Real Estate Group Looks To Dump Major San Francisco Hotels in Latest Sign of Market Distress
Park Hotels and Resorts said it halted loan payments on Hilton San Francisco Union Square and Parc 55 San Francisco, which make up about 9% of the city's total hotel stock. Park Hotels and Resorts, a Virginia-based real estate investment firm, has stopped paying back a $725 million loan on its main San Francisco properties and is likely to give two of the largest hotels in the city back to its lender. The decision to offload the city’s largest hotel, the 1,921-room Hilton San Francisco Union Square, and the 1.024-room Parc 55 San Francisco, represents a major disinvestment and negative sign for what was once one of the strongest hospitality markets in the country. Park Hotels CEO Thomas J. Baltimore Jr. said that the company expected to have the situation resolved by the summer. The removal of the San Francisco hotels from its portfolio will improve its balance sheet and financial performance metrics.
Published : 11 months ago by Kevin Truong in Business Finance
Park Hotels and Resorts, a Virginia-based real estate investment firm, said Monday it had stopped paying back a $725 million loan on its main San Francisco properties and is likely to give two of the largest hotels in the city back to its lender.
The decision to offload the city’s largest hotel, the 1,921-room Hilton San Francisco Union Square, and the 1,024-room Parc 55 San Francisco—the city’s fourth largest hotel—represents a major disinvestment and negative sign for what was once one of the strongest hospitality markets in the country. Taken together, the two hotels make up around 9% of the city’s total stock of hotel rooms.
Park Hotels announced that it had stopped making payments on the loan, which has a November 2023 maturity date. In an earnings call earlier this month, Park Hotels CEO Thomas J. Baltimore Jr. said that the company expected to have the situation resolved by the summer.
“You tend to see issues, particularly in large full-service hotels that have been focused on the business and commercial side of the business, like those focused on meetings and conventions,” Reay said. He contrasted the situation with smaller leisure hotels in areas like Napa, Sonoma and Monterey that have reaped record revenues.
He pointed to other signs of trouble, such as the distressed sale of the Huntington Hotel in Nob Hill and financial troubles at the nearby Stanford Court Hotel, which is having trouble paying back its loan.
In 2016, Hilton San Francisco Union Square and Parc 55 San Francisco were appraised at $1.6 billion, according to CMBS loan documents. Reay said the rubber could meet the road when a lender takes control of the properties and sells them off at a substantial discount.
“If you have a 50% reduction in value since 2016, if you start to take that across the board on other hotel assets, that’s going to be a major problem,” Reay said, noting that the hotels most at risk are larger hotels that cater to business travelers.
In 2019, Hilton Union Square and Parc 55 earned $175.4 million and $95 million in room revenue, respectively. That compares to less than $30 million for each property for 2022, according to data provided by Reay.
Park Hotels has offloaded properties in San Francisco through the pandemic, selling off the 360-room Le Meridien in the Financial District for $221.5 million and the 171-room Hotel Adagio near Union Square for $82 million in 2021.
In a statement, Park Hotels said it plans to get the properties off its books in an effort to “materially reduce our current exposure” to the San Francisco market. Park Hotels also owns the 344-room JW Marriott Union Square and the 316-room Hyatt Centric Fisherman’s Wharf.
“This past week we made the very difficult, but necessary decision to stop debt service payments on our San Francisco CMBS loan,” Baltimore, Jr. said in a statement. “Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges—both old and new.”
Among other reasons, Baltimore cited record high office vacancies, concerns over street conditions and a weak forecast for convention booking through 2027. The company estimates average annual convention room nights between 2023 and 2027 at 530,000 compared to 875,000 room nights in the two decades prior to the pandemic.
Park Hotels projected that the removal of the San Francisco hotels from its portfolio will improve its balance sheet and financial performance metrics. In its investor presentation, it said that returning the properties would lead to a forgiveness of debt income and a potential dividend payout of $150 to $175 million.
“To have a publicly traded company giving back the two of the largest hotels in the city, it's pretty scary for other hotel owners in San Francisco,” Reay said. “I hate to sound doom and gloom, but I think it’s going to get worse before it gets better.”
Topics: Real Estate, California, San Francisco