On-Demand: The Path Forward for Hotel Owners & Asset Managers
August 12, 2020
Panelists will discuss factors that hotel investors need to consider as they plan for the future, including hospitality performance review and industry outlook, hotel valuation in a distressed cycle, cash management and asset preservation best practices, force majeure and other issues, and insurance claims for COVID-19 losses.
Deborah Friedland:With that, I'm going to turn the presentation over to Cindy who's going to walk us through some of the trends that we've been seeing and some of the future trends that we're expecting.
Cindy, thank you.
Cindy Estis Green:Thank you very much, Deborah. I'd like to talk about where the business has been since COVID arrives on our doorstep. Just looking at a high level at the weekly pattern since the beginning of April through to July 31st, which is the last date, we update every week. You can see the red line is average rate and the blue line is occupancy. At our worst case back on April 10th, which was the worst week in terms of downturn for the hotel industry, we were about 77% down from 2019 in occupancy, and about 42% down in average rate.
As of July 31st, we've moved up to about 48% down in occupancy and 27% in rate. So right now we're standing at an occupancy percentage through the end of July of 39%. We are definitely seeing growth. It has been steady, but I know that it will not be linear, it's going to be somewhat fits and starts. We'll have a little bit of improvement, and then as we've seen with some of the infection rates spiking in different markets, it's slowed things down. So I don't think it's going to be a perfect linear situation, but I think it will gradually continue to improve.
And just to give you some distinction, our data, we don't use STR data, we have our own database. We have about 35,000 hotels providing data and updating every week. And instead of just total revenue and room nights, we actually break it out by channel, rate category. We track cost of acquisition and our market definitions, because I'm going to talk a little bit about markets, the traditional STR ones, there's 165 markets and 650 sub markets.
We've actually gone through and done work to expand, to look at markets in terms of the density of hotels. So we report on 335 markets about double the number and 972 sub markets. So when I talk about markets, they're going to be smaller than the STR markets and a little more precise around where the hotels are located. In terms of occupancy, we also report differently than STR. So when I say it's 39%, we actually count the supply whether a hotel is open or closed. We don't just look at the open hotels.
So I think the STR numbers have been reported a bit higher, but when you look at open-end closed hotels and we have statistical ways of deriving when they're closed. We're not waiting for them to report, we are running about a 39%. So it's a bit lower than what has been reported through STR, but it's probably a bit more accurate. But the fact is it's improving. I'm going to just break this out by rate category.
Unpacking the business is really important. Looking at revenue or RevPAR is interesting, but understanding the composition of it is even more powerful because the recovery is very uneven. We all know that group and corporate business will be slower to return for all the reasons we know in terms of travel restrictions that are imposed either by companies, or in specific States, or municipalities, or counties.
If you look at this chart, this is all upper upscale, upscale, upper mid and mid-scale hotel. So we've removed luxury and economy for various reasons. The pink line is Rack/BAR business. The red line, dark red line, and the green line is loyalty member rate and OTA business. The red line is OTA.
So when we looked at all of the rate categories that are producing business now throughout the U.S., what we're seeing is the only rate categories that are actually in growth mode right now are what we call promotion and loyalty member rates, so that's one category and OTA, and everything else is either flat or has declined. We know that group at a little bit of uplift related to COVID issues, medical teams, or first responders, or something like that.
But for the most part, group has been down and most other segments are down. So Recbar has been relatively flat, but it's been declining a little, and the two categories that are growing are leisure-based, which most people are expecting that. When we look at the categories that are in growth mode where we see the loyalty member rate, which is the typical direct booking business largely through the brands.
And that would be promotion rates for the independents or small chains, and the OTA, they've been running neck and neck since the recovery began towards the end of April. And if we track this by individual chain scale, you'll see some differences. So in the upper upscale hotels, when the red line is above the green line, that means OTA is outperforming the loyalty member rate or the promotion business.
So for upper upscale, the OTAs have definitely have the upper hand. That isn't the case though for the upscale chain scale, where it's been a horse race where loyalty member rate and promotion was exceeding OTA, and then OTA jumped ahead around 4th of July. They're actually converging by the end of July and they're running about the same. Between Recbar loyalty member rate and OTA, the three categories make up 60% of the demand in the U.S. right now.
If we look at upper mid-scale, you can see the lines are converging where they're almost on top of each other. What is different in the past downturns like in 9/11 or in the '09 recession, the OTAs had huge spikes. In '02, they spiked 100% growth, in '09, after that recession, there was about a 30 or 35% growth in OTAs. What's different this time, which is interesting is the direct booking campaigns by the brands have definitely been sustained through this process. And right now the business is running neck and neck, which means that instead of the OTA absorbing a lot of that leisure demand, the loyalty member rate business is actually maintaining about half of it.
And it's at the expense of the Recbar business, but a lot more businesses coming direct. So for appraisers and others who are trying to do underwriting, it's really important to know because the profit margins for direct business are twice that of a third party business. So it really does make a material difference. If we look at the mid-scale chain scale, there's a bigger gap. The red line is above the green line, that means the OTA is outperforming.
So they did come together a little bit in the middle of June, and then particularly around 4th of July and onward, there's been a pretty steady stable gap, but a gap where the OTAs have outperformed them. When we look at the overall business and thinking, what is the composition of RevPAR and what is our vulnerability right now? This is 2019 data, and you can see that the five rate categories, Recbar group, corporate OTA, and loyalty member rate or promotion make up over 80% of the RevPAR.
So the RevPAR for the country was $81. We call it cope. That's net of booking costs. When we look at the group and the corporate, that made up a full 33% or one third of the RevPAR. Which means that if corporate and group is slow to come back, we have a hole in the hotel industry that's worth 30% of the RevPAR that until it comes back, it's going to be very hard to fill. So it's going to cause a lot of things, like there's going to be a lot more competitors who are competing down market because they can't fill with the group and corporate they were getting.
We also are seeing an uptick in corporate business, but it's more the smaller corporate accounts in the drive to regional markets, the secondary and tertiary markets. Looking at performance by quarter, you can see that April and May were in the pits, they dropped substantially. The first column is two, one, then we have April, May and June. And you can see June came back quite strongly. Obviously, we're not close to where we were before COVID hit, but we still have this gap, and obviously anyone seeing this recording later, you'll get this data.
Just summing up, looking at some specific market differences, not surprising the leisure markets in Texas, California, and Florida, and the Southeast were the strongest during the worst of this COVID, which is Q2. They weren't always the highest and occupancy, but they were able to drive better rates. So we are seeing hotels in some markets, generally leisure beach kind of markets that have rates that are higher than they were last year. So it's not all doom and gloom, it's just very spotty and very different.
We also have noted that every one of our 335 markets, there's either a drop in occupancy or RevPAR compared to 2019. Every single one, there was no exception. The biggest year over year reduction in revenue for Q2, and again, I'm focusing just on Q2 to see the difference with the COVID period where the markets with large either group and/or corporate base. Again, not surprising, that was a big part of the base of those markets, Boston, San Francisco, Orlando, Chicago, and Washington D.C.
The top markets for RevPAR were all either secondary or tertiary with heavy drive to demand, which I know everybody is well aware of that. Just to name some, Panama city, Florida, Pensacola, Ocean City, Maryland, Hilton Head, and Corpus Christi. Those markets were in the top 10 for RevPAR for 2019, just to give her a frame of reference in some contexts. They ended between 34th and 227th. So they're clearly not top markets, but they are right now and it's just different behavior.
In terms of top markets for occupancy alone, again, very secondary markets ones. There were some on the list I had to look up because I didn't even know where they were. In the middle of States that were normally not primary. Pueblo, Colorado, Panama City, Victoria, Texas, and Cheyenne, Wyoming. When we look at those top occupancy markets and Q2, the best that it got was between 47.7 and 56.8. So the markets that did the best, that was it, it was around the 50% mark.
The lowest occupancy, if you exclude the closed hotels was between six and 15%. So just kind of a flavor of what's going on and a little sense of where we're going. There's definitely improvement. It is slower than everybody wants it to be and we obviously need that corporate and group to come back, but it's moving in the right direction.
Deborah Friedland:Thank you, Cindy.
Cindy Estis Green:Sure.
Deborah Friedland:As a market junkie, I look to Wall Street to get a sense of what's to come. So Wall Street looks at tomorrow and Main Street looks at today. As of yesterday, there was a complete reversion into risk on for hospitality industry. There was a selloff in gold, safe investments into hospitality companies, everything from reeds to C-corps brands all across the board.
Based on what you're seeing in the data, does that support what we're seeing in Wall Street? That things are going to be looking up pretty soon?
Cindy Estis Green:The one good thing about the hotel industry, which we all know, we're not going to become virtual anytime soon, so it will come back, and everybody's question is, "How soon will it come back?" We think that there are markets that are going to be coming back in 12 to 18, and we already see it with the growth in some of these secondary and tertiary markets where they haven't had international or fly-in demand.
I think in 12 to 18 months, they're going to actually be back, and especially the mid-scale, upper mid-scale and upscale properties. But the ones that have big group or corporate, the national account corporate base, it will take them two, three years for some of them. It could even be upwards of four or five years. So it's going to be very uneven, but I definitely see it's moving in a positive direction.
The corporate business, which was down like 73% at the worst time in the middle of April, when I looked at it for July 31st, it's going to sound bad, but it's like minus 50%, but minus 50% compared to 73 is a huge difference, and it's coming back. So the smaller corporate accounts will come back before the big national ones. But it is coming back and it's positive, and it's just a question of which markets and when, and how quickly these travel restrictions come off.
Deborah Friedland:Thank you. Edy, I'm going to turn it over to you. In terms of valuation, again, we typically look at historicals and we look at sales data to get an indication of where our cap rates are on and how to value the lodging assets. Even that there's a dearth of transactions in today's market, and again, just given the unprecedented nature of where we're at right now, how are you valuing assets?
Edy Gross:Good morning. The appraisal methodology hasn't changed. We're still using primarily a discounted cash flow analysis and probably that's the only valid methodology when you have no revenue and basically no income to speak of. This is the time when a five or 10-year cash flow projection is the only way to determine a reasonable value conclusion.
In regards to rates of return, that's a tricky question because you're right. The sales activity has declined by 90 to 95%, which is dramatic compared to all the recessions in 2001 and 2008. So I don't think we've ever had a period where no sales activity has occurred in over six months. And some of the closes that have occurred during COVID were being underrated before the academic started.
So it is a challenging exercise to determine what is the appropriate cap rate for each specific location or hotel that we're appraising. And part of it is based on what Cindy was alluding to. There are no markets down here, the place in the Southeast that were appraising that are the same. Place like Orlando that relies on theme park visitation and conventions, there's none. Theme parks have been closed up until recently and the convention center is not producing one event.
So the occupancy levels of hotels in Orlando is less than five or 10%. The cap rate of a property there wouldn't be the same as a cap rate of a hotel. Hampton, Maine courtyard on a beachfront in secondary markets in Florida that leisure business is driving to, and you have occupancies in the 60, 70, 80% on even weekends. So it is a determination that we do on a case by case basis based on the market.
Deborah Friedland:Before we started our webinar, you were mentioning that 90% of your business had to do with special servicers and you're dealing with a lot of distressed assets. What is that telling us? What's to come? What is forbearance 2.0 look like? We were just getting out of the forbearance, 1.0 where lenders were working with borrowers and playing nice in the sandbox. What is your world look like? What is it telling you?
Edy Gross:We have two stories going on. On one side, we have the asset itself and the market, and again, on a case by case basis. Some markets are performing much better than the other ones, and rebuilding the cash flow of a property in some of the up and coming markets, again, the secondary or tertiary drive to locations is looking very positive I suppose to other major markets reliant on conventions or corporate activity. That's one story.
The other story would be the capital markets, and the capital structure of many hotels is in complete disarray. And that's where the special servicers are taking over. Some of the recent data from Trip indicates that there are approximately $20 billion worth of mortgages in the hands of special servicers. And out of the 20 billion, about three-and-a-half million represent mortgages that are in good standing.
And the balance are in different periods of delinquency for closure, REO, et cetera. That's where the special servicers become the main source of business for valuations at this point in time. Six months ago, we were working on appraisals for either development, or refinancing, or sales activity. That business has nearly evaporated or it represents five or 10% of the work we do today.
Deborah Friedland:I'll just sum up. Where do people go for debt? Who's active in the market where to find capital given the tremendous amount of cash burn in operations and the need to recapitalize?
Edy Gross:That's a difficult question for sure. Some of the private sources of capital are active and aggressive, but the major lenders, they have not been active at all. On the other hand, they are trying to sell that. That's essentially where they are. They're trying to review the loans that they have, whether the loans are, again, CMBS, or CLOs, or, CREs. And they are probably, and for the most part, not lending.
Again, there's obviously a few deals out there. We've heard from a major lender that there is a potential major transaction happening in the Southeast where the buyer and the seller are both major clients of this bank, so the bank is willing to consider financing on this upcoming transaction. But for the most part, if it wouldn't be that situation, they wouldn't be considering any financing at all.
Again, it's basically private lending that is taking place for the very few deals that are happening.
Deborah Friedland:Gary, I'll turn to you. Again, another indicator I look to is the number of phone calls that EisnerAmper's bankruptcy and restructuring group and forensic accounting group receive. That indicator is off the charts. They are a group, and I know across the country, restructuring and bankruptcy groups are ramping up tremendously for the expectation of the onslaught of litigation that's coming down.
Can you give us a sense of what you're seeing in your world? What's keeping you busy? What you're hearing?
Gary Thompson:Sure. Hello everybody. I guess we're seeing a lot of activity on two fronts. Number one, under a hotel management agreements, whether it's from the perspective of the owner or the manager. Everybody's looking at their rights and obligations when performance is running so low relative to the comp set. What might that mean for performance termination thresholds that are going to be measured in early 2021, what type of documentation should be taking place right now in that regard.
And relatedly, we've all heard the phrase force majeure, and it's case by case, but it's everywhere. It's in HMAs, it's in franchise agreements, it's in vendor agreements, group cancellations. Contracts use slightly different words to define force majeure. The law has its own definition. Depending on your perspective, you may or may not want to invoke a force majeure excuse for non-performance or for delay of performance, or maybe you do.
So with the assistance of legal counsel is just something you have to drill down on agreement by agreement and look at the language. It's difficult to generalize, but by and large payment related obligations are more absolute and not subject to a force majeure cancellation or delay and nonpayment obligations by and large are. But it's something that could play out in any number of disputes as we go forward.
This phrase, force majeure or the same concept in terms of some sort of excuse or contractual excuse for lower performance. Then the other major front of course are insurance claims, we're looking at business interruption claims on behalf of both owners and managers under their usually broad property programs that ensure multiple properties. In the hospitality industry, which is quite unique, there are some specialized coverages for communicable disease.
They were all drafted with the idea of Legionella in mind or an outbreak of contagious illness at a specific hotel site that shuts it down or slows down business for a period of time. We've never seen anything like this with a pandemic across the country, but those coverages are quite specific. They're usually called contagious illness or communicable disease. It can also be under a pollution program and they usually invoke sub limits or lower limits of coverage.
That's where there's the most potential for insurance recovery. The much bigger potential source of recovery, which everybody I think has heard about is they're just broad business interruption insurance coverage for all COVID related losses. That's a big issue that's being litigated now across the country, but on the litigation front, it's mostly being led by restaurants who are pressing that issue in light of civil orders, which invokes a subset of business interruption coverage called civil authority.
But I guess right now, insurance is just a big, big question for everybody. Owner, manager special servicers who are now have the task of pressing those insurance claims along to see what kind of recovery there might be. That'll take years to settle out. That aside, as we go forward, there were a couple more quarters of potentially tough times. Ultimately, financial distress causes disputes between owners, and managers, and sometimes brands, and sometimes lenders.
So there's potentially some disputes to be wary of coming forward.
Deborah Friedland:Yeah, I would expect that we're going to say all of those fronts, but Gary, let's break it down and narrow it out. With COVID, can you just talk about some specific steps that hotel owners, asset managers can take to limit their liability risk associated with the pandemic in terms of their employees and hotel guests? I'll also say, can you then talk about your opinion as to whether this is a real threat or not?
Why don't we start with, how do you mitigate that specific risk?
Gary Thompson:On that front, potential liability, third party lawsuits from guests or others, it's been a great source of concern. But my view on that is, especially if you're a hotel operator, if you follow the CDC guidelines, you follow all written directives from your local health department, you're doing all of the standard things that everyone else in the industry is doing. Mandatory masks inside of the hotel space, some front desk have plastic shields, extra disinfection, temperature checks of staff or other measures to ensure that your staff are healthy.
First warning signs of anybody potentially being sick with COVID, they're sent home, there's a contact tracing of your own that you do when you get a report. Who is this person? Who are the seven or eight people in their core group? Let's all send them home. If you're doing all of the obvious common sense things to mitigate COVID among your staff and among your guests, then that's basically the standard for negligence is, what's reasonable?
If nevertheless people get the COVID, and they will because they're on all kinds of other places as well, my view is there's a low likelihood of third party liability sticking to operators or owners. Obviously, some States and maybe even the federal government might actually adopt laws that provide immunity from such lawsuits. But setting that aside, even under the common law of just negligence, it's going to take a pretty egregious case, I think, to break through on the liability front.
It's going to have to be something like a hotel that did nothing. They had staff that were infected and they didn't send them home. That's the kind of things that would make any normal person say, "Wow, that was very negligent." So in that regard with respect to insurance, by and large, liability insurance is stepping in to defend those types of claims and lawsuits, unless there's a pretty clear virus exclusion that kicks in.
On the liability side of your insurance, things should fall into place. I guess the key advice there as with all insurances, provide notice. Don't hesitate to provide notice. Sometimes people are reluctant to do so because they think it's going to drive up premiums. It doesn't matter. Get the notice and make sure that the carrier knows. You've experienced some incidents of COVID among your staff or your guest is potentially a lawsuit.
Hopefully it won't be, but if you don't get the notice in, then you might not be able to tap that insurance at a later time.
Deborah Friedland:How about business interruption insurance? I know I've gotten a lot of questions from different owners and investors in hospitality who've lost millions of dollars in business interruption out of no fault of their own because of government mandates and whatnot. How does an owner ensure that, or increase their chances of receiving recovery for this?
Gary Thompson:You certainly have to drill down on the words of the policy and see if you have any of these specialized coverages that mention communicable disease or something like that. But if you just have a general all-risk property policy, the general concept is something physical has happened at the site, a tornado, a fire, a flood, and as a result, there's been an interruption of business.
The words are fairly open ended in terms of what is physical loss or damage. We policy holder lawyers that represent the hotels, the owners and managers argue that physical loss is different from physical damage, and that's what this is. COVID-19 is a physical thing and it's caused this interruption. The more indirect way of causing the interruption though is civil orders have been put in place that if they don't directly shut down a hotel, slow down traffic.
They basically keep people at home, incentivize people to stay at home and cause a loss of business. So the big question in the courts will be, if those civil orders are real reason why you're losing business, not because you had COVID on your site, but because there's this order in place in your County or your city, if that's the reason, is that enough to invoke coverage? That's something that's being actively litigated right now.
I can tell you, there was a decision in D.C. where I live last week and it was in favor of the insurers on that point. So I wouldn't put a high expectation around recovery for broad business interruption loss if you haven't had COVID onsite and you don't have a specialized coverage. But there are lawyers on every front fighting in every State to create that opening. So it's just important if you're not litigating yourself just to listen, pay attention.
If you put in your claim notice, that should preserve your rights. If you need to litigate at a future time, you can do it then.
Deborah Friedland:Thanks, Gary. Cindy, I'm going to turn back to you. One of the statements and the data was showing seemed to indicate that brands are going to be the winners coming out of this. We came into this pandemic in a very different environment where it was all about unique experience and independent assets we're doing tremendously well. Airbnb was extremely popular and there was a again, a risk on to different types of properties and not just open to different experiences.
On what you were mentioning, it sounds to me that perhaps the brands are going to be coming out of this even stronger. Just wondering if that's correct, if what you're seeing and what your thoughts are about that.
Cindy Estis Green:I don't think it's a matter of being branded, or independent, or soft brand, or any of those things. What we're seeing, as I mentioned, because of the uneven nature of the demand that's coming back, no, it's not the normal flow of demand that any market is accustomed to. Because of that, those that are being favored are attractive to the kind of demand that exists, which is, if you're in a place where there's a lot of drive to business, if you're in a place where you can be attractive to local corporate accounts, to leisure business, to small groups.
We're seeing the beginnings of some of the small social, leisure-oriented groups. Whether it's anything from weddings to lacrosse teams and talker teams and so on. So if you're in a place where you can accommodate that kind of business and you're attractive to that kind of business, then you will recover faster and you'll come out of this well. The loyalty member rate business is also a lot of the independents and the smaller chains have equivalent book direct activity that they've created when the brands created theirs.
So I think that it's exciting that the book direct activity actually is sustained through this crisis because as I mentioned, it's much more profitable business, twice as much. So I think that it depends more where you are geographically and the nature of your product. If you have 30,000 square feet of meeting space, you're going to have a hell of a hard time filling that whether you're a brand or you're independent.
So I think it's if you're a good match for the nature of the demand in your market, you're going to be much better off than those that are dependent on business that will be slower coming back. So I think that everybody will end up fine, but it's like, can we sustain the 12 months, 18 months or three years until the business comes back in our market, and in some markets for five years? That's the question, is how do we get through that?
And obviously, Edy and Gary are speaking to those topics because they're dealing with debt restructuring and legal issues because that's unfortunately the part that fills that gap until we're back. But I don't think it's so much if you're branded or not. I think it's more relative to the nature of demand, which is why it's so important for appraisal and everything else to understand for any lenders or anyone involved in this process.
You really need to understand the nature of demand in each market because the high level revenue figures are meaningless unless you understand the composition of it. Because it's going to come back so differently depending on the market.
Deborah Friedland:Thank you, Cindy. Edy, we look to DCF to value hotel assets, and part of that process is forecasting out five to 10 years. With no visibility right now, even into next year's budget, how are you going about forecasting six months from now or the three years, what whatnot? How are you adjusting to with expenses and whatnot? What are you looking at? Can you give us some insight into how to do that more precisely?
Edy Gross: Sure. Over the past few months, we have been developing in Newmark, a monthly occupancy projection model so that we can provide a reasonable assumption for estimating occupancy during the first two years of our 10-year cash flow projections. That monthly approach that we're taking, again, it's an educated estimate without question. Everything that appraisers do is based on using existing data and making reasonable assumptions going forward.
So with all the uncertainty that we have on a regular day-to-day business, we have this even greater uncertainty with COVID. This monthly approach that we have to occupancy, it's at least an educated step that we are following to project at least the next 24 months in. Basically that approach assumes what share of the occupancy on a monthly basis the market will get in 2020 relative to 2019.
For instance, if we're doing an appraisal in Jacksonville beach with a selection of five or six hotels, and we know that that competitive set achieve an occupancy of 70% in June of 2019. And we see either, however your star reports or even the performance of those actual hotels, and we see that the performance is 40%. So we know that the market has a gap that is measurable.
Based on that reasonable assumption, we apply similar estimates for coming months. That way we build an occupancy for the next 12 months and for the subsequent 24 months. And eventually depending on the market, obviously we assume that you'll get back to historical monthly levels during the next 24 years on markets where you can really achieve that. Other markets would be a little bit more challenging and would require a four-year recovery, for instance, a big convention market.
But a small resort market as Cindy mentioned, we are potentially seeing 12 to 18-month recovery. So at least our monthly estimates allow for that occupancy to come back and create, and everything in our evaluation models of appraisal companies is driven off of the occupancy component.
In regards to room rate, once again, the secondary drive to markets, we are seeing that rates are either generally flat or perhaps growing because when hotels had to close, they didn't have to discount when they were closed. Now that they are open again, they don't have to discount to gain the business back because some of those smaller markets are limited in supply, so they don't have to discount rate for the most part.
So the revenue aspect is, again, those are the general steps that we're doing. The expense projections as months go by, we got really busy starting in late May and through June and July. That has been a subject of discussion as to what room's expenses should be today relative to last year. Should there be a higher room expense ratio or less. And we're learning as we go along that the potential increased in cleaning and making sure that the product is safe for the traveler, but that comes at the expense of less labor because the rooms do not get cleaned when people are checked in.
So that's for instance, a department that meets further analysis. You have less labor, but more cleaning products and expenses create perhaps a department where the ratio should be lower than 2019. Same thing with food and beverage, again,, you don't have a restaurant open. You only have a grab and go, therefore you shouldn't be spending money in labor and therefore the department could be profitable.
Modest amount of profit based on selling the grab and go at a small profit in. So again, it's really case by case. Ultimately the expense analysis so far, we have been involved primarily in appraisals of smaller to medium size hotels. We have not done appraisal of smaller to larger convention resorts. Those will be without question challenging because that business is just not around and will not be around for a while.
So again, for the smaller properties, it appears that the cash flow construction is not very complex. Clearly there's a level of uncertainty, but it's not very complex relative to where the properties were in the past.
Deborah Friedland:With respect to additions to supply, I know that was a tremendous threat to hotels. It's like a new hotel coming in and you're fixed location, so you can't really adjust to that tremendously. But given that there's no financing, what's happening with new supply? And what's your forecast?
Edy Gross:Again, market by market. Clearly anything that is under construction will likely be developed, whether this has to be a significant distress between the owner and the lender for a project that is underway to not be finalized successfully. Probably the hotels that fall through the cracks and will not be completed are the ones that are in the early stages of development and those developers that are seeking financing today.
Again, with the exception of very few markets, I just don't see how you raise any money in this market to build a large hotel. On the other hand, we actually have appraised two proposed hotels in Nashville and Charleston. Those markets still have the interest of many participants. Again, there was a lender involved that hired us to do an appraisal of a proposed hotel in those two places.
Other than that, I just don't see other locations where the supply in the early stages will really come to fruition anytime soon.
Deborah Friedland:Thanks, Ed. Gary, Edy mention of litigation between lenders and owners a number of times. Can you speak to what you're saying with respect to that and what it tells you about the coming months, and how to prepare, and what a borrower can do to help best prepare for these kind of disputes?
Gary Thompson:Under a lot of loan agreements, there are arbitration provisions or mediation provision. So there may be a process built into the agreement that provides time for dialogue to try to work out a practical solution before lenders invoke more heavy handed rights that they tend to have under these agreements. So if it's a matter of needing more time to improve performance, there's possibly conversations that could be had to by that time.
But force majeure, there's that phrase again, it's something that maybe an owner could invoke to excuse, or at least delay the time of the required performance under the loan agreement to try to preclude as long as possible any ultimate relief that the lender might want to invoke. Some lenders have less patience for the process and we'll just jump straight to court. Relationships really are the key to, in a practical sense, trying to iron this out and maybe knock on wood.
If we could all get to the first quarter of next year, if there's a rebound in the industry that we'll get back on from footing. But the language in the agreement would be their first place to really start to drill down and plan in advance if need be depending on how things go.
Deborah Friedland: Again like that, is there a point where you recommend that the owners always reach out to their attorney if at what point do they bring somebody like yourself in? I know you're probably going to say, "Right away," but at what point?
Gary Thompson:A lot owners have in-house counsel, and this is what they really know their agreements well, their loan agreements, their management agreements their franchise agreements. So they're typically the masters of language and they know their rights because they negotiated the rights. So if you've got the resource of in-house counsel, absolutely. Everybody should be all hands on deck looking at all those agreements and thinking about different scenarios that might develop.
Sometimes it's just notice requirements that have to get out, letters to provide certain notices under certain provisions. So that requires just a lot of detailed attention. If you don't have the resource of in-house counsel to do the sort of thing, yes, absolutely. You need outside counsel to help cock those details and earlier to make sure you're not missing any notice states that you may need to provide to preserve certain rights.
Deborah Friedland:Thanks, Gary. Cindy, when we first spoke, you mentioned that you're not a hospitality company or a technology company. Even the pandemic and the guests wanting to interact less with other guests and employees, the trend with using your cell phone to unlock your door to everything from planning dinner and whatnot. Is technology the key to success? And if so, with your data that you are mining, do you need to be a tech major at college?
Is that the success? Is that what brings your revenue managers now, technology specialist who can play with all these algorithms and whatnot to generate the maximum revenue and the mix for the asset?
Cindy Estis Green:I think that data and technology will play an important role, not just in the hospitality industry, but in many industries. I have spoken to many brands and the larger management companies and ownership groups over the last six months, everybody is trying to leverage data and technology more. Whether it's guest facing or not. I'll just give a few examples. The idea that loyalty programs used to be very much driven by like points and people were like, "Oh, everybody likes them because you get more points." That is not what's driving them.
The brands have come to realize that the functionality within the loyalty program comes to their app where they have like mobile check in, and keyless entry, and choose your own room or some of these other functions. The only way you get to use those is when you're a loyalty member and you make your booking through the app or through a direct channel. That's good for the owners, it's good for the brand, it's good for the consumer.
And they get this functionality, in a COVID world, it really is helpful because we're having a contact list experience. But COVID or not, we've been moving in the direction of using more data and tech, and the consumers are becoming much more data and tech savvy. So they're expecting it, all of the younger population, the X, and the millennials, and everybody else who's been digital natives, they're expecting that sort of thing.
So with or without COVID, there's definitely a move to using data and technology. On the cost side of the equation, in trying to say, "COVID is now dealing this blow to the industry. We will not come back and be the same." There are good things in that. And the good thing is everybody is reevaluating their structure. So just on the commercial side of the business where generating revenue is what it's all about, there used to be these big silos, and big teams, and the brands had hundreds of sellers selling group business.
There were silos of revenue management, and a silo for group sales, and a silo for business transient, and a silo for digital. Now, they're creating commercial umbrellas and they're consolidating, and they're becoming much more efficient in the way they go about getting their business. This will have potentially permanent changes and reductions to payroll, for example, within sales and marketing.
So I could see 10 to 20% reduction in payroll as a result of this consolidation, this move to being more efficient. Because data and technology can enable the hotels to know more about what's happening in their market so that you can have one person that's overseeing the activity of 20 hotels instead of 10, because they have access to algorithms, we generate optimal business mix for a hotel.
That used to be something someone had to figure out on their own. If that's served up to them, they don't have do any of the analysis, they just have to execute. So I think we're going to have, and this is all positive, and this was happening without COVID. I just think it will be accelerated with COVID. So whether it's behind the scenes efficiencies on the payroll side, or it's guest-facing with things like the apps that will enable the consumer to be a little bit more self-service and control their experience more.
Or it's just the data and technology to operate the business and figure out what business to go after, I think that there's plenty of other data within operations to reduce labor costs. There's robotics that's starting to pick up. Robotics right now for cleaning or for delivering things around the hotel to the guests so that you don't have to interact with another person.
So I think for now it's going to be driven by COVID but I think overtime, these things would change anyway, and I just think they're going to be accelerated. And I think the move to data and technology is a good thing. It doesn't mean we're not going to have guest interaction or it's going to take away the essence of hospitality. We're going to retain that, we're just going to have data and technology supporting it in a way that makes us smarter and more efficient and able to operate more effectively.
Deborah Friedland:Thank you. We actually only have a little less than four minutes, so what I'd like to do is just turn to each panelist and I'm going to start. But just quickly, words of advice, predictions just to close for our audience with respect to getting through this and how to just survive. For me, I'm telling my clients to really be tremendously focused on cost containment from even the minuscule items.
Really just price out everything, and cut costs, and watch staffing. But also on the other side too, to get out there, market and aggressively try to gain market share and push on both fronts. It's hard to do when you're so focused on just getting through the day and the cash burn. But it's essential to making it out from this very distressed period and being a survivor.
Gary, I'll turn it to you quickly. What's your two sense on how to advise and how to get through it and you get to the other side?
Gary Thompson:Let me go back to insurance. A lot of you are renewing your insurance programs right about now or in the second half of the year, so be careful on that front. Insurers are going to try to increase rates, restrict coverage with new virus exclusions. They're not paying any claims on the COVID side. They're the real winners here right now, but it's something, working with your risk manager, if you have one and your broker.
It's a very delicate process right now, more so than any other year I've ever seen. This isn't going to be a routine renewal process for anybody. If you do have insurance claims, notice them. And my final advice under all your agreements, learn agreements, management agreements, franchise agreements, read them. There could be notice provisions that have to be sent to preserve certain rights just in case you need them in the future.
So just a big step back and a study of all those documents and anything you might need to do.
Deborah Friedland:Thanks Gary. Edy?
Edy Gross:We see light at the end of the tunnel, the hotel markets will recover. It's going to be a very uneven recovery. Clearly this was the worst hotel downturn that probably anyone has seen with nearly the worldwide hospitality industry coming to a halt and then shutting the doors. But things will change and will improve, hotels will come back to live. So from a performance standpoint, hotels will go back to accommodating guests. Will take time in some markets more than others.
We definitely see some markets being very efficient as it pertains to lower labor costs or access to drive to travelers. So we see again, positive on certain geographical locations relative to other traditional strong markets. On the capital market side, borrowers will continue to work with lenders, and as there is more certainty about the capital structure, lenders will jump back into the game.
And actually over the past couple of weeks, some lenders are starting to become more active in lending. And once the lenders are alive and present, sales activity will recover and pick up. So it's just a matter of time, without consumer confidence in traveling, it's just uneven to say when will it happen. And now that we have been on the road and seeing some of the hotel projects, we can see that some markets are recovering much faster than others.
So it's not a blanket statement to say, three to four years out, it could be as little as 12 months for certain markets, and it could be four years for certain other markets.
Cindy Estis Green: I have two quick comments. Don't cut rates. You'll cut rates in one hour and you'll spend 10 years trying to recover it. Know your demand and the profile of the demand because you can't afford to bark up the wrong tree. When you consider your revenue, just know there are serious costs associated with it and you have to consider the costs, not just the revenue when you're going after it.
So don't think that you have to go after every single thing in your market. Consumers are channel agnostic and you should go after the business that is most profitable to you. There you go.
Deborah Friedland:Thank you everybody. Again, I appreciate your time, your preparation. And to the audience, thank you for joining us today. I know I'm going to hand it over to Lexi. We have a breakout session and whatnot, but truly appreciate everybody's time. Thank you.