This article has been updated to include more information about the status of the debt and type of relief that owners of the Fontainebleau are seeking.
The Fontainebleau hotel put Miami Beach on the map in the 1950s when the sprawling oceanfront property opened its doors for business.
Now it is part of a far less glamorous trend — a wave of hotel owners needing a break on billions worth of property debt as the deadly coronavirus pandemic cripples business.
“No. I’m not surprised,” said Jodi Schwimmer, a partner at law firm Reed Smith, about hotel owners starting negotiations with their lenders about potential debt relief a month after nationwide lockdowns took hold to stop the pandemic’s spread in the U.S.
Owners of many trophy hotels had piled on a “tremendous amount of debt,” Schwimmer said, adding that Reed Smith represents a number of owners whose debt levels no longer look tenable after revenue plunged by as much as 80% to 90% in recent weeks.
“It’s just not sustainable in the current structure.”
Debt on the Fontainebleau alone accounts for $975 million, the biggest slice, out of $6.6 billion of hotel debt packaged into property bond deals that transferred in April to “special servicing,” according to data from BofA Global Research.
Special servicers are similar to loan officers at banks who handle problems that arise on property loans, except they work on behalf of bondholders when loans are bundled, rated and sold to investors as commercial mortgage-backed securities.
Brett Mufson, president of Fontainebleau Development, said in an emailed statement to MarketWatch that while the Fontainebleau’s debt has transferred to special servicing and characterized by the servicer a as “payment default,” the borrowers currently are not behind on any payments for the hotel or in default.
“As any prudent owner, we have reached out to our lenders, bond holders and servicers to engage in discussions surrounding modifications to our loan documents during these unprecedented times,” he told MarketWatch.
Servicer notes show the debt transferred to special servicing on March 30, which came only four months after real-estate developer Jeffrey Soffer refinanced the four-building hotel complex in November with a roughly $1.2 billion debt package.
“ “It’s creating tremendous anxiety about how they are going to feed their families, buy lifesaving prescription drugs and just meet their daily needs.” ”
Moody’s Investors Service, a credit-ratings firm, on Friday singled out hotels as the “hardest hit” commercial property type, along with retail, by the immediate economic fallout of the epidemic as it placed about $6.2 billion worth of commercial mortgage-backed securities on review for downgrade.
“It is very different from any other previous period of stress we’ve seen,” said Moody’s senior credit analyst EJ Park, in a follow-up interview with MarketWatch. “It’s global and coming at a sharp, immediate stop,” she said of economic shutdowns.
But when it comes to managing debt on iconic assets like the Fontainebleau, a key will be how property owners are able to bridge roughly the next two to five months, or until the market can “get back to a new normal, level of operations,” Park said.
Of note, Moody’s didn’t place any classes of the Fontainebleau debt deal it rated on watch for downgrade, but wasn’t asked to rate speculative-grade, or junk-bond, classes of lower-rung bonds, which would be most vulnerable to taking a loss in a default scenario. DBRS Morningstar, which gave BBB to B ratings to three subordinate classes of the deal, put the transaction under review with negative implications on March 27.
Toll after a rough month
Miami-Dade County Mayor Carlos Gimenez ordered all hotels and other commercial lodgings under his jurisdiction, which includes the Miami Beach, to be closed on March 19, except for “essential lodgers,” such as health care professionals, first responders and National Guard members.
Florida’s Gov. Ron DeSantis, an advocate of reopening the state’s economy sooner than later, said Tuesday in a briefing that Floridians have flattened the curve of new infections and that hospitals are “not going to get overrun” as they were in hard-hit places like New York and Italy.
During periods of stress, or when a borrower on a high-profile property may be viewed as an imminent default risk, loans often will transfer to special servicing before an actual default occurs to kick off talks with borrowers about potential resolutions, which can include forbearance, rate reductions, debt forgiveness, or other loan modifications, as well as foreclosure or bankruptcy proceedings.
“No one wants to see borrowers in bankruptcy,” Schwimmer said, adding that most property owners are seeking temporary relief until their operations can get back up and running and generating revenue, so they can resume their debt service payments.
Meanwhile, Wendi Walsh, secretary-treasurer at South Florida’s Unite Here Local 355, a branch of the national hotel workers union, told MarketWatch that the outlook has turned dire for 1,100 of its members who were immediately furloughed from jobs at the Fontainebleau after Miami Beach announced it would shutter hotels.
“They all have recall rights and will be called back to work when the hotel reopens and staffs up,” she said, but added that the Fontainebleau failed to make its April contribution to furloughed workers’ health care plan, “which means employees are going to find themselves uninsured in the midst of the pandemic.”
Furloughed workers now have spent about five weeks without pay as they wait for Florida to clear its long backlog of unemployment claims, according to Walsh. The Miami Herald reported earlier this week that fewer than 41,000 unemployment claims out of 1.5 million had been paid.
“It’s creating tremendous anxiety about how they are going to feed their families, buy lifesaving prescription drugs and just meet their daily needs.”
To be sure, the trajectory of late payments and borrower defaults will ultimately hinge on how fast states can reopen their economies, which in New York also will be tied to how quickly testing for COVID-19, the illness caused by the coronavirus, can be ramped up.
DBRS Morningstar analysts said they expect properties to see a cash flow decline that “may be more substantial” than early estimates and that convention and event cancellations could extend into the second and third quarter of this year, as part of its rationale for placing 20 lodging transactions on review for potential downgrades last month.
Read: U.S. commercial real estate braces for defaults as pandemic cuts cash flows