Hospitality Asset Managers Association members said the fate of the hotel industry could hinge on lenders remaining flexible as both banks and borrowers seek to avoid the worst-case scenarios for investments.
REPORT FROM THE U.S.—Hotel investors are starting to get a sense of foreboding, based on a recent survey of the Hospitality Asset Managers Association’s membership and commentary from that group’s leadership.
Members of the group were recently asked to rank, on a scale of one to five (with five meaning “doomed”), how much trouble they would be in if lenders stop being flexible. In total, 76.2% answered a three or worse, indicating they are more than halfway to doom.
“There’s a fair amount of pain out there, or people are anticipating a fair amount of pain,” said Matt Arrants, EVP of Pinnacle Advisory and HAMA board member.
A third (33%) of respondents said they anticipate being forced into a sale or lender foreclosure on a property.
“To me, that’s a pretty staggering statistic when you think about it in terms of the number of hotels,” Arrants said. “Nobody likes to get into this situation, so people will go to great lengths to avoid (handing back the keys to lenders).”
Chad Sorensen, managing director and COO of CHMWarnick, said that figure is “sobering” for an industry that once expected or hoped for a quick recovery from the pandemic. He said the reality of how doomed some investments might be is being underreported in the survey.
“There’s a lot of denial that’s masked by optimism,” he said. “You continue to hear people trying to wish their way out of this.”
Kim Gauthier, SVP of HotelAVE, said some of that optimism is fueled by the fact that many so far have been able to successfully kick the can down the road.
“We haven’t seen it yet,” she said. “People were able to leverage (Paycheck Protection Program) loans, but now they’re exhausted. And as we go into winter, occupancies haven’t returned. In some places, like New York City, hotels are closing for good.”
The reality of the depth of the crisis is still unclear.
“We haven’t seen the levels in terms of how many hotels will go back yet or how many hotels will hit the market,” she said. “We haven’t hit that precipice yet. We haven’t seen the flood yet.”
Sorensen said hoteliers are going to have to embrace a higher degree of realism in the near future as budgets are formalized for 2021, particularly as brands release their own budget expectations.
“There’s going to be a whole psyche shift once we get through this budget process and into Q1 2021,” he said.
Arrants said that type of mental shift is difficult for hoteliers.
“It’s almost like the theory of motion,” he said. “We’re all in motion, going down this track, and then all of a sudden COVID hit. It’s really hard for us to stop or change our outlook. That holds for a lot of us. It takes a lot of discipline to really acknowledge the severity of the situation.”
Building a budget
One of the most difficult questions for hoteliers to answer is what should serve as the basis when building a 2021 budget. According to the fall survey, many are relying on performance from 2019 (38.8%) or some combination of metrics from 2019 and 2020 (24.3%).
Asked what timeframe they’re using for budget comparisons, many answered “none of the above,” which board members said is an indication that some are using true zero-base budgeting.
In early expectations for performance, HAMA members indicated full-service properties could feel a greater share of the pain, with 43.7% projecting a 45% to 60% year-over-year decline in revenue per available room and 29.1% expecting a 15% to 30% decline for the segment.
Comparatively, 13.6% expect a 45% to 60% decline for limited-service properties, and 35.9% expect a 15% to 30% decline.
Larry Trabulsi, EVP of CHMWarnick, said communicating with managers about their true needs has been difficult in this environment.
“We’ve been asking the management companies for some visibility for their cash needs for Q1 next year, and you’d think we were asking for the recipe for Coca Cola,” he said. “It’s been a world-class secret, whether they don’t want to tell us or they don’t have the resources. But we’re sitting here now in October and very few hotel companies have given guidance, even for Q1, on what cash payments are going to be.”
In terms of when RevPAR will return to pre-crisis levels, 41.8% expect 2023 to figures to be in line with 2019 levels, and 36.9% expect to hit that threshold in 2024. Respondents expect the recovery to be slower in top 25 markets in the U.S., with 44.7% expecting a return to 2019 RevPAR in 2024.