Dismal Outlook for Hotels Is Good for Bailout Specialists

In a scene familiar to many banks, a Howard Johnson's hotel and a Comfort Inn languished two-thirds vacant for most of the 1991 summer season as travelers rushed by on a stretch of interstate highway about 30 miles south of Nashville, Tenn.

But more travelers began stopping only two weeks after Amerihost Properties agreed to assume $1.6 million remaining on a mortgage covering the two properties in Murfreesboro.

Amerihost is the only publicly traded company in a growing field whose competitors are jockeying to take troubled hotels off bankers' hands. As soon as Amerihost took control, a $400,000 capital improvement program got under way.

Occupancy Up Quickly

After a few simple adjustments, such as mowing the grass, fixing the signs, and putting "under new management" banners in place, occupancy jumped from 37% to nearly 50% in a business where 60% occupancy is considered the breakeven point.

Meantime, the wider problem is becoming more visible without any additional investment. More than $2.1 billion of hotel loans were in arrears or under foreclosure by the start of 1991, according to Coopers & Lybrand. And recovery in the hotel industry is expected to lag behind the overall economy until leisure travel rebounds.

Nowhere is the dismal predicament of hotel loans, or the proliferation of eager hotel managers, more starkly illustrated than in the situation of the Resolution Trust Corp. The thrift agency awarded its biggest hotel contract to date on Monday to Hotel Asset Management and Disposition, of Phoenix, which beat out 60 other applicants.

A Management Contract

The $5 million contract is to manage $300 million in troubled loans on hotels, mostly in the Southwest.

The agency owns 155 hotels from the portfolio of failed thrifts and could nearly double its hotel portfolio before its work is done, says Coopers & Lybrand.

As lenders to hotels come to grips with a bleak outlook, more and more find themselves worrying about micro-management issues such as signage, corporate booking programs, and maid service -- business considerations many didn't anticipate when they made what they thought were ordinary real estate loans.

This headache for bankers is becoming a windfall for companies such as Amerihost and Hotel Management and Disposition. They are enjoying a surge in management business and, lately, some inexpensive opportunities to acquire properties that have good prospects once the economy recovers.

Many Calls Coming In

"Our business is picking up dramatically because, as bad as times are, things are good for us," said Richard A. D'Onofrio, executive vice president of Amerihost, a hotel chain based in Des Plaines, Ill. "Banks are calling every day."

The deal for the two hotels enables Third National Bank of Nashville to shore up its loan and avoid costly bankruptcy or foreclosure proceedings. At the same time, Amerihost acquires a property for about $15,000 a room that would cost twice as much to build, Mr. D'Onofrio said.

Amerihost, which owns 22 of the 30 hotels it manages, is currently negotiating on similar deals in Colorado, Illinois, Ohio, and Wisconsin.

Morris A. Lasky, president of Lodging Unlimited, which has turned around more than 200 hotels in the past 21 years, said his business has tripled this year.

And he predicted the tough market will provoke more "creative" deals along the lines of the one in Murfreesboro.

Scarcity of Buyers

"The reality is, there aren't many |real' buyers out there who have a loan in hand and equity in hand," Mr. Lasky said. "It behooves the banks to be more clever in working out their problems."

Another incentive to avoid foreclosure on hotels is the threat of bankruptcy. Court decisions so far have been cruel to banks in hotel bankruptcies, noted Stephen Senie, a lawyer with Rosenman & Colin.

Unlike rental payments on offices, most states that have addressed the issue categorize room rents as "accounts receivable," meaning the lender can't collect the income from the property during the bankruptcy proceeding.

Although hotels account only for 0.7% of bank loans, according to Salomon Brothers, the sector is acknowledged to be among the more overbuilt in the real estate market.

The mortgage on the two hotels in Murfreesboro had been held by an elderly client of the bank's trust division, said vice president Dennis Hopper.

He emphasized that this was not a foreclosure and noted that Murfreesboro is the fastest-growing "exurban" community in the Southeast.

He said the firm's centralized billing and accounting system will allow the new manager to focus on marketing the rooms. Amerihost also has group sales contracts with some midwestern trucking firms, which enables it to rent rooms at a discount in slow periods, improving the overall yield on the property.

Mr. Hopper said the Amerihost came highly recommended by bankers in Indiana, where the firm has been able to improve the performance of a number of foreclosed properties.

"A lot of guys are realizing there are tremendous opportunities in the hotel business," Mr. Hopper added, making a distinction between Amerihost and an increasing number of fastbuck operators in "cowboy boots with silver toes that are looking for distressed properties."

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