May 12, 2010 --As Central Florida struggles with some of the highest home-mortgage delinquency rates in the nation, local hotel owners appear to be doing a better job than their peers elsewhere at keeping their properties out of trouble with lenders.

Even after a year of poor occupancy and revenue-robbing discounts, a relatively small number of hotels are behind on their payments in this, the nation's second-largest hotel market, according to a New York company that tracks commercial-mortgage activity.

A high percentage of the area's delinquencies -- including such high profile properties as the Four Points by Sheraton Orlando Studio City near Universal Orlando -- have continued on into foreclosure, according to Trepp LLC. But Orlando is "significantly below the national average" in its deliquency rate for hotel loans that are pooled and traded on securities markets, said Paul Mancuso, a Trepp vice president.

While the commercial mortgage-backed securities loans tracked by Trepp constitute only a small portion of all commercial real estate, their performance must be shared with investors, which makes it public information that's easy to monitor and measure. "The other 75 percent of the market is generally kept on a bank's balance sheet," Mancuso said. "Access to that information is harder to come by."

According to Trepp, 9.8 percent of Orlando's securitized hotel loans were delinquent at the end of the first quarter, compared with 16.9 percent of all such loans nationwide. And while the percentage of local delinquencies grew during the previous 12 months, it did not grow as fast as the national average.

"We don't see much more cause for concern in the lodging sector in Orlando," Mancuso said. "We think the hotel industry just in general has kind of reached a bottom."

Trepp's list of foreclosures included 10 local casualties, including the Studio City Sheraton and the Hotel Royal Plaza near Walt Disney World, whose foreclosure occurred in 2005. That hotel is now a real-estate-owned asset of an investment trust.

Much like residential foreclosures in Central Florida, foreclosures in the local hotel business can hinge as much on when and where a property was purchased as on the owner's income situation. Hotels built in expensive locations or purchased at the height of the real-estate market may now be saddling their owners with burdensome debt even as they continue to perform well.

"Just because your hotel is in foreclosure doesn't mean it's being managed poorly," said Scott Smith, a lodging instructor in the University of Central Florida's Rosen College of Hospitality Management. "You'd be shocked at some of the best hotels that are behind on their mortgage."

But a foreclosure can hurt a hotel if the owner cuts back on upkeep in response, said Jay Litt, a partner in Resolution Services, which recently bought the former Sheraton in downtown Orlando for $8 million after a lender foreclosed on the Uptown property. And when the foreclosure becomes public knowledge, groups may cancel reservations, employee morale suffers and sometimes maintenance is delayed.

"Clients become scared of the hotel," said Litt, whose renovated property now flies the Sonesta flag. "The very notice of foreclosure can very severely affect the amount of business the hotel is getting."

Paul Sexton, a local hotel consultant and broker, said Orlando has a relatively low number of hotels in foreclosure or behind on their payments, considering the size of the market.

With about 119,000 rooms, Orlando's hospitality industry is second in size only to Las Vegas'.

"Some of the other areas are getting hit much harder," said Sexton, vice president of HREC Investment Advisors.

Trepp said it sees the hotel industry bottoming out, but others, including Sexton, expect to see more foreclosures in coming months. With the approach of summer, Orlando hotels usually brace for lower prices designed to accommodate that season's value-conscious leisure travelers.

"The market is bouncing back, but it still has a very long way to go," said Scott Smith of PKF Hospitality, a hotel-tracking company. Nationwide, the industry just recorded its biggest annual percentage drop in profits since PKF began tracking the hospitality business in the 1930s, said Smith (no relation to UCF's Scott Smith).

He said he expects to see significantly more hotel foreclosures this year and next as loans made five to seven years ago come due.

Even so, it's not likely that those properties that do fall into foreclosure will languish on the market.

Sexton said that as more properties come up for sale, investor money will be waiting to buy them. Until recently, sellers were asking more for their hotels than investors were willing to pay, but now some are more willing to part with their properties -- especially banks that don't want to become hotel operators, he said.

He said he also has noticed a willingness on investors' part to undertake new ventures with properties in good locations, such as the run-down International Drive hotel near Sand Lake Road that was recently transformed into a water-park hotel called CoCo Key.

"You have a lot of money out there that is just dying to invest in hotel properties," he said. "People are going: 'This is still a good building; it's still in a good location. What can we do?' "

Sara K. Clarke can be reached at [email protected] or 407-420-5664.

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