta strain worsens, or any other potentially dangerous variants emerge, demand could remain stifled even longer. The bottom line: Until corporate and group demand meaningfully returns, which appears unlikely until 2022, occupancy levels will remain constrained at many urban hotels and hotels with significant meeting space.
The Impact Of COVID-19 By Sector
The pandemic hasn't affected all property types and locations equally. Similarly, the magnitude and pace of the rebound is also decidedly bifurcated. Hotels in urban markets and at airports had the largest RevPAR declines in 2020: 63.9% and 52.5%, respectively. By contrast, the drops were less severe at hotels located along highways (30.4%) and in small towns/metro areas (30.5%). With the vaccine rollout in early 2021 and a resumption in leisure travel, interstate and small-town hotels rebounded significantly. YTD through August 2021, RevPAR for interstate hotels was in line with the 2019 pre-pandemic level, and RevPAR for small-town/metro hotels exceeded the YTD August 2019 level by 2.9%. On the other hand, RevPAR for urban hotels remains severely depressed (down 48.4% compared with the same period in 2019), and we don't expect it to rebound until there's a sustained resumption in corporate, group, and international demand. RevPAR for airport hotels has recovered more strongly than that of urban hotels as airplane passenger miles increased, but it remains almost 35% below the YTD August 2019 level. Resorts fared well in 2021 due to pent-up leisure demand; their RevPAR improved significantly, lagging that of 2019 by 11.2% as of August.
Over the last 18 months, midscale and economy hotels (mainly limited-service and mid- and low-priced extended-stay hotels) outperformed full-service hotels in the luxury, upper upscale, and upscale categories. Leisure travelers favored drive-to locations, low price points, and--in the case of extended-stay hotels--in-guestroom kitchens. For the YTD period through August, midscale hotels' 2021 RevPAR was only 4.9% below the 2019 level, and the RevPAR of economy hotels exceeded the 2019 level by 2.7%. At the other extreme, luxury, upper upscale, and upscale hotels' RevPAR trailed YTD 2019 levels by 35.7%, 46.4%, and 31.7%, respectively. These hotels are typically located in more populated areas, have higher price points that are less appealing to budget-conscious leisure travelers, rely more on corporate travelers, and have significant meeting space that caters to group business.
U.S. CMBS Exposure To Hotels
Between 2015 and 2018, which was toward the end of a 10-year expansion in U.S. lodging RevPAR, about 15%-17% of CMBS conduit collateral was backed by lodging properties. It then dropped to 12% in 2019. In 2020, the percentage fell to 10% as the COVID-19 pandemic took hold and the origination of new loans and the securitization of existing lodging loans stalled after the first quarter. Through September 2021, only 4% of conduit issuance was collateralized by hotel properties; many of these loans were originated prior to the pandemic and comprised mainly limited-service hotels.
On the SASB side, the percentage of lodging transactions rose sharply from 2015-2019 and peaked at over 40% in 2017 and 2018. Issuance fell to 25% in 2019, as RevPAR was perceived to be at peak levels (which turned out to be the case), and then it dropped to only 17% in 2020. Of the 10 SASB hotel transactions in 2020, four were backed by the MGM Grand and Mandalay Bay casino-hotels, and they constituted almost half of the issued SASB balance for the year. Issuance has rebounded somewhat this year, with hotel-backed SASBs making up 17% of issuance through early October 2021. Of the seven hotel transactions so far in 2021, four were portfolios of extended-stay and limited-service hotels, and these made up 92% of the 2021 SASB hotel issuance balance.
Our Approach To Hotel Cash Flow And Value
Given the inherent volatility of the lodging sector, we have generally scaled-back our RevPAR assumptions by two to three years when room revenues are rising--and potentially more in environments with oversupply or eroding fundamentals. However, current RevPAR levels for the U.S. overall are below the nominal levels achieved in 1997. This reflects an unprecedented demand decline caused not by an economic downturn or oversupply but by the global pandemic.
The rollout of the COVID-19 vaccine in early 2021, the gradual reopening of lodging properties and demand generators, and pent-up demand have resulted in a slow and gradual improvement in industry performance overall. However, as discussed, the recovery is bifurcated. Hotels that rely more on corporate, group, and international demand (especially urban and convention hotels) continue to struggle. Indeed, they might still be generating negative net cash flow (NCF), unable to cover operating expenses or debt service. We expect continued weak performance for these hotels and difficulty recovering until there is a stable demand base to fill guestrooms. For hotels with continued weak trailing-12-month (TTM) NCF but improving monthly performance trends, an operating expense and debt service reserve might be warranted to carry the property through the next one to two years. In other cases, where occupancy and NCF levels remain consistently negative due to the hotel's market mix or location, we may decline to provide ratings feedback. This is because the amount of time needed to return to a more normalized level of performance could be too uncertain, thus impeding our ability to derive a sustainable NCF and value for the property at this time.
On the other hand, the performance of certain resort hotels, lower-priced extended-stay hotels, and economy and interstate hotels has been stable--or has even improved--over the last two years. Resorts, particularly in Florida and in other locations travelers can drive to, benefitted from pent-up leisure demand, their accessibility, and the closure of competitive hotels. Many limited-service and extended-stay hotels had heightened occupancy levels due to increased demand from guests affected by COVID-19 or needing to quarantine, out-of-town health care workers requiring accommodations, and travelers looking for lower-priced accommodations outside of populated markets. In our analysis of these properties, we would evaluate the performance over several years. If the last two years had a notable improvement, we would seek to understand whether this demand increase is sustainable.
In our analysis of all hotels, we use expense levels that reflect long-term averages and industry norms. We don't consider recent expense declines due to partial guestroom and amenity closures, reduced staffing, and lower marketing expenses to be sustainable because they will likely return to normal levels once occupancy does. We are also cognizant of the significant labor shortage across the industry and the related rising wages, and we will likely consider this in our analysis. We may also use higher capitalization rates for certain hotels that we believe are more likely to experience continued near-term weakness or NCF fluctuations.
A CMBS Performance Update Via A Deep Dive Into Our Rated SASB Portfolio
As of September 2021, about $94 billion in hotel loans were outstanding within the universe of conduit and single-borrower deals, which accounts for about 16% of the $587 billion combined total, according to Trepp data. In terms of composition, slightly more than half (about 54%) are securitized in diverse conduit transactions, and the remainder (46%) are included in SASB deals. The overall delinquency rate (at least 30 days delinquent) for all U.S. CMBS loans was 4.4% as of September 2021. By property type, lodging had the highest delinquency rate at about 10.1%, which, though elevated, is less than half of the June 2020 peak of 22.3%.
In addition, lodging constitutes the largest proportion of loans in forbearance at 59.2% ($25.0 billion in total) of that overall population. For reference, the total forebearance rate for all CMBS loans is 6.4%. We consider a loan to be in forbearance if it's on the master servicer's watchlist for COVID-19-related hardship.
To provide a bit more detail on performance, we examined the 30 SASB transactions we rate from the 2016-2020 vintages (see appendix). We've rated an additional three transactions in 2021, which we've omitted because they're only seasoned one to three months. Our analysis revealed:
- Of the 30 transactions, 27 were classified as current as of the September payment date.
- The strongest financial metrics were in certain limited-service/extended stay portfolios, as mentioned earlier. However, results were not uniform by any means, and some single properties had relatively strong performance.
- We downgraded over half of the transactions in mid/late 2020. These actions were typically on classes that originally had a speculative-grade rating or, in some cases, a rating in the 'BBB' category.
- There were some instances where the loan is listed as current but the borrower is continuing to make back interest payments to satisfy the terms of a forbearance agreement.
- In several cases, debt yield or other threshold tests were waived to extend the maturity date of the loan; about a quarter of the transactions have fully extended (or modified) maturity dates in 2021/2022.
According to the Green Street Commercial Property Price Indices (CPPI), which tracks institutional-quality properties, lodging is one of three property types where valuations remain below pre-COVID-19 levels, with a modest overall decline of 4%. Nevertheless, their values have increased 28% over the past 12 months.
We continue to monitor this nascent recovery's impact on rated deals and new transactions. We will likely update our views next in early/mid 2022 as we evaluate factors such as return to offices, the developments in convention/business travel, and any impacts on the consumer from broader economic growth/inflationary trends.
|Additional Details On Vintage S&P Global Ratings-Rated SASB Deals (2016-2020)|
|Deal||Collateral||Original balance (Mil. $)||Current balance (Mil. $)||Status notes and history||Final maturity date||Lowest rated class||Notes from servicer commentary|
|WBHT 2019-WBM||Waikiki Beach Marriott||337||337||Current; 9/21||12/25||'CCC'; class F, lowered 11/20||Improving occupancy trend, borrower expected to exercise extension in December|
|AFHT 2019-FAIR||Fairmont Austin||300||300||Current; 9/21, SS since 5/20||09/24||'CCC'; class F, lowered 07/20||One-year extension closed in August 2021|
|CFCRE 2018-TAN||Aruba Marriott||195||195||Current; 9/21, SS 2/21-6/21||02/23||'BB'; class D||On watchlist for low DSCR|
|JPMCC 2017-MARK||Mark Hotel||115||115||Current; 09/21, SS 4/20-3/21||06/22||'BBB-'; class D||On watchlist for low DSCR|
|BAMLL 2017-SCH||Sheraton Grand Chicago (Leasehold)||115||115||Current; 9/21||11/24||'BB'; class D-L, lowered 07/20||Borrower seeking to exercise second one-year extension option|
|NOHT 2019-HNLA||Hyatt Regency New Orleans||325||325||90+ Days DQ; 9/21, SS since 7/20||04/24||'CCC+'; class F, lowered 07/20||Forbearance agreement executed in 7/20, borrower seeking additional relief, was affected by Hurricane Ida|
|WFCM 2017-HSBD||Hilton San Diego Bayfront||220||220||Current; 9/21||12/23||'BBB-'; class D, lowered 07/20||Borrower exercised option to extend through 12/21|
|BAMLL 2019-ASH||Renaissance Nashville/Westin Princeton||240||240||Current; 09/21, SS 3/20-4/21||03/26||'CCC'; class F, lowered 07/20||Loan has a forbearance on replacement FF&E reserve until January 2022|
|UBSCM 2018-NYCH||Seven limited-service New York hotels||300||290||Current; 9/21, SS since 4/20||02/24||'B-'; class F, lowered 08/20||Mezzanine lender is new owner/borrower, modification terms included $10 million principal paydown, maturity extension, and partial payment of default interest|
|NCMS 2018-SOX||Intercontinental Boston||110||110||Current; 09/21||06/28||'AA-'; class B||N/A|
|SLIDE 2018-FUN||Kalahari Waterpark/Resort Poconos||363||337||Current; 9/21, SS 4/20-3/21||06/23||'B'; class F||Forbearance period ended 09/20|
|GSMS 2019-SMP||Starwood Marriott Portfolio||219||219||Current; 9/21||08/24||'CCC+'; class F, lowered 10/20||One-year extension letter signed 8/21 to extend through 8/22|
|JPMCC 2018-ASH8||Eight full-service hotels||395||395||Current; 9/21, was SS 4/20-5/21||02/25||'CCC'; class F, lowered 07/20||Loan was modified Jan 2021 and extended in Feb 2021 to Feb 2022|
|BHR 2018-PRME||Four full-service hotels||370||370||Current; 09/21, SS 4/20-12/20||06/25||'CCC'; class F, lowered 07/20||Next maturity 06/22|
|CLNY 2019-IKPR||Innkeepers Portfolio||755||755||Current; 9/21||11/26||'BBB-'; class D||N/A|
|BX 2017-SLCT||96 limited-service hotels||1394||449||Current; 9/21||07/24||'B+'; class F||N/A|
|BX 2017-APPL||51 limited- service hotels||800||185||Current; 09/21||07/24||'B-'; class F||Loan maturity extended to 7/22|
|GSMS 2017-STAY||InTown Suites Portfolio||200||200||Current; 9/21||07/22||'BBB-'; class D||N/A|
|HMH 2017-NSS||Shidler/NSSP Portfolio||204||204||90+ Days DQ; 9/21, SS since 5/20||07/22||'CCC'; class F, lowered 07/20||N/A|
|GSMS 2017-SLP||138 hotels in 27 states||725||725||Current; 9/21||10/22||'CCC'; class F, lowered 09/20||Previously a moratorium on payments to FF&E reserve account 6/20-12/20|
|MSC 2017-ASHF||17 lodging properties||427||412||Current; 9/21||11/24||'CCC'; class F, lowered 07/20||Upcoming maturity in 11/21, extension expected|
|CSMC 2017-PHFP||20 hotels||240||240||Current; 9/21, SS Since 6/20||12/22||'CCC'; class F, lowered 08/20||Modification executed 08/21; early repay of forbearance payments in exchange for waiving DY requirement to extend|
|BBCMS 2018-RRI||Red Roof Inns||400||216||Current; 9/21||02/23||'B-'; class F||Next maturity 02/22|
|IHPT 2018-STAY||85 extended stay hotels (InTown)||471||471||Grace, not yet due; 9/21 (current as of 8/21)||01/23||'BBB-', class D||Last WL commentary 3/21, indicates next maturity date of 01/22|
|THPT 2018-THL||Tharaldson Hotel Porfolio||960||778||Current; 9/21, SS 3/20-12/20||11/24||'CCC'; class F, lowered 08/20||Loan modified in 8/20 to extend the final maturity date|
|AHT 2018-ASHF||Ashford Highland Portfolio||783||721||Current; 9/21, SS 4/20-4/21||04/25||'CCC'; class F, lowered 07/20||Back interest receivables expected to be current over next two months, comments a/o 8/25/21|
|AHPT 2018-ATRM||JQH Hotel Portfolio||635||635||Current; 9/21||06/25||'CCC'; class F, lowered 11/20||Standstill agreements reached in 05/20 and 10/20|
|CSMC 2017-CHOP||CLNS Portfolio||780||780||Nonperforming matured balloon, SS since 4/20||06/22||'CCC'; class F, lowered 06/20||Borrower has entered into a purchase and sale agreement with a buyer subject to lender consent. Lender is in the process of negotiating the assumption documents while the sales process is proceeding. Near-term maturity 10/21|
|CGCMT 2020-WSS||Woodspring Suites Portfolio||435||425||Current; 9/21||02/27||'B'; class F||N/A|
|NCMS 2018-RIVA||Magnitude Hotel Portfolio||179||171||Current; 9/21, SS 4/20-5/21||02/23||'BBB-'; class D||Modification agreement was executed in February 2021. The new maturity date is 2/6/2022|
|N/A--Not applicable. Sources: S&P Global Ratings and Trepp.|
This report does not constitute a rating action.
|Primary Credit Analysts:||Natalka H Chevance, New York + 1 (212) 438 1236;|
|James M Manzi, CFA, Washington D.C. + 1 (202) 383 2028;|
|Secondary Contacts:||James C Digney, New York + 1 (212) 438 1832;|
|Ryan Butler, New York + 1 (212) 438 2122;|
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