News

Article printed August 26, 2009 in the Wall Street Journal Real Estate Page

Hotel Receivers Face Long Stay -- and Rich Rewards

Tough Task of Taking Over Troubled Properties Can Lead to Long-Term Management Gigs; Evicting the Pigeons
By Kris Hudson

The growing wave of U.S. hotels defaulting on their debt has spawned a growth industry for companies that oversee and operate hotels seized by lenders.

In many cases, the companies taking over the ailing properties own their own hotels as well. The new business is helping them hang tough during one of the worst hotel markets since World War II.

The Wigwam Golf Resort & Spa near Phoenix. Destination Hotels took over management after the property's owner filed for bankruptcy protection.

Prism Hotels & Resorts, which owns or manages roughly 20 hotels, has in the past year taken over as interim manager of 17 foreclosed hotels, including the 52-room Casa Madrona luxury hotel in Sausalito, Calif. Prism, which has another 20 management contracts pending, hired 22 new employees to help handle the workload at its Dallas headquarters and inherited hundreds of workers at the hotels it took over.

GF Management LLC, which manages or owns 30 hotels on a regular basis, has added oversight of 35 foreclosed hotels, ranging from a 400-room Sheraton in Orlando, Fla., to a 104-room Super 8 in Columbus, Ohio. Philadelphia-based GF has added dozens of workers.

If they pull off the new assignments well, they could emerge from the recession larger, stronger and more competitive. They typically charge fees of 1.5% to 5% of the hotel's revenue.

An even bigger enticement is winning a long-term management assignment from whomever winds up buying the property.

But it promises to be a long slog for new management. With analysts projecting a recovery starting no sooner than late next year for hotels, interim managers anticipate a longer stay this time.

"In the early 1990s, a lot of our assignments were for six to 12 months," said Jeff Kolessar, a senior vice president at GF Management. "In the 2001-02 cycle, they were 12 to 18 months. This cycle, the assignments may last a little longer than that."

U.S. hotel occupancy, which registered 64% in July, is at its lowest level since Smith Travel Research began tracking the figure in 1987.

Real-estate research company Real Capital Analytics now classifies $18 billion in hotel loans as distressed, meaning they are delinquent, in foreclosure, in bankruptcy or have been restructured by lenders. That compares with just $1.3 billion in distressed loans on hotels a year ago.

Interim managers' challenges often include completing abandoned renovations, appeasing hotel brands angry about the property's shortfalls and, occasionally, ousting the former owner from living onsite.

Business sometimes can be revived by bolstering a hotel's customer service or reducing rates. Russ Dazzio, Chairman of R&R Global Hospitality, oversees a highly experienced management company that works closely with court-appointed receivers that oversee numerous troubled hotels. He said, “We have, salvaged a Los Angeles hotel's bookings this year by taking pro active action and paying past-due amounts the hotel owed online-booking services such as Orbitz and Expedia.”

A foreclosure doesn't always mean a big operator, such as a Marriott International Inc., will stop managing a hotel or licensing its brand to it. But, in some cases, a brand will drop a hotel in response to a previous owner's customer-service shortfalls or refusal to renovate the property.

Another challenge for interim managers: hanging on to the conventions and group meetings booked at those properties. Contracts for such events often allow the visiting groups to cancel if the hotel goes into foreclosure or receivership.

That happened at the 331-room Wigwam Golf Resort & Spa near Phoenix. Interim manager Destination Hotels & Resorts, a unit of Lowe Enterprises, took over management of Wigwam in May after the resort went through receivership and into bankruptcy.

By then, the Wigwam had lost several conference bookings amid the management upheaval of the previous weeks. Destination hustled to retain the rest, succeeding in some cases but not in all.

"It takes a lot of work to convince a client that we're still going to be here in six months when they bring their group in, and we're going to service that event," said Michael Everett, a Destination senior vice president.

Sometimes, a few sweeteners are needed to keep group bookings from bolting.

"You have to give something to entice them to stay," says Leslie Ng, chief investment officer at Interstate Hotels & Resorts, which regularly manages 225 hotels, owns 57 and this year has added management of five delinquent hotels. "That could be a reduced rate or a free coffee session" for the group, she says.

There isn't much that interim managers haven't already seen in previous downturns.

Prism Chief Executive Steve Van recalled taking over a foreclosed, 400-room Orlando hotel in 2002 only to find the ousted owner loading the hotel's televisions and furniture into moving trucks. A deputy sheriff accompanying Mr. Van stopped the man.

GF Management's Mr. Kolessar recalled assuming management of a foreclosed hotel in Memphis, Tenn., in 2002 and evicting the former owner, who was operating a pigeon farm on the hotel's grounds.

<< Back to News