The owner of a Gold Coast hotel is handing over the keys to its lender as the COVID-19 crisis continues to plague the downtown hospitality market.
A venture of Cranston, R.I.-based real estate investor Procaccianti has an agreement to transfer the 345-room Hilton Chicago Magnificent Mile Suites to a trustee for its lender through a deed-in-lieu of foreclosure, according to a Bloomberg report tied to the nearly $70 million in debt on the property.
The move will add the 30-story property at 198 E. Delaware Place to the list of downtown hotels sacked by the pandemic, which has squeezed travel demand for 18 months and has raised questions about when or if a portion of it will ever return.
Some banks have been patient with hotel owners, reaching agreements to defer loan payments to buy properties time to recover. But it’s been more difficult for owners of properties like the Hilton Chicago—whose loans were packaged with other mortgages and sold off to commercial mortgage-backed securities investors—to strike such deals because trustees for CMBS loans oversee so many loans that are tied together. Other prominent downtown hotels, including the Palmer House Hilton and JW Marriott Chicago, also have CMBS debt and have been hit with massive foreclosure lawsuits.
For Procaccianti, the pandemic hit less than seven months before its $77.2 million loan on the property was due to mature. The owners stopped making loan payments shortly after COVID brought things to a halt, according to Bloomberg data tied to the loan, and LNR Partners—a special servicer appointed to oversee the loan on behalf of bondholders—began collecting all the property’s cash flow. LNR disclosed in July that it was working out a deed-in-lieu transaction with the hotel owners.
The current loan balance is just under $70 million, according to Bloomberg data.
A Procaccianti spokesman declined to comment and an LNR spokesperson couldn’t be reached.
It’s unclear whether LNR will hold onto the property until the hotel market stabilizes or try to sell it sooner to recoup money for bondholders, which would likely take a loss if the hotel traded today.
Another group of investors, meanwhile, are happy the hotel has succumbed to distress. The property is one of a handful of Chicago-area hotels with debt linked to CMBX 9, a U.S. credit-derivatives index tied to groups of CMBS loans. Hedge funds and other short sellers last year started ramping up bets on CMBX 9 because of its outsized exposure to hotel debt.
In addition to the Hilton Chicago Magnificent Mile Suites, three other Chicago-area hotels are tied to loans that are part of CMBX 9, according to research firm Trepp: The 317-room Hyatt Regency Lisle at 1400 Corporetum Drive, the 145-room Holiday Inn & Suites at 205 Remington Blvd. in Bolingbrook and the 101-room Holiday Inn Express & Suites Chicago West-Roselle at 1490 W. Lake St. in Roselle.
Bloomberg data shows the owners of the Lisle property have not missed any loan payments despite the hotel averaging 16% occupancy in the 12 months ending in June. The trustee for the bondholders of the Bolingbrook property loan agreed to extend its maturity date to July 2022.
The Procaccianti venture bought the Gold Coast hotel in 2005 as part of a five-property portfolio it acquired from GE Capital and spent nearly $16 million renovating it before it refinanced the property with the current mortgage in 2015, according to documents tied to the loan. The hotel was appraised at $112.4 million—or more than $325,000 per room—at the time of the refinancing, Bloomberg data shows.
The property’s performance was slipping prior to the pandemic. With an average occupancy rate of 79%, the hotel generated less than $4.4 million of net cash flow in 2019, off of $20.9 million in revenue, according to Bloomberg data. That net cash flow was below the nearly $4.9 million the owners paid in debt service.
Revenue per available room, a key performance metric that accounts for both occupancy and room rate, averaged less than $41 among downtown hotels that were open this year through the end of June, according to hospitality data and analytics company STR. That’s up slightly from the full-year 2020 average of $35.29, but down 56% from the June year-to-date revenue per available room average in 2019.