Back in early August, we footnoted the decision by Hyatt Hotels (H) to abandon the Hyatt Regency Princeton after falling behind on the mortgage. At the time, we contrasted the corporate decision to abandon a property it no longer wanted with similar decisions that countless Americans are making about their homes.
Now we know how the decision to walk away affected Hyatt: It made money, at least on paper. Here’s how the company puts it in the 10-Q it filed on Wednesday:
“A pre-tax gain of $35 million was realized on extinguishment of the $45 million secured mortgage debt. … The pre-tax gain of $35 million has been recognized in other income (loss), net on our condensed consolidated statements of income (loss).”
The reason is pretty straightforward: The company carried a liability of $45 million on its books for the mortgage, and eliminated it. Reversing an obligation typically generates income in accounting — not hard cash, certainly, but it has the effect of contributing to net income on the financial statements.
Considering that Hyatt reported $46 million in pre-tax income for the quarter, the $35 million from Hyatt’s strategic default wasn’t inconsequential. All in all, not a bad outcome for a “strategic default,” to borrow a phrase from the Fannie Mae executive we cited in our previous post on this hotel.
Meantime, we hear that employees at the hotel are pretty nervous about what’s it all means for them, understandably. Hyatt offers a little information in the filing (on p. 12):
“The hotel continues to be operated as a Hyatt-branded hotel; however, the lender has the option to terminate Hyatt as the manager within one year after the ownership transfer. If the lender does not exercise the termination option within one year, our management agreement will terminate in 2021.”
So there’s a good chance the hotel will continue to operate, owned either by the lenders or by other investors if it’s sold again. Hyatt may even continue running it — collecting a management fee in the process.
So for Hyatt, walking away seems to be relatively painless. That isn’t always the case for a lot of Americans.
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