The Procaccianti Group reportedly has purchased the $27 million note on the Hilton at Dedham Place for $17.5 million.
In what could be an indication of difficulties in the local hospitality market, a Rhode Island hotel operator has purchased the loan for the Hilton at Dedham Place, industry sources told Banker & Tradesman last week. The $27 million note had been held by Teachers Insurance and Annuity Association.
From what I hear, it has closed, one source said of the loan’s sale to the Procaccianti Group of Cranston, R.I. The company also owns the Double Tree Inn in Lowell.
Calls to Procaccianti officials were not returned by Banker & Tradesman’s press deadline. Ted Saraceno, a principal with the hotel’s owners, the Kurt Saracen Co., declined comment on the matter. Saracen Co. principal Dominic Saraceno is listed as the borrower for the Hilton loan.
According to sources, the Procaccianti Group paid $17.5 million for the loan, which has been in default for several months. Documents placed the outstanding balance at $27.04 million, compared to $27.43 million as of September 1996.
At this point, it is unclear whether Procaccianti plans to rework the loan with Saracen or foreclose on it and take over the property, although one broker familiar with the deal opined that the latter strategy is more likely given the company’s experience as a hotel operator. The source called the facility a great property that should do well over the long haul. Along with 249 guest rooms, the Dedham Hilton features a 120-seat restaurant, 120-seat lounge and full fitness center.
The source said there was considerable competition for the loan, adding that another encouraging sign was that none of the bidders dropped out or tried to retrade their offers even after the Sept. 11 terrorist attacks. Bids were due the day before the tragedy.
Given the silence of both parties, it is hard to determine whether the Dedham Hilton has been struggling of late, but industry observers say that full-service hotels have been especially impacted by the lingering economic downturn. Such operations are tied closely to the national economy, said Jack Corgel, managing director of the Hospitality Research Group.
There’s definitely a lot of pain in that segment right now, said Corgel. Although the supply side of such properties has been kept relatively in check, Corgel said activity has plummeted dramatically since the beginning of the year. The terrorist attacks have compounded the problem, he said, but the roots of the demise lie more in the general economic malaise brought on by the collapse of the technology sector.
Torto Wheaton Research Chief Economist John Southard concurred with that outlook, explaining that hotels in such technology-heavy markets as San Francisco and Austin, Texas, have trended downward in lock step with the technology companies they had been so dependent upon during the extended boom period. The drop in company travel, coupled with the terrorism fears, has affected to the industry greatly. Southard said that for hotels, this is as bad as it has ever been.
‘Extreme Situation’
Occupancy rates at many full-service hotels are down by 10 percent, said Southard. And while hotel owners are generally considered to be in better shape than they were a decade ago, Torto Wheaton is anticipating that there will be increased delinquencies in debt payments for hotel firms in the coming months. Based on a recent analysis between Torto Wheaton and the Hospitality Research Group, the number of hotels expected to see a debt-service coverage deficiency could more than double next year.
Of the 3,300 hotel financial statements in Hospitality Research Group’s proprietary database, 16.4 percent were unable to generate enough cash from operations to cover their interest payments in 2000. The firm estimates that number will rise to 20.9 percent this year and an alarming 36.5 percent in 2002.
We are talking about a fairly extreme situation, said Southard.
Interestingly, it does appear that the hotel industry has done a better job of keeping new construction in check than it did during the go-go days of the early 1990s. Although the Gulf War certainly had an impact on the problems and defaults faced by owners in that cycle, the situation was exacerbated by the cascade of new rooms that flooded the market nationally at the time.
Corgel said he believes that supply will remain in check for the next several years, estimating there will be normal growth in new hotel rooms of 3 percent for the next two years, followed by 1.5 to 1.8 percent in 2004.
Given the uncertainty of the current economy, coupled with the unprecedented events of early September, Corgel and Southard said it is a challenge to determine how long it will be before conditions improve. In a best-case scenario, however, it appears that the hotel sector will remain problematic at least through mid-year 2002, with Corgel predicting the situation may begin to moderate in the third quarter before seeing a return to normalcy in the fourth quarter.
We’ve got a long way to go to get back to where we were, said Corgel. Surviving will depend largely on an owner’s equity position, he said, as well as basic fundamentals such as the age and location of their property.
