Close or stay open? Asset managers weigh options

A drop-off in demand related to COVID-19 has forced hotel closures, and asset managers told Hotel News Now that hotel owners and operators need to be looking at what they can do to survive this difficult environment.

REPORT FROM THE U.S.—As the ongoing public health crisis from COVID-19 drags on across the globe and brings travel to a grinding halt, more and more hotels are being confronted with the cold calculus of whether they’re better off shuttering for the time being.

Third-party asset managers speaking to Hotel News Now said those discussions have been dominating talks with owners and operators, which is an extraordinary position for the hotel industry to be in.

Earlier in the month, officials with Hotel Asset Value Enhancement released their projections and outlook for the industry in light of the coronavirus outbreak in the U.S., projecting a five-year recovery period, calling the impacts “both devastating and unprecedented.”

Michelle Russo, CEO of HotelAVE, said in talking with the hotels her company works with “pretty universally the decision has been made to close.”

“In large part, that’s about protecting the asset and employees from the virus,” she said. “But we do have a number of hotels in conducive locations to service larger groups that have a purposeful need related to addressing the outbreak, like housing the National Guard, nurses or (college) students who couldn’t get home.”

Both Russo and Larry Trabulsi, EVP at CHMWarnick, said a large focus of asset managers work of late has been analyzing cash flow and fixed costs for hotels to determine how prepared they are for a sudden zero-revenue environment.

“We’re used to looking at flex and flow scenarios where the occupancy is up and down and formulating how to react to that,” Trabulsi said. “But this is totally brand new territory for all of us, and it’s forcing tough decisions, like do you keep your GM on or are they furlough. Lot of hotels have furloughed or laid off 90% of staff.”

Closures and zeroed-out revenues force difficult considerations and discussions with brands and lenders, sources said, especially since debt is structured to insure continuous operations of properties.

Tim Dick, senior director of asset management and investment services at CBRE, said his advice to properties going through the debate of staying open or closing is to “air on the side of caution.”

“I think there’s a moral obligation to not endanger employees by making them be at properties when you (stay) open,” he said, while noting it’s possible to minimize risk by following CDC guidelines.

And if properties do close, they need to take some steps to minimize their eventual reopening costs.

“You can be closed but still maintain an engineer on the inside of the property to keep systems running,” he said. “Once you start shutting things down from an engineering and physical plant perspective, the value of the property starts to shrink.”

Finding demand
As Russo noted, there are compelling reasons for some hotels to stay open, and hotel groups can and should be in continuous talks with groups that might need those rooms and beds.

She noted there are programs in some states, particularly California, where hotels can sign up for alternative uses like housing homeless people or serving as excess capacity for hotels. She said it’s important if staying open to work with programs like that or negotiate with larger organization on terms of operation rather than just taking any business regardless of the circumstances.

“There shouldn’t be anyone leaving houses who need hotel rooms except for essential individuals, and those should be coming in the form of a group negotiation,” she said. “It’s not just that a group of nurses decide to get rooms at the Residence Inn.”

Russo noted the considerations on whether to stay open or close won’t be equal across all different property types.

“It has to be a certain-size (property), and the group has to justify reopening because it’s accretive to covering some carry costs,” she said.

Russo said this is harder to accomplish for large, luxury properties versus hotels in a range of 100 to 200 rooms.

Trabulsi noted these decisions aren’t purely financially driven, with some owners looking to provide much-needed service.

“The financial perspective is just one part of the conversation,” he said.

Dick agreed some properties could and should decide to stay open to help “the greater good and their communities” because that’s the right thing to do, but there “has to be some economic benefit, but at a discount.”

Those two instincts don’t necessarily conflict, at least at the moment.

“Right now the economic analysis also supports the social decision,” Russo said.

Those hotels that do stay open have to be careful to mitigate risk and liability, sources said.

This includes cutting back on in-room housekeeping, closing public spaces in hotels and changing food-and-beverage operations to limit contact between guests and staff.

Working with lenders and brands
Sources said the immediate reaction from both lenders and brands was to offer some flexibility with owners and operators, but there will ultimately be limitations to that flexibility.

“Early on with the deviations from brand standards, (the brands) were awesome,” Russo said. “Now were in the working capital dance, and everyone is trying to navigate this collaboratively.”

She noted one obstacle the industry faces is regulatory limitation on how long lenders can defer payments, which is capped at 90 days.

“If lenders can defer or abate for more than 90 days without negatively influencing their own ratings, that could give everybody more room to practice patience,” she said

Russo noted that lenders themselves don’t want to seize hotel assets given the difficult environment.

“If lenders get too aggressive, then borrowers may just give them the keys,” she said.

Trabulsi noted the brands themselves have been “absolutely swamped” by the ongoing crisis and said their “initial reaction was stronger than in other downturns.”

“And it had to be,” he said.

Russo said each of the brands have been rolling out amendments to management and franchisee agreements to allow for COVID-19-related closures, although there has been some back-and-forth related to some brands trying to insert unrelated language.

“When push comes to shove, everyone is acknowledging the amendments need to just address the task at hand, and they don’t need to take the opportunity to raise new issues since we need to move at a quicker pace,” she said.

She also noted the current environment poses a unique threat to management companies, which exist on fees that are a percentage of revenues.

“We have to spend an equal amount of time with lenders and brands as we do talking with management companies about cash management,” she said. “There are a lot of operators asking for working capital advances.”

What comes next?
All sources noted that hotel ownership and management groups need to be working today on what reopening plans are or what the ramp-up plan will be after the crisis passes.

“They should be working on both a marketing plan and an operational plan,” Dick said. “Those are separate but need to be considered in tandem.”

Trabulsi noted that reopening might not be in the cards for every hotel. And those that do could see major changes in terms of brands and operators.

“Once they close, the question is do they reopen and what’s the highest and best use for those hotels, not just as a piece of real estate,” he said. “Owners will be looking at existing management agreements and could be looking at how to decouple from those contracts.”

 

Source: hotelnewsnow