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Evaluating Hotel Strategies as Events Develop

Mar 24, 2020

As COVID-19 continues its aggressive pace across the globe, the impact on the hospitality industry has been unforgiving. As tracked by industry analysts, hotel stocks have fallen by over 50% since January 1, 2020 versus approximately 30% for the broader indexes. With travel coming to a standstill, the market can expect to see an increasing number of hotel closures.

With 1 in 25 jobs supported by the hotel industry, the rapid pace of booking cancellations is having an immediate, negative ripple effect that risks seeing smaller, less capitalized companies fail. Based on current occupancy estimates, the American Hotel & Lodging Association (AHLA) says four million total jobs have been eliminated already or are on the verge of being lost in the next few weeks. In certain affected markets, including Seattle, San Francisco, Austin and Boston, hotel occupancy rates are already down below 20%, and individual hotels and major operators have already shut down operations. 

In a rush to conserve cash, companies are cutting staff, dividends, and buybacks. Last week, Marriott furloughed both corporate employees and hotel employees. Coordinated requests for government intervention have begun to take shape. On March 17, CEOs from the largest hotel companies met with the White House to discuss economic recovery solutions.

As I write this article, the Federal Reserve launched unprecedented measures to support U.S. households and companies by announcing that it would purchase unlimited amounts of Treasury bills and mortgage-backed securities. And without quick action on a proposed $1.3 trillion economic package by the federal government, uncertainty and bad news will continue to wreak havoc. With potential government assistance for the hotel sector still unclear, hoteliers are grappling with the decision of whether to close a hotel or operate at skeleton-staff levels. Many owners are also limited in their ability to close due to contract obligations with lenders or landlords, giving them less flexibility in their options for next steps. Now is a good time for hotel owners to work with financial advisors to go over the data and prepare an analysis with recommendations regarding whether to shutter operations. And if owners must stay open, delicate negotiations with lenders and brands are necessary to operate the most effectively with limited options.

Pragmatic Steps

Cost Reduction Strategies:

If a hotel must continue to operate due to contractual obligations, make sure that operations are streamlined to bare bones. Review all contracts with suppliers and cancel all contracts that are deemed unnecessary immediately, requesting a reduction in fees from others. Reduce costs to operate the asset. Ideas for operational cost savings – wherever feasible – include:

  • Close pools/saunas/hot tubs and set thermostats to the lowest setting to maintain
  • Set all public, meeting, back of house, and offices to minimum temperatures and airflow
  • Close down guest room floors, reduce temperature settings, unplug appliances
  • Turn off all guest floor ice machines
  • Turn off all banquet and kitchen ice machines and coffee brewers, and consolidate all coolers and freezers
  • Turn off lights where possible and dim all lobby lighting
  • Turn off kitchen exhaust fan and make up air unit
  • Turn off all laundry equipment and laundry boilers
  • Turn off kitchen boiler and circulating pumps
  • Shut off gas to kitchen equipment
  • Close fitness center and turn off cooling units

Insurance Considerations

  • Document group cancellations including date, number of attendees, and loss of revenue and submit insurance claims in a timely manner. Depending on government mandates for the state where the hotel is located, business interruption reimbursement may apply.

Brand/Management Company Issues

  • Communicate regularly with the franchise/management company to understand the financial implications of closure versus low occupancy scenario
  • Understand the closure and relaunch process with respect to costs, timing, and communication support
  • Know your rights and the responsibilities of the brand and management company under the Hotel Management Agreement (“HMA”) and franchise agreement Document all communications

While the industry is in crisis, now is the time to evaluate options and work with a financial advisor who can help identify strategies that will meet the challenges of the moment and position for the future.

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Deborah S. Friedland

Deborah Friedland specializes in in operational strategy analysis, asset management, valuation, internal control review and assessments, market studies, and transactional due diligence for investors and lenders.

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