Hotel Industry in Crisis: Defaults and Government Intervention

Strategic Insights -

The hotel industry is facing a significant crisis as several prominent hotel brands and companies are experiencing defaults and financial difficulties. Sunstone Hotel Investors, a hotel REIT, recently defaulted on its mortgage for the W San Diego hotel, while the administration suggests capping pay for employees of companies that received TARP infusions. Meanwhile, the government is considering expanding compensation curtailment to all financial services firms.

Key Takeaways:

  • Sunstone Hotel Investors defaulted on its mortgage for the W San Diego hotel, a high-profile hotel brand owned by Starwood Hotels & Resorts.
  • The local hotel operating environment has weakened significantly, leading management to believe the property is worth "meaningfully below" the principal amount of the debt.
  • The W hotel brand, managed by Starwood Hotels & Resorts, has 29 properties worldwide and 22 in its pipeline.
  • The administration is considering capping pay for employees of companies that received TARP infusions, such as American International Group.
  • President Obama may want to expand compensation curtailment to all financial services firms.
  • Government should focus on regulation and oversight, rather than micro-managing employee compensation.
  • Companies like Citigroup, Bank of America, and General Motors were asleep at the switch leading up to the financial crisis.

Statistics:

  • Sunstone Hotel Investors acquired the W hotel in San Diego in 2006 for $96 million, or roughly $370,000 per room.
  • The company closed on a $65 million first mortgage with an interest rate of 6.14%.
  • There are currently 29 W hotels worldwide, with 22 in the pipeline.
  • American International Group received $182.3 billion in TARP funds (Source: Treasury Department).
  • Citigroup received $45 billion in TARP funds (Source: Treasury Department).
  • Bank of America received $45 billion in TARP funds (Source: Treasury Department).

Sources:

  • "Sunstone Hotel Investors Defaults on Mortage for W San Diego Hotel" (Zacks Equity Research)
  • "Administration Wants to Cap Pay for TARP Recipients" (Zacks Equity Research)
  • "Past performance does not guarantee future results" (Zacks.com)
  • "Registered investment advisor" (Zacks.com)
  • Treasury Department: TARP Infusions (See below for exact reference)

* "Troubled Asset Relief Program (TARP) Infusions" http://www.treasury.gov/initiatives/tarp/Pages/default.aspx

+ "TARP Overview" provides details on recipient companies, including AIG (American International Group), Citigroup, and Bank of America