Hospitality Executives See Pockets of Resilience Amid Harsh Impact of COVID-19
A “black swan” event, the COVID-19 pandemic has had a devastating impact on the hospitality sector, affecting everything from revenue to operating models and the ability for hotel owners to pay debt service, says Brian Waldman, executive vice president of investments for Peachtree Hotel Group.
The insights from Waldman came last Wednesday, July 1, during a webinar he moderated on the current state of the hospitality sector. The session was titled “Distressed Hotels: Sourcing Debt and Equity, Acquisitions and Value-Add Strategies.” A group of panelists not only discussed the epic challenges currently facing the industry, but also the road ahead.
IMN hosted the event, and panel participants included David Parsky, managing principal of Arris Investments; Krystal England, senior director of Canyon Partners Real Estate; Rani Gharbie, head of acquisitions and development for The Pod Hotels; and Andrew Gindy, principal of Walton Street Capital.
“Fundamentals are very depressed, and as a result the industry is in a cash-preservation mode,” began Gindy. “Recovery in terms of demand will remain unclear until there is some sort of vaccine or therapeutic measure to be taken against COVID-19. Without a visible end in sight, those of us in the industry need to preserve cash. Folks are very focused on restructuring, gathering more time and cutting costs.”
Since the COVID-19 pandemic began to escalate in mid-February, hotels in the U.S. have lost more than $38 billion in room revenue, according to the American Hotel & Lodging Association. The impact of the virus on the hospitality sector continues to be felt across the country. Six out of 10 rooms in open hotels were reported as empty by STR on June 24.
In the interim, staying afloat in the hospitality sector will require the implementation of several protocol changes tailored to guest safety. “Reopening plans are going to revolve around reduced staffing and enhanced cleanliness protocols,” said England, whose company currently has a number of hotels under construction and several operating assets in the hospitality sector. “With respect to the top line, it’s anyone’s guess what the remainder of the year will look like. We are being as conservative as possible when looking to convey to our investors and partners what to expect.”
“With that being said, we have some green shoots within our portfolio, and they’re all taken in the context of recovering from what the industry experienced in April,” continued England. “We’ve had luck in a few assets with government contract business, which has provided a substantial boost to occupancy and overall revenue. It’s nothing like the numbers we were seeing prior to the pandemic, but putting any heads in beds is a good thing at this point. We’re also seeing a level of resilience within our extended-stay product line that is unique for that particular segment.”
While green shoots are evident, their appearance largely depends on the market and product type. “Our portfolio is very New York-centric, so we don’t have a lot of green shoots right now,” said Gharbie. “Most of our portfolio is shut down. We went from $500 million in revenue to quasi-zero in recent months. One of the things that has been most difficult in terms of preserving cash and working out the cost basis is letting go, or furloughing, most of our operating staff. This is not dissimilar from what most of our peers here have had to do during this time.”
“We tried as much as possible to preserve our corporate staff,” continued Gharbie. “One aspect that has played into The Pod Hotels’ favor financially is its conservative use of leverage and the strong relationships it has with its balance sheet lenders.”
“Overall, we are optimistic about New York,” said Gharbie. “In the short term, though, we’re not delusional. We don’t think operations are going to come back to normal anytime soon. We don’t think travelers have a gun to their head to travel without a vaccine. We’re in a bit of a wait-and-see period, like everyone else. The reality is there is a lot of uncertainty from an operating perspective in the hospitality industry.”
Parsky of Arris Investments agreed that we are still in the early phases of dealing with COVID-19 from a hospitality perspective. ”The vast majority of borrowers are still getting their head right in terms of coming up with a forecast to present to lenders, which is just the beginning of the dance,” he said.
“Ultimately, we are going to reach a resolution — whether it’s through rescue capital, a foreclosure or some sort of recovery that precludes the need for either of those options,” Parsky continued. “The first deals made in many depressed cycles are from companies going fishing to try and see if they can be bailed out of the problem.”
“Patience has got to be the rule of the road right now,” said Parsky. “We still have a large number of hotels that are closed, and a number that are limping along on life support. I think preferred equity is an ideal model right now. If you can get to the finish line, it provides an insurance policy and a lifeline. From my perspective, opportunities are going to drive the process here. It seems like there’s a fair amount of capital in the market, and it’s just a question of timing and the flow of opportunities once the dance is over between borrowers and lenders.”
Forbearance — and how long it will continue to be granted — is another question on the minds of many in the hospitality sector. “From our perspective, when COVID-19 hit, everyone was in this together,” said Waldman. “Lenders were handing out forbearance like it was candy. I feel like lenders are starting to tighten their belts a bit and are looking at which assets really need it and which assets don’t. I see groups continue to burn through their liquidity and lenders starting to get impatient.”
The availability of forbearance is a case-by-base situation largely dependent upon the borrower, the lender and the product at hand. “If you have made some steps to recovery and you’re seeing strong demand, you’re more apt to put capital in and work with your lender,” said Gindy.
“If you’re closed and have no visibility as to when the hotel is going to reopen, it’s hard to keep writing checks. Having a relationship with your lender has never been more important,” continued Gindy. “I don’t think we can kick the can down the road much father — maybe six months, maybe less. There have been other funding sources that have helped delay in hopes that things would have returned by now, but they haven’t.”
Gharbie agreed that the period for forbearance is likely to come to a close soon. “In our portfolio, the vast majority of our hotels [work with] balance sheet lenders with great relationships, and we’ve been able to get them to be forbearing,” he said. “We took COVID-19 seriously from an early point and took action. And that was well received by the lending community, but that forbearing is not going to last very long — probably [ending] toward quarter three or quarter four of 2020.”
— Katie Sloan