10 Strategies for Hotel Owners/Operators to Navigate the Recovery

May 04, 2021

This article originally appeared in Turnaround Management Association.

By Deborah Friedland

Hospitality was one of the first industries to be impacted by the pandemic, and it will likely be one of the last to recover. With business and international travel all but suspended and leisure travel significantly restricted, the industry in 2020 experienced its worst performance since the Great Depression.

While occupancy has improved from March 2020 levels, it is far from 2019 performance levels. Markets that were particularly negatively impacted by the lack of business and group travel include Orlando, Miami, San Francisco, Chicago, and New York. As of December 2020, 18 hotel properties consisting of 5,976 rooms in Manhattan were reported permanently closed.

With tens of thousands of rooms temporarily closed, fourth quarter revenue per available room (RevPAR) experienced a year-over-year decline of 85.2%. On the other hand, hotels in extended stay and vacation rentals located in drive-to markets have outperformed—especially those properties located proximate to national parks and beaches.

The American Hotel and Lodging Association (AHLA) predicts that business travel will be down 85% through April 2021 compared to 2019 and then will begin ticking up only slightly. Large events and international travel are expected to recover in Q3 2021. Leisure travel is expected to recover more rapidly. SmithTravel Research forecasts full recovery of demand across the U.S. for 2023, while RevPAR recovery is projected for 2024. Occupancy in 2021 is projected to increase 16.6%, followed by a 24.2% upturn for 2022.

Understandably, most owners/operators have been in emergency response mode, doing what they can to attract demand, cut costs, and seek loan forbearance. But now, longer-term strategies that position hotels for profitability when demand does return must be implemented.

With vaccine distribution increasing across the U.S. and internationally, so is consumers’ willingness to travel. Given this economic environment, here are short- and long-term strategies hotel owners/operators should consider to enhance their operating performance and cash flow.

1. Communicate Necessary Information

Information is power. Whether a bank, landlord, or vendor seeking payment, understanding where a borrower, tenant, or customer is financially is crucial. More communication is never too much. Being responsive and providing answers, good or bad, is better than not doing so. Open, responsive communications produce understanding, and, most importantly, generate trust.

2. Understand Legal Obligations

Hotel owners/operators should reread all agreements, including management, franchise, loan, partnership, leases, and insurance policies. They should know their rights and obligations, notification and reporting requirements, definitions of default and remedies, performance thresholds, and business interruption coverage. An incomplete understanding of their legal situation may mitigate their ability to develop and implement successful business strategies.

While reviewing all contracts and documents, owners/operators should gather lease and contract abstracts and note termination dates. They should review pricing on all contracts and leases and note those that are above market to identify prime targets for renegotiation.

3. Monitor Cash

While projecting revenue in this unpredictable environment is difficult, owners/operators should create a cash flow model with alternative scenarios of revenue and expense at least on a monthly basis for three years. If possible, the first 10-20 weeks of the cash flow should be modeled weekly.

The cash flow estimates should be thoroughly documented and based on assumptions of occupancy, room rates, food and beverage spending, and departmental and undistributed operating costs. This model allows investors and management to monitor the business and be prepared for discussions with debt and equity capital providers. The model should be refreshed in real time as market information is received and hotel performance changes.

4. Be Selective in Cost Cutting

Most owners/operators have already raced to reduce operating expenses at their hotels. It is now time to step back and determine whether the reductions were optimally allocated. The key is not to cut back at the expense of potential revenue as demand improves.

Owners/operators should identify those expense items that are behind the scenes and will not impact the guest experience. Beyond typical operating costs, they should look into longer-term savings, such as property tax appeals and cost segregation studies, if appropriate. While there is insufficient price discovery today to determine value, there is little doubt that, for now, most hotel values have declined.

Owners/operators should consult with an advisor to ensure that they are taking advantage of all federal relief programs for which they are eligible, including Paycheck Protection Program (PPP) loans, employee tax credits, and changes to the tax laws that were designed to provide financial relief. They also should renegotiate terms with their vendors, service providers, and insurance companies.

While cutting operating costs is imperative to surviving the downturn, owners/operators should be selective when evaluating their marketing budgets. They should carefully evaluate specific costs with an eye toward return on investment (ROI) as well as a return to market, considering the projected increased demand outlined earlier.

Owners/operators should look at professional memberships, subscriptions, and event spending before cutting the sales team, especially if team members are productive. Now is the time to maintain and even gain market share by actively soliciting corporate and group accounts while competitors are distracted. Owners/operators should encourage their sales team to be creative by using social media and other low-cost outreach.

5. Embrace Technology

While the hospitality industry has traditionally been slow to adapt to technology trends, one positive impact of the pandemic was a willingness by hotels to explore new technologies and adapt to the new contactless environment. Hotels that made the investment in technology prior to the pandemic were rewarded.

New developments in payment methodology, voice control, artificial intelligence, virtual reality, and cybersecurity are more prevalent. While balancing technological interfaces with personal experiences is important, hotel owners/operators should adopt a more creative, innovative approach to how technology is used in individual hotels and companies. Keeping up with the latest hotel technology trends is of the utmost importance, not only to improve the customer experience but also to improve internal processes.

6. Restructure Debt

To get through the liquidity crunch, many owners/operators have already requested loan forbearance from their lenders. That temporary exemption may soon be expiring. Given the distressed state of the hospitality sector, it is extremely difficult to refinance with a new lender, even for hotels with positive cash flow. Modifying current debt is more likely to be successful.

Owners/operators should continue to have discussions with their current lender for a permanent restructuring of their hotel’s financings. They should have a well-thought-out proposal that includes a three-year cash flow model with concrete profit optimization ideas. They should also be prepared to contribute additional equity to demonstrate their commitment.

Most loans already have low interest rates, so there may not be much room to negotiate on that front. Depending on the circumstances, owners/operators should focus instead on extending maturity with a lower overall payment, being mindful of the covenants in their original agreement that might be tripped, even with new loan terms. The accounting and tax consequences of any loan modification should also be considered.

7. Monitor Internal Controls and Enforce Standard Operating Procedures

The most dangerous business risks are those one never sees coming. Financial, operational, and reputational risk lies around every corner—from the unforeseen, such as being in noncompliance with laws and regulations, to the intentional, such as employee misconduct and fraud.

Hotels need to identify and manage risk to minimize exposure and its consequences—from reputation erosion to legal consequences. Access to critical and insightful expertise is crucial in today’s environment. If unexplained financial and accounting anomalies, white-collar crime, improper conduct, contractual disputes, and losses resulting from unplanned events occur, they cannot be ignored. Owners/operators should consult with an advisor who specializes in the hospitality industry to get help when faced with a whistleblower event, investigation, regulatory inquiry, or litigation.

8. Find New Capital

A prolonged lack of liquidity pending the restoration of demand has forced many hotel owners/operators to seek additional capital. The good news: There is abundant capital among real estate investors for the right deal. The not-so-good news: Such capital is typically expensive, and negotiating the property’s value is difficult without comparable sales in the market.

Sources of capital will vary greatly depending on circumstances, including market, chain scale, and the current level of distress and recovery time. While the process may be difficult, it allows an owner/operator to emerge with the financial strength to compete in the new market reality.

9. Rethink Property Improvement Plans (PIPs)

Owners/operators should conserve their cash and consider undertaking only those projects that are mandatory to maintain good standing for licenses and agreements and those that provide an ROI. They should negotiate with the brand on the timing and scope of brand-mandated projects and solicit revised bids from their providers. With the decline of new hotel development projects and capital improvement projects being delayed, contractors and vendors might be more inclined to reduce their costs.

Owners/operators should make sure that their current PIP is reflective of the post-COVID world with respect to cleanliness, social distancing, and an emphasis on wellness. Common areas designed for flexibility and multiple uses, high-performance ventilation systems and antimicrobial finishes to heighten guests' wellbeing and safety, and more reliance on self-serve amenities will all become essential.

Hospitality contractors are offering coronavirus retrofit packages for various levels of hotels. These packages might include flooring in hallways and public spaces, replacing countertops and built-ins with antimicrobial and antibacterial finishes, and adding high-tech filters to HVAC systems. Materials typically seen in healthcare facilities and commercial kitchens—stainless steel, porcelain, solid surfaces, glass—will become more prevalent in hotels. According to the AHLA, cleanliness is a major factor in choosing a hotel in the wake of COVID-19. An owner/operator shouldn’t be shy about publicizing the hotel’s enhanced cleanliness and safety protocols.

10. Repurpose Real Estate

For a variety of reasons, some hotels will not recover, and alternative strategies must be considered. Hotels are most easily converted to multifamily, senior housing, and student housing. In many locations, municipalities are relaxing zoning restrictions on permitted uses of commercial properties in recognition of changing consumer trends.

For example, in January 2021, Governor Andrew Cuomo proposed a temporary rule to amend the New York State Multiple Dwelling Law (MDL) applicable to lawful building permits issued prior to December 31, 2026, with a stated intent to “authorize flexibility in zoning to address high commercial vacancy rates and underutilized hotel properties located within specified areas in New York City, particularly in response to the COVID-19 pandemic.”

Buildings seeking to convert to residential use under the amendment must be located in certain areas of New York City. To qualify, hotels must have fewer than 150 rooms and can be located in any borough outside of Manhattan or in an area of Manhattan roughly between Chambers Street and 110th Street. Office building conversions would need to be located in the area of Manhattan between Ninth Avenue, 60th Street, Park Avenue, and 14th Street.

An owner/operator contemplating a conversion to another use should consider conducting a highest and best use study that evaluates the location and physical attributes of the existing structure, supply of and demand for the prospective alternative property types in the local market, and the return on cost associated with a significant renovation and repositioning of the property. Converting a high-cap-rate, difficult-to-finance property into a low-cap-rate, easy-to-finance property may prove a good arbitrage for owners/operators with the know-how, flexibility, and capital to implement this strategy.

Conclusion

Given consensus estimates that the industry will not return to 2019 levels for another two to three years, hotel owners/operators must seek longer-term solutions to maintain a viable business model. Moving forward, new patterns of business and leisure travel will evolve, and the hospitality market must be nimble and creative to capture pent-up demand for travel and experiences.

Analyzing the specific circumstances of each property is essential to develop a customized and workable strategy that will best position the asset for the start of a new cycle and the new normal. Working with an asset manager or hospitality consultant who has operational experience but does not get overly involved in day-to-day operations of the property can work with hotel management to increase profitability and maximize the value of the asset.

According to the U.S. Bureau of Economic Analysis, the U.S. personal savings rate as of January 2021 was at 20.5% as compared to 7.6% at same time last year. Many have put off vacations and business trips this past year. The significant amount of pent-up demand for travel both by consumers and by businesses that want to get in front of their clients (combined with the potential additional savings) may mean the return to travel happens sooner and is stronger than most predict.

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.