Bankruptcies in the hotel industry haven't been as prevalent as predicted six months ago, but there has been a pickup in receiverships.

Daniel Lesser, president and CEO of LW Hospitality Advisors, said during a panel on the 2nd Annual Distressed Hotels Virtual Forum titled “Hotel Receiverships: Key Considerations for Owners, Servicers & Lenders” that the industry expected to see a tidal wave of bankruptcies due to the business impact from COVID-19.

“We’re actually not seeing that many bankruptcies. We are seeing a pickup in receivership opportunities, there’s no question about it … but frankly not seeing the flood [of bankruptcies] that I, for one, was expecting,” he said.

Lenders don’t want nonperforming hotel assets back, he said, and many are doing everything they can to “kick the can down the street.”

Even when COVID-19 is in the rearview mirror and travel returns, the runway will have been exhausted for sponsors.

“Just because people start traveling again and hotels start becoming more active, it doesn’t mean that the challenges of servicing debt is automatically resolved,” Lesser said.

Mary Jo Heston, a United States bankruptcy judge for the Western District of Washington, said many of the bankruptcies that occurred in 2020 — across the board and not just for hotels — were primarily companies that were in trouble pre-pandemic.

For cases specific to hotels, recent filings appear to be at least citing COVID-19 as the reason.

“It’s interesting because the lenders appear to be working with them, at least so far as getting the use of cash receivables to operate and a budget,” she said.

Heston said there are a few scenarios that will drive an increase in bankruptcies or receivership. One is if the lender starts taking action to foreclose.

Kevin Semon, director of asset management at SitusAMC, which provides commercial real estate services, said the biggest advantages of a receivership versus a bankruptcy are timing and cost.

“We’re finding with the bankruptcy, there’s so many court hearings and requirements before the judge and the dockets are full, [and] they’re moving quite slowly. Receiverships, especially if we can come in with a stipulated receivership order, we can be in and out of the court in a very timely manner,” he said.

With fewer hearings before the judge and fewer motions to be filed, the costs are significantly less for a receivership.

When Heston was representing lenders, she preferred receiverships over bankruptcies for a few reasons, largely due to cost.

“In a bankruptcy, there’s always a creditor committee that is looking for ways to monetize payments to unsecured creditors. You don’t have that in a receivership case,” she said.

Hotel assets have unique characteristics, such as they’re a 24/7 operation unlike retail where the lights go off at night, and rents reset daily, Semon said. Additionally, receiverships can be subject to franchise and management agreements as well as subordination and non-disturbance agreements.

A lot of hotels are also subject to union collective bargaining agreements.

Mark LeBlanc, executive vice president of development at Aimbridge Hospitality, said it’s a unique situation with the unions. His company has 1,400 locations, including 19 managed properties in New York, “which has been a huge problem.” Of those 19, he said 12 haven’t reopened yet because it’s cheaper to keep them closed than open them with the unions.

Semon said if the receiver doesn’t understand these unique characteristics of the hotel, they will have difficulty facing them.

“You need somebody who is schooled and well-experienced,” he said.

Lesser said at the end of the day, hotels are a different animal compared to other forms of commercial real estate, and there’s a low bar of qualifications needed for someone to become a receiver.

“I’m in the middle of handling a receivership of a portfolio of 48 assets around the country, and when I stop to consider that if there was a receiver who is not savvy in hotels, I don’t know how they could possibly get it done,” he said.

Lesser said he takes a contrarian approach with investment opportunities.

“I like the former darling markets, which are now the dogs — the 24/7 downtown, urban locations like New York, San Francisco, Boston. These markets are highly challenged right now. I haven’t seen any opportunities bubble up, but I think we will,” he said.

If and when big-box convention hotels in urban locations become available, he anticipates they will be available at fractions of replacement cost.

LeBlanc said hotel assets in Portland, New York and Houston have been hit the hardest. But the largest discounts today are in secondary and tertiary markets, which big institutional buyers aren’t interested in.

In cities "like Eau Claire, Wisconsin, 100% of the hotels there are delinquent,” he said. “But I’d rather have a great property at a fair price than a fair property at a great price, and to do that, you’re probably going to go to New York.”

Heston said lenders need to be mindful of when financing becomes available because that makes it more likely that a borrower is going to resist a receivership versus a bankruptcy.

“In a bankruptcy you can cram down a lender in terms of value, and if you’re on an upswing, there’s a distinct advantage of a bankruptcy over a receivership. As those factors change, the lenders need to decide if they’re willing on the particular borrower to provide new money, so they have some control over the future,” she said.

Semon said as loans come to a crashing end, lenders need to look at capitalization. If an owner can bring in new, fresh capital to recapitalize, it’s essential, because that would be something that the lender can’t get through foreclosure of the real estate.

“Keep your capital ready, be willing to deploy capital as necessary to save your deal," he said. "Lenders are going to be looking for that additional co-investment back into the deal together with terms that the lender can provide."