Hotel Crisis
So I've read a few articles about hotels having a difficult time and was wondering what sort of options they have going forward. Could they do something like convert a percentage of rooms into service apartment style units to weather the storm?
Hotel guy here at an institutional shop.
We have been hard with 90% of our properties closed. We have basically been projecting 2020 to be a wash and recovery returning to 2019 not until 2023. When states decide to reopen means nothing to us in a sense. They can open all they want but will there actually be any demand?
I think there’s three sides of the fence in looking at this from a travel perspective..on one side, you have your people who still have their jobs and financially stable who will be eager to travel and get out once the lockdowns are lifted. In the middle, you have your people who still have their jobs and are financially stable, but will be terrified of going anywhere once lockdowns are lifted, maybe even until a vaccine is out. And then on the final side you have, unfortunately, your people who now not financially stable and lost their jobs who will most certainly not be taking their family of four to Disney World or to The Bahamas, whenever those opportunities are finally available. Weighing the percent of each side is impossible to predict. Forecasts can’t just mirror those of a recession. This is entirely different.
It is a tough road ahead for sure, but I think we will be ok in the long term.
I can chime in here to. We own several limited service hotels. I agree with the above comment on a recovery will take 3 years at least. Just got off a conference call with a big time broker of one of the largest hotel investment sales divisions. He stated we should expect 50% of operators to go under. These will primarily be under Hilton and Marriott flags. The other 50% that survive will be your run of the mill Motel 6s and various other budget and midscale brands (Less than $100 ADR). For our portfolio, our break even is 30%, but thats with reduced staffing and deferred mortgage. So just primarily on GOP we can get by on 30% as we shut off F&B components, reduced utilities, payroll, etc. However, this is still negative NOI across the board once you factor in debt. This will be a terrible recovery for hotels. Right now the banks and special servicers are willing to work with you, but in 5 months, they won't have the patience. You will see several foreclosures occurring around beginning of Q4. Plus we will enter the winter season, which the worst part of the year for the majority of hotels. I read somewhere that people are going to travel heavily once the stay at homes are lifted, but the big difference this time will be that they will do more day trips rather than trips that require use of airlines and hotels. There is no doubt though that the industry will fundamentally change forever. Lol I have even some borrower's asking for 18 month loan deferment from CMBS servicers.
You are a lender - you don't operate assets generally speaking. There is a reason why banks avoid foreclosures on single resi, let alone large portfolios. It's never in the bank's interest. I was bidding on a retail portfolio a bank had put with a broker - the equity was still owning it and they didn't give a fuck. The bank was doing the leg work of putting the asset on the market, because they needed the equity to stay involved in the meantime to run the thing so that it would not run to the ground. It's the same with hotels, it's very asset management intensive - banks do not want to deal with this shit and will not repossess until they absolutely have to (equity walks away cause they don't give a shit)
The NPL shit you have is generally some shopping centre in the middle of no where, what's the alternative use for that?! You need to put a hell of a lot of NPL in a portfolio to then sell it to CerBerus, Blackston, or Lonestar. This is a last resort as a Bank as they'll fuck you on price. If the asset is in a good location with alternative uses, your operator will think of it most likely and they'll sell Before it gets foreclosed. What you are saying is the equivalent of everyone Bragging aBout off market sales. Rarely happens and extremely hard to find. Unless you are trading in the suB $10mln category, and even then.
I generally agree with Ozymandia. For the hotel space, the $/sf (income & value) tend to be higher than other asset classes so it rarely makes sense to redevelop. Assuming that a surge of supply does not hit the market and recovery is seen to be bring values remotely close in 2019 over the next 3-5 years, this should hold.
In terms of loan sales, lenders may need the cash in the short run (often times for regulatory reasons) are willing to offload their loans to take a loss rather than continue booking losses into the future. A well capitalized shop that has the ability to bring the hotel back to performance or renovate/redevelop it could take advantage of current market conditions and either receive outsized returns on leveraged loan positions or receive properties for pennies on the dollar.
In general, for hotel owners, this is a much deeper revisit of 9/11 where the hotel industry will be acutely affected for at least the next couple of years. Right now, owners are taking advantage of industry wide forbearance but there will be a day to come when the economy reopens completely and the hotel industry does not bounce back to the same degree due to typical contractionary effects (which hit hotels harder than other asset classes) as well as a layer of fear to travel. Once the Covid smoke clears, we will most likely start to see a wave of foreclosures and discounted buying opportunities come from disillusioned and overleveraged landlords which should provide a once-in-a-lifetime buying opportunity.
can you explain how your breakeven is 30% ? what’s the math on that?
Not sure what you need by math. Dont have a property level number off the top of my head, but see here:
Lets say its a 100 room hotel. At 30 rooms an ADR of $80, which is a pretty conservative number with this downturn, we are earning a total of $2,400 a day on average. 15% of this goes to Marriott. We got reduced staffing for housekeeping, which costs maybe $300 per day for three housekeepers. Then our front desk could costs about $400 a day (hourly earning of $16). Utilities are going to run about $300 a day as we shut off floors, AC units, other areas, etc. We got no F&B. Supplies probably running a $75 a day. We have one manager on payroll overseeing operations still, rest of marketing and other divisions are furloughed or let go. This pay averages around $250 a day. Plus maintenance is at $200 a day for one person to show up and make sure everything is in good condition. Then remaining $500 plus is allocated to everything else such as repairs and maintenance, internet, cable, other expenses, etc. Actually my number is conservative could probably take occupancy down to 25% and still would be good. We actually have the manager working shifts right now so the hourly for front desk associates would be less. This is purely NOI and not factoring in debt. We're all running this bare bones to survive.