Though the COVID-19 pandemic has had catastrophic effects on the hotel industry, we are now seeing some glimmers of hope. Today, there’s a rising number of vaccinations across the country, better employment numbers and a stock market at or near its all-time high. Furthermore, airlines are reporting a rush of bookings, previously shuttered hotels are re-opening and a recent report from STR indicates that the U.S. hotel industry is posting its highest demand and occupancy levels since the beginning of the pandemic.
Contributed by Cliff Risman, co-chair Hospitality & Leisure Industry Team, Foley & Lardner LLP, Dallas, Texas
It appears, however, that recovery is not being experienced equally across industry segments and that the cash drain of the last year will have lasting effects.
Unique roads to recover
In the luxury and ultra-luxury segments, assets are starting to trade at near pre-pandemic pricing levels. As has been widely reported, the extended-stay segment of the industry continues to achieve better rate and occupancy levels than other industry segments, in comparison to pre-pandemic levels.
All of that having been said, what of convention and meeting hotels and resorts? When will large groups again convene in person? It appears that even with the accelerating levels of vaccinations and the lifting of governmental restrictions on large gatherings, recovery for this segment will take time. After all, these types of large events require long lead times to plan and host, and there will need to be a re-norming of corporate travel and social gathering policies. Corporate leaders are surely anxious to get their teams in the same room to reconnect, but this will take time.
Forbearance, capital reserves, bankruptcy, receivership
What about all the hotels for which lenders provided forbearance? Sooner or later, their owners will face the end of forbearance and need to catch up on deferred interest payments or, at a minimum, be required to again start making scheduled debt service payments.
Many owners – with the blessing of their brands and managers – stopped funding reserves, put capital projects on hold, and dipped into FF&E reserves for other purposes, which brings to the surface yet another headache that owners will soon feel. At some point, those capital projects will be necessary, and the brands and manager will require the reserve accounts to be replenished.
Surprisingly, while there was some uptick in the number of both receivership and bankruptcy filings, the actual number of filings was not the predicted massive uptick. One likely reason for this is the amount of CMBS debt in the industry. Many principals who had signed springing recourse guaranties, as is generally required for a CMBS loan, were effectively precluded from filing bankruptcy.
Although some foreclosures did occur, they also did not occur at the predicted frequency. Absent the rare situation of a bad actor or malfeasance, lenders – and in the case of the CMBS debt, servicers – were reluctant to take hotel assets in to REO.
One can only assume that having learned from previous downturns, kicking the can down the road and continuing to extend forbearance or exiting via a discounted loan sale were each more palatable lender responses than foreclosure. This was especially true since the pandemic is not a situation where a lender could reposition, change managers or reflag an asset to achieve better results.
As to the large pools of capital that have been raised to take advantage of distressed pricing, some has been spent purchasing and recapitalizing hotels and hotel portfolios as well as purchasing discounted hotel loans, but certainly not as much as had been predicted.
Many suggest that this lower-than-expected transaction volume has been the result of an inability to value assets and a corresponding mismatch between seller and buyer expectations, as well as some level of additional liquidity generated by cash infusions from PPP loans and other one-time government stimulus.
Not all will survive
Where does all of this leave the industry? I suspect that luxury and, most certainly, ultra-luxury assets, will bounce back to pre-pandemic values faster than other asset classes. Meanwhile, drive to beach, mountain and other destination assets will lead the way and urban assets will lag. The extended-stay segment will likely continue to out-perform other industry segments. Large convention and meeting hotels will undoubtedly be the last segment to recover with significant pain, defaults, receiverships and some foreclosures, deeds in lieu of foreclosure and short sales yet to come.
As to all other industry segments: Absent another COVID 19 spike, the long climb to profitability, covering debt service and pre-pandemic valuations will continue. Those with access to sufficient liquidity will likely survive the journey. Many assets that have thus far managed to survive may not return to pre-pandemic levels of profitability nor survive. And, as is almost always the case, there will be transactions.
Those who have access to capital or staying power will, in the long run, generate above-market returns, while those who run out of cash will recognize significant losses or not survive at all.