Financing, changes to hotel ops spur Town Hall talks

NEW YORK—During a recent town hall, produced by Hotel Business, InspireDesign and NEXT Events, hotel industry experts offered their thoughts on the issues facing the industry during the COVID-19 pandemic.

The virtual conference, sponsored by Access Point Financial, included nearly 600 registered attendees, and roughly $5,000 was raised for the Hospitality Cares’ Coronavirus Fund.

The town hall, moderated by Christina Trauthwein, editor-in-chief of Hotel Business and InspireDesign, covered a variety of pressing issues, from financial to guest-facing. All of the questions were asked in real-time from the attendees.

Jim Merkel, founder/CEO, Rockbridge, was asked about how borrowers can talk to their lenders about repaying their debts when properties aren’t generating any revenue.

“We’ve been spending a lot of time talking to our lenders, and one of the most important things that you do in these times is communicate heavily and be very transparent,” Merkel said. “We’ve been in dialogue with them from the get-go.”

Merkel said the type of lending source is going to drive behavior. “But with what we’re seeing, the lending community was as surprised as everybody else by the severity and the speed with which things unraveled,” he said. “What they’ve been doing is kicking the can down 90 to 180 days, deferring payment. I think a lot of that is trying to be responsive and sensitive to the situation where everybody is working really hard and where there’s a lot of pain as it relates to the human toll, both from the virus, but also from the economy and the layoffs.”

But, he said, going forward, banks are going to be much more credit-focused. “The deferrals are not free,” said Merkel. “If you really look at the numbers, I’m calling this the ‘COVID-19 ditch.’ There’s going to be a ditch of cash flow that just because we’re deferring it doesn’t mean that we don’t have to pay it and we have no income; it just increases our principal exposure. That will come into more focus in the next 90 to 180 days. As a borrower, we’re all hoping that the economy opens up. It has to move, and we then start to isolate what the issue is, just in this ditch—what I’m calling the March to September cash flow ditch and, hopefully, that’s what we can limit it to. And then we put plans together and work with our lenders to repay that over the life of the loan.”

While the audience wanted to know how to handle lenders for hotels that have already have been built, some wanted to know about hotel projects that are in development or already under construction.

“I would say it falls into three buckets,” said John Hardy, founder/president, The Hardy Group. “One group is stopped completely. One group hasn’t gotten to construction yet and hasn’t had to face that decision, and the other group is accelerating as much as they can. It’s a mixed bag and I think anybody that doesn’t have financing right now is not going to get financed anytime soon. The markets have dried up, so I think that just depends on how well capitalized someone is or how aggressive they are.”

Merkel said that his company is accelerating on projects that have been capitalized. “One of the practical things that we have to remember is that the banks in the capital markets are just not focused on new deals at the moment,” he said. “There are going to be banks and financial institutions that will lend, and the good projects…that have good merit and good sponsorship [will get financed]. The ones that shouldn’t have gotten done just won’t get done in this environment. The lenders went into this crisis as healthy as they have ever been, and their reserves and capitalization were really in strong shape going into it. You’re going to see once they get their arms around what their credit exposure is today, I think you’ll see some getting back to business, but you just have this practical lull. Put on top of that that we’re all working remotely, it’s very difficult to move things forward in the immediate near term.”

Now may be the right time to renovate, if you have the means, according to Hardy. “It’s a good time to get things done in a property if it’s closed down or has little occupancy,” he said. “You can move quicker on construction. You can save money. You have less lost revenue obviously.”

Alan Benjamin, ISHC, president, Benjamin West, called it a “phenomenal” time to renovate. “You don’t have to worry about your guest satisfaction scores going down,” he said. “You could add many more floors of buffer zones if you’re doing tub shower conversions or anything else that would create noise and dust. And as John said, you don’t have to worry about displacing revenue because there is not that much revenue to displace right now. So, it’s a great time to get ahead of it. And then when the market does recover, whenever that is and whatever it looks like, you’re not taking rooms out of service at that time, because then every dollar is really going to be precious.”

One reason that it is a good time to renovate is that, despite early fears, the global supply chain has not been severely affected by the pandemic. “If I roll back to the six-week period from March 1st going back to the middle of January, we were having constant calls with clients about how to get products out of Asia, specifically out of China,” he said. “China overall, from an FF&E and OS&E standpoint, did a very good job. Probably 90-95% of the concerns turned out to be unfounded—not to say that there weren’t a few projects that had something late, but it was usually a week or two—usually not more than that. They put rules in place for the factories to reopen after Chinese New Year.”

He continued, “Fast-forward to today. China overall is doing very, very well, as are Vietnam and other parts of Asia. The U.S. is doing well with specific issues… There are different rules now in terms of what factories are open.”

Merkel was asked whether it will be a buyer’s market for developers, owners and investor funds with the means to acquire properties.

“It’s a certainty prices are going to be lower,” he said. “There’s no question… What you’re going to see is the people that were sellers and not long-term holders that didn’t get their last dollar in ’18 and ’19 and continued to hold are going to be true sellers at some point here in the near future. And it’s certainly in the buyer’s favor today and it will be a buyer’s market for some time. Simply, the data won’t be there. It’ll be difficult for lenders to underwrite and therefore, it will impact values. And so the buyers will absorb that in the price—that uncertainty.”

When asked for some positives that may come for the hospitality industry because of the pandemic, Cindy Estis Green, CEO/co-founder, Kalibri Labs, said that she sees some potential improvements. “This is causing a very close examination of costs and everyone who was so good at managing costs will come up with new ways to be even better,” she said. “…I hear a lot of discussions with my clients and have had many discussions about the organizational structure. We just can’t afford to have siloed revenue management, sales, digital and all these different departments. I think we’re going to move to commercial teams that are much more efficient. So this is something that we should have been doing and everybody said they wanted to do, but now we had the reset button pushed, and I think we’re going to become a much more efficient operation because all of that overhead that sort of piled up over the last 10 years as the economy was strong and the growth was buoyant, I think will force a much closer examination to be much more surgical about the way business is acquired.”

In addition to the way business is acquired, changes will be made in what is offered to guests. “I think we’re going to see the hotel industry change,” said Jagruti Panwala, AAHOA chairwoman and president/CEO, Wealth Protection Strategies LLC. “In many ways, I really believe it. In the U.S., we are so accustomed to offering a hot breakfast to our guests, and with the sanitation that is happening now, you have seen probably all of the brands stop doing that. I believe that those are things that are going to change for the long term. As the airlines changed their standards after 9/11, I believe the hospitality industry is going to have some major changes to protect our guests and employees, and also to change the landscape of the industry for the long term.”

Cleanliness of properties will be very important to guests; like the elimination of a breakfast buffet, other panelists agreed that other changes are likely. 

“Clean is the new green,” said Benjamin. “…I think it is a great opportunity for the hotel industry to do that also—redefine safe and secure as clean.”

Hardy said that health consciousness and safety are going to be big factors in how people decide where they are going to stay.

“I think there is going to be a change in people’s comfort levels in terms of sanitation,” he said. “Every one of these crises changes the market somehow in ways we didn’t anticipate. You can already see it where Marriott [and others have]published these new standards for housekeeping that will change housekeeping significantly.”

The safety standards implemented by the hotels are also going to give them a leg up on short-term rentals. “When you make a decision of where you are going to stay, are you going to be more comfortable in a hotel that is branded, where they are pushing sanitation and hospitality and security, or are you going to go to [a home-sharing rental]without knowing who the owner is and what they have done?” asked Hardy.

The new safety standards may create a new way that amenities are handled, including a move away from the bulk dispensers that brands added to cut down on the use of plastics. “I think that may go back to the individual containers again,” he said. “It may be when you check in you are handed a package—at least for a while.”

Hardy said that events like these put things in perspective. “I would also say that these kinds of shocks to the system make everybody appreciate the really important things in life,” he said. “It’s not all about money or career. It’s about how everybody works together. We all have the same challenge.”