Loans Expert

Red Roof Inns Inc., the hotel company acquired in a Citigroup Inc.-led buyout for $1.3 billion two years ago, defaulted on four loans totaling $361.4 million, credit rating company Realpoint LLC said.

The debt, which is 30 days delinquent, includes a $181.75 million loan and others valued at $76.6 million, $67.6 million and $34.4 million, Frank Innaurato, managing director of CMBS analytical services at Realpoint said. The collateral includes 113 Red Roof locations.

Hotel operators are struggling as the recession limits business and leisure travel. Occupancy is down 11 percent this year through May from a year earlier, according to Smith Travel Research. Mid-priced chain Extended Stay Hotels earlier this month filed for bankruptcy protection, citing decreased revenue and high debt.

“While we are projecting defaults to rise through 2010, mostly from cash-flow struggles across property types, we expect to see more and more potential defaults in hotel collateral later this year and in 2010,” Innaurato said in a phone interview. “While the focus has been on the luxury segment, it has been interesting to see that the mainstream hotel sector is also being affected.”

Red Roof, acquired from Accor SA in 2007, is transferring three of the loans to a special servicer and the fourth one in July, according to Innaurato, whose firm has access to loan data.

Restructuring Debt

“Due to the current state of the lodging industry, Red Roof Inns Inc. has entered into discussions with its lenders in order to restructure the debt related to the acquisition of the real estate assets of the company,” Red Roof said in an e- mailed statement. “While the company is profitable on an operating basis, Red Roof believes that a debt modification is the best way for the company to manage through the current downturn and position itself for future growth.”

The company said day-to-day operations and employees, vendors or franchise owners won’t be affected.

“Even if property cash flow remains sufficient to cover debt service, another possible explanation for these delinquencies is that the borrowers deliberately defaulted to force the loans to special servicing, where the borrower may attempt to negotiate a modification with its special servicer,” Morgan Stanley analyst Andy Day said in a note today.

Red Roof has 345 properties in 36 states and has more than 6,000 employees, according to its Web site. It specializes in budget properties with rates as low as $67 a night.

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