Hotel owners, a lawyer and an asset manager talk about their priorities in the first weeks of the coronavirus (COVID-19) pandemic.
REPORT FROM THE U.S.—Priorities often shift rapidly in response to crisis situations, and the same is happening in the hotel industry.
On a recent webinar produced by the Boutique Lifestyle Leaders Association, two hotel owners, an asset manager and a lawyer discussed issues they’re addressing in real time at this point in the pandemic as well as how they’re planning for the future.
Stay open vs. close?
Weighing the pros and cons of keeping hotels open or closing them was a top priority for the hoteliers on the webinar and is one they continue to revisit.
“We have 54 hotels and all but eight have closed at this point (as of 6 April), or suspended operations, depending on the definition you use,” said Jon Bortz, president and CEO of Pebblebrook Hotel Trust. “We spent a good bit of time suspending operations—it’s not a small task.”
Jim Merkel, CEO of Rockbridge, said 40% of the company’s owned portfolio was closed, or “anemically open,” as he described it. “There’s not a playbook for this scenario. Everyone’s working hard to make these tough decisions, care for their employees and do what’s right.”
The decision to stay open or close calls for scrutinizing many factors, said Chad Crandell, managing director and CEO of CHMWarnick, whose company has more than 75 hotels in its asset-management portfolio and as of 6 April had closed or suspended operations at 45 and were on track to close an additional six properties the week of 13 April.
He said his company works with owners to analyze business and operations case by case.
“When it became apparent group would flatline for April and May, those hotels (where the majority of business was group-driven) rose to the top of the list to suspend operations,” he said. “We tried to hang on to hotels with more transient business and in many secondary markets we’ve been able to do that.
At the end of the day, Bortz said it’s a cashflow decision. His company kept a few properties open to house airline and air freight crews, and to facilitate heavy renovations happening at others.
A big part of the process to close hotels involves employees, and speakers said a big portion of their time has been spent navigating the CARES Act and what it means for their business.
Merkel called the week of 30 March “a Herculean effort” to complete SBA loan applications on time, amid changes to forms and other moving targets.
“The SBA loans are primarily for employees,” he said. “We have to spend 75% of it on the team … and it’s largely to get dollars into our team members’ pockets, so we’ve been really focused on that.”
Bortz called the unemployment insurance part of the CARES act “a good thing” for employees of closed or suspended hotels, because he said most people could apply and receive unemployment insurance fairly quickly.
Deciding on who would stay at a hotel came down to assessing baseline needs.
“Most of our properties are down to maybe five to eight people in total and that includes security,” Bortz said. “Decisions were made based on what needs to be done and who is best qualified to do it.”
Guy Maisnik, partner and vice chair of global hospitality group at Jeffers Mangels Butler & Mitchell, cautioned that employment laws, including those around franchise issues, Title VII and the Occupational Safety and Health Administration, still apply, even in times of quick decision-making.
When it comes to layoffs versus furloughs, he also cautioned employers to know how their states define various stages of employment in regards to benefits people can receive.
“Look at each employee separately and determine what makes the best economic sense and what is in the best interest of the employee,” he said.
Bortz and Merkel said they’re spending a lot of time assessing financial issues—finding ways to maximize cash retention and communicating with lenders.
Merkel said Rockbridge, which functions as a lender via its investment funds as well as an equity investor, is forbearing for about 90 days on the majority of the loans because “we believe everyone needs to get down the road before we really understand what the impact is going to be.”
By waiving covenants, using furniture, fixtures and equipment reserves for cash and other tactics, he said Rockbridge wants to “enable borrowers to have as much cash as they can to get through the next 90 days.”
Bortz said communication is key.
“We’re responding to our shareholders, talking to our banks, our credit lenders, and at the end of the day marshalling all our cash flow through savings we’ve focused on related to (general and administrative costs), to capital, to slimming down our teams,” he said.
Protecting resources is critical, he said, and he predicted the industry will see hotels unable to open “because the cash burn will exhaust their resources.”
Merkel reminded listeners that “good cash management is critical. … We’re preparing for an extended period of time of low occupancy and low operating levels, and in some cases we closed in order to prepare for the cash we need to make it though this period.”
What does the future hold?
Assessing opportunity is difficult in the near term, speakers said, because underwriting is so nebulous right now, and while owners said they’re fielding calls, buying right now is a gamble.
“There’s little to no financing available for any kind of levered buyer,” Bortz said. “That market will be frozen for some time, maybe the whole year. For us, the opportunities will be maybe late this year and more likely next year. There will be assets that need capital, to reopen or for renovations, assets that are struggling. … We and others will come in with capital.”
Merkel agreed those opportunities will present down the line, but “it’ll take time to get through the change and understand it.”
“Doors will open that we don’t know about, good opportunities will present themselves, and I think we’ll see ways that we did business before that will need to change,” he said.
Maisnik said one big difference between the current crisis and the Great Recession is that in 2008 and 2009, “you just needed money.”
“Assets were operating. They were down but not this far down. Now you don’t just need money, you need talent and it’s not easy. You have to have a much bigger risk profile than you did before,” he said.
As for a return to travel, the speakers agreed that “uncertainty” is the key word.
But based on the nature of the pandemic and its targets, they agreed drive-to, leisure business may be the first segment to return to hotels, and group business will be last.
“Big group business was clearly the first to cancel and it’ll be the last thing to come back,” Crandell said.