The Not-So-Hospitable Guest: Navigating the Impact of Coronavirus in the Hospitality Industry

March 12, 2020

By Deborah S. Friedland and Kristen Lewis

The implications of the Novel Coronavirus (COVID-19) are widespread throughout our economy, and hotels, airlines, cruise companies and entertainment venues are facing critical impact. When combined with the ordinary stresses of running a successful property, it can seem overwhelming to make the tough decisions this situation demands.

Take a deep breath. The big question is: How can you keep your business on track as global travel slows to a halt? The answer involves a mix of strategies, from improving operating performance, to reducing or right-sizing expenses, to re-evaluating your agreements with your customers, vendors, management companies, and brands. By implementing practical solutions to these challenges, you may be able to not just preserve, but enhance the value of your enterprise during these trying times. Here are some factors to consider as you plan for the coming months:

Benchmarking Performance

How does your operation compare to competitive hotels? Work with a business advisor to establish baseline metrics, and then monitor your performance relative to the industry in order to identify areas for improvement and cash flow innovation that you might be missing out on. Do this on a regular basis. Striving for optimal performance under these tough conditions should be your goal.

Prioritize Your Commitments

You have many different priorities, contracts, and obligations vying for your attention (and money). This downturn will only exacerbate those demands. It’s vital to take a moment to evaluate those commitments one by one and set a strategy. What needs to happen right now versus what can be put off for the future? Meeting payroll is vital to keeping the doors open, while paying down your debt may be more negotiable for long-term operations. The balancing act may be tough, but take the time and set a clear strategy to juggle commitments appropriately.

Supply Chain, Construction and Renovation Projects

Disruptions in the supply chain are being felt, particularly for goods coming from China and other areas hard hit by this pandemic. If you don’t already have a backup supplier plan, it’s time to put one into motion. If you are in the middle of a property improvement plan (PIP), you may not be able to finish your renovation or building project on schedule, and that means you will have rooms offline. Review agreements and timelines with an advisor to understand your rights during a construction stoppage and to evaluate what options are open to adjust contract terms or make alternative payment arrangements.

Loan Payments

In order to meet debt service, companies must meet specific coverage ratios, and hotels in distress will have trouble meeting those agreements. If you have a big payment coming due on the horizon, you may be able to negotiate more favorable terms with the creditor. Advisors can assist in discussions with lenders to obtain amendments or assist with workouts.

Insurance

The World Health Organization (WHO) just classified COVID-19 as a pandemic. That activates certain clauses and language within your insurance policies (and other agreements). Review your policies with a specialist to better understand what remedies may be available to you in case of interruptions.

Contracts

Speaking of the pandemic designation, that word will bring your force majeure clauses into particular focus. Review your outstanding contracts with a specialist to understand your obligations and decide what mitigation options may be available in extreme circumstances.

Management Fees

Review your existing management contracts to evaluate if there is any possible flexibility in negotiating with your management company on fees. There may be performance clauses in the contract which you can utilize to your advantage when negotiating. Working with an advisor you can determine what your rights as an owner are, what the management company’s rights are, and how you can best approach fee negotiations or payment timetables during the crisis.

Sales and Marketing Concerns

Smaller owners overseeing large national hotel brands can sometimes be overlooked, and may encounter difficulties gaining the attention and marketing resources of the national brand. Make sure that the national brand’s sales and marketing functions are working to support revenue maximization in your location. Shared services fees should be reviewed on a regular basis to determine whether what you are being charged by the brand or management team is accurate and confirms with the terms negotiated in your contracts. An advisor can help you evaluate these costs and whether the national brand is fully delivering on their agreements so that you receive the support you are entitled.

Cash Management and Internal Controls

This is always an issue for hospitality businesses; however, it is critical in times like these to ensure that fund flow is accurate, bills are being properly paid, and invoice payments are collected. Make sure that you’re not stockpiling cash unnecessarily. Internal controls need to be tight, especially as more people will be in financial trouble and may be tempted to perpetrate a fraud.

There are numerous factors to think about and monitor aggressively during these uncertain times. The good news is that there are ways to shore up your operational picture to get through any crisis.

About Deborah S. Friedland

Deborah Friedland specializes in valuation, acquisition, finance and conversion or operation of real estate, with expertise in REIT structures and the turnaround of numerous hotels, resorts, restaurants, and mixed-use real estate.

About Kristen Lewis

Kristen Lewis is the Director of Marketing for EisnerAmper LLP in Philadelphia Pennsylvania. She has written articles for CPA Practice Management Forum and the Pennsylvania Institute of Certified Public Accountants.

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