Pair of Midtown Hotels Default on $98M Debt

reprints


A $98 million financing package for two Manhattan hotels has sunken into default, according to Fitch Ratings.

SEE ALSO: Bethpage Federal Credit Union’s $28M Loan Refis Maryland Student Housing Property

The debt, which dates to late 2014, is secured by two midtown lodgings: the 148-key Hampton Inn Manhattan Grand Central, at 231 East 43rd Street, and the 135-key Holiday Inn Express Herald Square, at 60 West 36th Street. The mortgages on the property, including an $85 million senior loan held in CMBS and a $13 million subordinate component, were scheduled to pay off on Oct. 6, but the owner, a fund managed by Kuwait Finance House Capital (KFHC), apparently failed to come through with the loans’ balance on time.

This week, the CMBS portion of the debt was transferred to its special servicer, Rialto Capital Advisors.

A spokesman for KFHC said that “in the last 25 years, Kuwait Finance House and KFH Capital [have] managed numerous funds that invested in U.S. real estate on behalf of their clients. They have a very strong record.” The spokesman added that KFHC is currently seeking a refinance for the property. 

CMBS financial data provides a clue about the source of the properties’ trouble. When Cantor Commercial Real Estate originated the five-year, interest-only debt five years ago, income for the Hampton Inn covered debt-service requirements more than two times over, with a debt-service coverage ratio of 2.04

But by June — the most recent month with data available from Trepp — that number had declined to 1.28. 

Revenue at the pair of hotels has held more or less steady over the course of the loan, rising to $21.9 million this year from $21.7 million at origination. But expenses have grown more rapidly: They’re up 15 percent over the same period, rising to $14.5 million this summer from $12.6 at origination.

The erosion of the two-property portfolio’s debt-service coverage may have made an autumn refinancing difficult for Kuwait Finance to come by this year, sending the ballooning loan payment headed for an unexpected default.

Otherwise, performance has been strong: As of 2019’s halfway point, the Hampton Inn’s 12-month occupancy rate stood at 92.3 percent, with the hotel earning an average daily rate of $224.65, as per Trepp.

The loan on the two hotels makes up 6.2 percent of the COMM 2015-DC1 CMBS deal, which Deutsche Bank brought to market four years ago. Neither Fitch Ratings nor Kroll Bond Rating Agency, both of which rate the conduit, sounded alarm bells about the Manhattan lodging debt when they last issued their opinions about COMM 2015-DC1 in surveillance reports released in January and February, respectively.

KFHC’s parent company Kuwait Finance House, based in Kuwait City, was founded in the late 1970s as the first Islamic bank in the tiny but wealthy Persian Gulf nation, sandwiched between Iraq and Saudi Arabia. Kuwait’s oil wealth makes it one of the world’s 30 wealthiest countries on a per-capita basis according to the World Bank, which ranks Kuwait just behind Italy and well ahead of South Korea. The bank practices Sharia-compliant finance, which aims to follow Islam’s dictates about what kinds of interest-earning investments are compatible with the religion’s usury proscriptions.

Its acquisition of the two hotels came less than a year after it announced the creation of KFH Real Estate, a unit that would manage the bank’s international equity-investment efforts.

Correction: This story has been updated to clarify that the hotels are owned by a fund that is managed by a subsidiary of Kuwait Finance House, not by Kuwait Finance House itself.