HOTELS Editor in Chief Jeff Weinstein had a sobering conversation with a prominent U.S.-based owner-operator on Thursday morning about how the novel coronavirus has so swiftly cut occupancies and spiked uncertainty about when business will stabilize.
“Going back to SARS, 9/11, the great financial crisis, even the Russian ruble crisis, I’ve just never seen demand evaporate at the scale and speed that it has,” the shell-shocked executive said. “And not only have I not seen it, I don’t think I ever conceived of the depth and breadth of what we’re seeing… This is a true black swan.” The initial response: Dust off the crisis playbook.
HOTELS: What’s your take on what’s happening?
It happened really, really, really fast. And so I can only hope that that over-correction, that kind of conservatism for the sake of precaution and safety – when we do get a relatively clear signal, or a stabilization signal from the powers that be, I would imagine that recovery is fairly steep. But then that also depends on the magnitude of the economic crisis that this ends up scaring up… Depending on those first-quarter estimates, I think you’re going to start seeing layoffs if this lasts much longer, because people are having liquidity issues. You’ve got to make payroll.
(It may have an impact on unemployment numbers.) That concerns me about any prospects of recovery in the summer, but I tend to think you are going to see people travel, but they’ll do it more frugally. Driving to vacations and shorter vacations, even urban markets, might be something that helps in the recovery.
H: What can you tell me about what you’re doing?
We’ve got a lot of non-revenue generating, non-essential staff at this point, (and that) is being reduced or in the process of it. We’ve furloughed doormen, we’ve furloughed desk agents, consolidated shifts. We’ve got management taking more shifts, you’ve got middle-management coordinator type positions being looked at very closely, and in most cases eliminated. And then just from a programming standpoint, a lot of the restaurants and bars have gone to very limited hours with limited all-day menus. In some cases at select-service hotels, whatever food service there is is limited to breakfast only, with a reduction in force with restaurant and bars and catering as well.
And a hiring freeze, no new hiring. We are suspending most non-essential capex … (We are) suspending for the time being e-commerce and marketing spend until we know where to allocate that. Because right now you’d be selling into a no-demand market, because we’re just not seeing pace pick up. We see some markets where you’re seeing pace picking up, we have positive bookings coming in, but the cancellations more than offset it. The positive pace is not enough to hold up these occupancies. So it’s a typical demand shock scenario.
H: What’s your outlook on RevPAR?
(Some brands) are saying that they could be down 30% for the year on top line, which for those owners, that could very well be a two-X hit on the bottom line. If you’re wiping out 60% of the EBITDA that’s a real problem. I don’t foresee it being that negative for the year on an annualized basis, but I don’t think that a (decrease of 20% in RevPAR for the) year is out of the realm of possibility. But I imagine that if we end up somewhere, (down 15% to 20%) for the year, the upside of that range will be maybe (down 10%). So then I think for some of the higher operating leverage companies, that’s probably going to be a 2-X, 2 and a half X down on EBITDA. We would expect that we’d be able to stem the loss of EBITDA to a 1.5-X on whatever the top line reduction is.
H: How are you talking to your best customers?
All those folks are being contacted and talked to on a one-on-one basis by whoever’s managing that relationship, to see what their outlook is, etc. And that’s all being then filtered back into our overall forecast… But it takes the operators a couple of days to do a forecast, and when you’ve got the volatility we’re having and you’re seeing the complete slide in business on a day-to-day basis, that’s unclear. So we do continue to run forecast periodically, once a week.
H: Anything internally that you’re telling corporate or property?
I had given a town hall to our above property level teams, not more than five months ago, saying that I felt that the economy wasn’t really as strong as the headlines would have you believe. And I said, in our sector, we’ve been seeing the deceleration since the second quarter. It’s going to be some tough sledding ahead as it is, and here we are. What I’m telling them now, and what I told them then, is that the bad news is it won’t be business as usual, and it gets really hard before it gets better. On the other hand, we’ve got some battle-tested veterans here who know how to get through these kind of events, and how to put things back together, so follow their lead.
I’ve been talking (to leadership) one-on-one on the phone, in person constantly, and they all seem up to the task. And so I’m just trying to support leadership… I think a lot of companies are going to have layoffs too, at the corporate and above-property level, I fear, and that may happen here as well. And I tell them that it’s just important right now to keep our noses down. The way to get through this is just putting one step in front of the other. We’re clearly not going to do anything to risk anyone’s health and safety, but at a time like this we need even more accountability than we would need on in the ordinary course.
(It’s) just trying to keep people motivated because I think a lot of people have gone wide-eyed, and what the response should be is still unclear for many people. We started doing cost cuts in the fourth quarter of last year because I was feeling very uneasy about this year. And so they’ve seen a little bit of it, but now it’s all getting ramped up because we’re getting into tier-three level cuts, which is our highest level of contingency planning. And some of the younger folks weren’t in decision-making roles during the last crisis, so they’re going through this for the first time as leaders. And I think those folks probably need a little bit more guidance and support through it in order to make sure that they remain up to the task.
H: With all this pain, do you see any opportunity?
I don’t see it yet. I think we need another few months for things to settle down. But certainly, with interest rates that are probably going to come down even lower, I think that’s good news in the recovery, right? Because less costly debt allows you to be better leveraged to the recovery. You can have more flow-through when things start coming back if the debt costs are lower. And that’s good news. I think it also will help the values of hotel assets snap back more quickly. It can be a better cost of capital for acquirers, and so I think those could be positive on the way out, but it’s going to be interesting to see what it costs and what the collateral damage is just getting through the next two quarters. And then I think we’re going to have a better place to see what things look like.