US hotels see further performance declines in November
US hotels see further performance declines in November
28 DECEMBER 2020 10:38 AM

U.S. hotels continued to see performance declines worsen in November, but profitability metrics are improving slightly and the number of rooms in construction are declining, which set up the industry for more positive comps in 2021.

NASHVILLE, Tennessee—As the year comes to an end, the November data is just another jarring reminder of how poor a year 2020 was for the U.S. hotel industry.
Better data is on the horizon, but the monthly results do not show any of this yet. 
1. November data slips and slides
November RevPAR declined 52.6% and, I hate to say it, but the further deceleration from October was expected since the CDC urged everyone to stay home for the holidays. This marks the second consecutive monthly decline after September’s 46% RevPAR decrease. And then Airbnb went public with a 113% stock price appreciation on the first day, making it look as if travel and tourism had a normal year and all was well looking forward.
But make no mistake, the coming December and Q1 2021 results will likely still be painfully small since the comparable in early 2020 were still normal.
The good news is that Sandra Lindsay and Margaret Keenan were the first people to get the COVID-19 vaccines, starting us off on the road to recovery.
2. October profitability
The Consulting & Analytics team published the October profitability slides, and the data is just an affirmation of what we know: with limited revenue opportunities comes lack of profitability.
But these figures are pretty jarring when you see them in print. Earnings before, interest, taxes, depreciation and amortization per available room of less than a dollar? Who wants to be in a business like that? The headline title is about as much lipstick as this pig can handle. Yes, the monthly data is getting less bad, but only relatively speaking compared to the prior months.
Declines of more than 100% in EBITDA imply that for every dollar in revenue, owners lost more than a dollar. In other words, they had to fund debt service shortfalls out of their own pockets. And you can do that for a while, but eventually you wonder how much more you throw “good money after bad.” The existential question that owners face these days is whether to continue to fund shortfalls. Or in the words of the commercial real estate sages, The Clash:
“Should I stay or should I go now? If I go, there will be trouble. And if I stay it will be double.”
Because, yes, if you stay the next few months, you will continue to need to pay out of pocket or find expensive rescue capital. Then again, with vaccines in circulation, maybe holding on and staying engaged is the answer. But with every looming check you must write, leaving (and leaving your equity behind) is more appealing, especially if you already have realized your expected returns over the last few years. Trouble either way.
3. CMBS insights
The good folks from the Costar Risk Analytics team published CMBS insights based on the Intex data and a few things stand out. For one, hotels with CMBS debts are more susceptible to default in a recession than other commercial real estate asset classes. The data speaks for itself.
The year is not over yet, so this data may have not topped out. Looking at this chart, you have to wonder if the default line will rise or if this is indeed the peak since, as detailed above, there are compelling arguments to make your debt payments now that vaccinations are going on around the globe.
The other item I found interesting is that because the CMBS data has detailed cash flow and underwriting (U/W) information, you can compare “what should have been” to “what came to be” and the chart here shows this comparison.
In other words, underwritten NOI expectations for hotels pretty much match what actually happened. That cannot be said in 2020 when that ratio dropped to 80%. And hotel values for businesses reappraised today stand at around 70% of underwritten value, so roughly a 30% discount. Listening in on a few webinars these days it seems that the consensus is that this discount will get smaller over the coming quarters and eventually end up at around -15% to -20%. Let’s see where assets will trade in early 2021.
4. Pipeline data declines
The number of rooms in construction (I/C) is now the same as it was a year ago, meaning the year-over-year change is 0%. There are 206,000 rooms actively being built and we have recorded positive growth basically since late 2018. But no more. And when you look at the trajectory of the percent change, it is not unreasonable to assume that declines will be in our near-term future (aside from one or two coming months where the data is still positive because of reporting delays).
A total of 24 projects moved from final planning and planning to I/C (last month it was 37). Next month, showing December data, it is likely to even go lower than that, but then again who in their right minds starts a hotel project in December in a pandemic? People with conviction, that’s who. The real test of developer appetite will come when March and April roll around. By that point, 100 million or so people will have gotten vaccines and the hotel industry will be getting ready for leisure demand in the summer and corporate group demand in the fall. And that could positively impact developer sentiment. But will it also sway bankers to lend on hotels? That’s the question.
5. 2021: Let the roaring ‘20s begin
The new year cannot come soon enough, but even the change in calendar will not magically turn the data around. Our projection still stands, though, at the end of 2021 STR will have recorded the largest single revenue-per-available-room growth jump we have ever seen: +30% or so. Yes, it’s easy math, the comparable is of course abysmal, but still let’s take the outlook for what it signifies: a return of leisure trips to weddings and birthdays; a return of business travelers to meet in offices; and a return of association and corporate group meetings in large ballrooms. I look forward to seeing you back on the road in 2021. Happy New Year.
Jan Freitag is the SVP of Lodging Insights at STR and National Director for Hospitality Market Analytics at CoStar.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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