Finance  ·  CMBS

Park Hotels & Resorts Halts Debt Payments on 2 San Francisco Hotels

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Park Hotels & Resorts has terminated payments this month owed on a $725 million nonrecourse commercial mortgage-backed securities loan backing two San Francisco hotels as part of a plan to reduce exposure in the struggling city. 

The Tysons, Va.-based real estate investment trust has halted debt service for the CMBS loan scheduled to mature in November 2023 that secures the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco. The REIT said it “intends to work in good faith with the loan’s servicers to determine the most effective path forward,” which is expected to result in “ultimate removal” of the assets.  

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“After much thought and consideration, we believe it is in the best interest for Park’s stockholders to materially reduce our current exposure to the San Francisco market,” Thomas J. Baltimore Jr., the REIT’s CEO and chairman, said in a statement released Monday morning.  

“Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges — both old and new.”

Baltimore noted San Francisco’s “record high office vacancy” with more persistent remote working habits than peer cities, a weaker than expected convention calendar in the city through 2027, and “concerns over street conditions.”

A May 2023 commentary from master servicer Wells Fargo said the loan was added to a CMBS watchlist in late April due to its low debt service coverage ratio and having just an 88.6 percent occupancy rate, according to CRED iQ data. The loan was co-originated in October 2016 by JPMorgan Chase (JPM), Deutsche Bank (DB), Goldman Sachs (GS), Barclays (BCS) and Morgan Stanley (MS)

The REIT said that removing the loans and hotels would result in “an improved balance sheet and operating metrics” and reduced leverage. Park’s portfolio currently consists of 46 hotels with more than 29,000 rooms primarily in major city centers and resort locations.

The Hilton Union Square at 333 O’Farrell Street, which is San Francisco’s largest hotel, was shuttered for 14 months at the beginning of the COVID-19 pandemic before reopening in May 2021. Parc 55 downtown at 55 Cyril Magnin Street, the city’s fourth-largest hotel, was shuttered for two years before reopening in May 2022. 

The decision by Park to cut its San Francisco footprint occurs at a time when the city has incurred negative headlines from increased crime, homelessness and large retail closings. This spring, Gap, Nordstrom and Saks Fifth Avenue all announced plans to permanently close stores the large retailers lease in Downtown San Francisco.

Andrew Coen can be reached at acoen@commercialobserver.com