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The Next CRE Casualty: Union Square's W Hotel

Tyler Durden's picture


With the New York's Stuy Town implosion getting picked up by the Wall Street Journal months after being written about on Zero Hedge, the question now is what the next landmark property to go bankrupt will be. According to Real Estate Alert, the iconic Union Square W Hotel may just be it. The hotel, which was acquired by Dubai's troubled sovereign wealth fund, Istithmar, for $285 million in 2006 (one of the few acquisitions of a hotel at a price of more than $1 million per room) has been bleeding cash lately after room rates have declined by 24%. The result has been an inability for the owner to even meet debt service obligations: a sure sign the current balance sheet is doomed, with an outright default just a matter of time.

Per Real Estate Alert:

Istithmar, the investment arm of Dubai’s royal family, used high leverage to build a portfolio of high-end office and hotel properties, many of which were acquired near the top of the market. It also made a number of private equity plays, including buyouts of retailers Loehmann’s and Barneys New York. The fund plowed some $2.5 billion of its own cash into $27 billion of investments over the past six years, according to Bloomberg. Last month, it froze its investment activity and said it planned to restructure its debt.

And here is why the math on every single REIT "upside case" out there is highly suspect:

The hotel’s net cash flow this year is running at an annualized rate of $8 million, down from $14.8 million in 2008, according to the servicer report. That barely covers the $7.5 million of annual debt service on the senior mortgage, but isn’t enough for the mezzanine loan. Like all luxury hotels in Manhattan, the W New York Union Square, at 201 Park Avenue South, is struggling with a drop in revenue because of the recession. Room rates are down $100 from a year ago, according to a servicer report. What’s more, the hotel’s annual property tax more than tripled, to $3 million.

If industry indications are any sign, the rebound is still far away for the troubled New York hotel segment:

The average occupancy for luxury hotels in Manhattan was 74.2% in the first eight months of the year, down from 81.9% a year earlier, according to Smith Travel Research. Room rates plunged 24%, driving room revenues down 31%.

As for those about to get whacked when and if Istithmar decided to call it a day: some very unhappy clients of Credit Suisse:

The purchase was financed with a $232 million debt package from Credit Suisse that consisted of a $115 million senior mortgage and a $117 million mezzanine loan. Credit Suisse securitized the senior loan and placed the mezzanine debt with one or more unidentified high-yield investors. The interest-only senior mortgage, with a 6.5% coupon, matures in October 2011. It was securitized via a $3.4 billion pooled offering (Credit Suisse Commercial Mortgage Trust, 2006-C5).

And while the maturity is only two years in the future (as are many other scheduled CRE maturity rolls), the likelihood that the loan will continue paying current income for the next 24 months is virtually nil.

So if this is the fate of one of the sovereign fund's landmark properties, what will happen to its two other trophy hotels?

Istithmar’s real estate holdings include two other Manhattan properties: the Mandarin Oriental at Columbus Circle and the office building at Six Times Square. Istithmar has been converting Six Times Square into a hotel, but work on the project appears to have slowed dramatically.

Alas, examples such as this continue being merely the tip of the iceberg. In the meantime, various hotel and multi-apartment REITs continue receiving wanton upgrades by analysts who only care about pocketing underwriting commissions. Yet the cliff when the bulk of owners realize they are unable to service debt payments is rapidly approaching (just look at the exploding number of names on the special servicer watch list). How that particular reconciliation of reality and analyst-fantasy plays out will surely be a fun one to watch.


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Wed, 10/14/2009 - 11:04 | 98711 lizzy36
lizzy36's picture

Tyler, didn't you take your hopium this morning?

Kicking the can down the road is merely an extension of "hope as a strategy". 

Happy day's are here again.......

Wed, 10/14/2009 - 19:12 | 99360 lizzy36
lizzy36's picture

andy, i was being facetious. 

totally in your camp.

Wed, 10/14/2009 - 11:08 | 98716 curbyourrisk
curbyourrisk's picture

Didn't anyone learn from the Japanese who tried to buy up Manhattan last time someone was fluch with money?  There is only one Peter Minuit!

Wed, 10/14/2009 - 11:08 | 98718 texpat
texpat's picture

Where THE FUCK is the upside on $1million per room?


Wed, 10/14/2009 - 11:24 | 98740 Miles Kendig
Miles Kendig's picture

That would depend on the props for the discerning business traveler.

Wed, 10/14/2009 - 12:03 | 98777 E Thomas St.
E Thomas St.'s picture

2800 a night 365 a year seems to justify it. Wait, you're telling me that at current rates the highest rate I can book right now is 799 a night? File this under Cash Flow Disasters.

Wed, 10/14/2009 - 11:13 | 98724 Anonymous
Anonymous's picture

aw man that sucks, that place has a great bar and they make some awesome tots to snack on. not to mention some of the girls at the underbar....blow your mind.

Wed, 10/14/2009 - 11:58 | 98768 Gilgamesh
Gilgamesh's picture

Wunderbar, miss that place.  Still hot, hey?

Fri, 09/11/2009 - 02:19 | 99504 j0sh1130
j0sh1130's picture

starwood still runs the W regardless of how poorly the investment performs for isithmar.

Wed, 10/14/2009 - 11:34 | 98741 Miles Kendig
Miles Kendig's picture

Catastrophe - Defined as a situation that can yet be successful with additional energy & resources.

Wed, 10/14/2009 - 12:16 | 98797 svendthrift
svendthrift's picture

Where will the hipsters go to show off their skinny jeans?


Wed, 10/14/2009 - 12:28 | 98811 Anonymous
Anonymous's picture

For a million a room they need to provide Spitzers "friends".

Wed, 10/14/2009 - 12:58 | 98851 A Man without Q...
A Man without Qualities's picture

Last time I stayed in that place back in 2006 and it felt like I'd been mugged.  Everything, not just the porn, was charged as extra.   I arrived to stay for a week, after a 12 hour flight in the pouring rain.  I had a smoking room and asked if there was somewhere to get cigarettes.  The porter said there was a place right across the street and offered to go over and pick up a packet.  Seemed like a decent offer, but they charged me $10 extra for collecting them and the guy still wanted a tip.  Everything in the room was wrapped in cellophane and unless you looked very carefully you would not notice there was a price tag. Breakfast was extra, just about the only included thing was the hot water. 

Anyway, it looked like a serious attempt to maximize cashflow, even with the risk of permanently pissing off the clientele.  So, no surprise they were in the process flogging it to a bunch of dumb Arabs and no surprise the bookings are sharply down.  I for one, would never go back. 

Wed, 10/14/2009 - 13:22 | 98872 Gimp
Gimp's picture

They would have to charge $2,000+ a night per room to have any chance of breaking even. That price is even high for the big apple. 

Wed, 10/14/2009 - 14:25 | 98953 Anonymous
Anonymous's picture

Love the place tho.

I always stay at the W, wereever I go.

Wed, 10/14/2009 - 19:44 | 99388 Green Sharts
Green Sharts's picture

Based on the information here, the $14.8 million in cash flow for 2008 wasn't enough to cover interest on both the senior mortgage and high yield mezzanine financing.  The senior mortgage interest is $7.5 million annually and the mezzanine loan is $117M versus $115M for the senior mortgage and presumably at a significantly higher interest rate.  If the mezzanine loan is at 10%, the annual cash flow required to service both mortgages would be $19.2 million.

If the cash flow is currently running at $8 million annualized and a buyer would pay an 8% cap rate the hotel is worth $100 million versus a purchase price of $285 million.  The $53 million in equity is wiped out, the mezzanine financing is wiped out and the senior mortgage is worth $.87 on the dollar.

How would they deal with the senior mortgage which was securitized as part of a pool of mortgages?  I'd guess they have to dump the hotel for whatever they can get to pay off the bond holders when the senior mortgage comes due in October, 2011.  A bank could take the property on their books but I'd think it would be hard to impossible to get a bunch of owners of a securitized pool of commercial mortgages to carry the property.  Is that correct?

We've been reading about the banks potentially playing extend and pretend with commercial real estate, but it seems to me that the underwater commercial properties that are part of securitizations will have to be dumped on the market over the next 2-3 years as the notes come due.

Who are the big owners of private placements of mezzanine financing like this, hedge funds or the CALPERs of the world?

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