With STR and Tourism Economics predicting that recovery in hotel demand to pre-pandemic levels is 11 quarters away, and most industry watchers forecasting that average occupancy/rate won’t rebound fully until 2022 (optimistically) or 2023, hoteliers have to move from macro to micro strategies to manage cash burn before they flame out.
“My mom used say, ‘Look after the pennies and the dollars will look after themselves,’” says Matthew Arrants, executive vice president, Pinnacle Advisory Group, Boston, Massachusetts. “We are in crisis. Everything is on the table. And I mean everything.”
By Contributing Editor Mary Scoviak
The necessity to double down on the details pretty much sums up the best-practice bar for protecting capital during the next phase of COVID-19-related distress. Take the reopen/stay closed decision. While the numbers have to work in the context of the individual property, its market, demand sector, brand, lender, team and local, state and national guidance, the pop-up storms spawned by the pandemic are adding in new radicals in the revenue/cost equation. It’s hard to justify how big the opening cash outlay will be when there’s no clear indicator for demand growth and no certainty on what the pandemic will impact from one day to the next.
Unpleasant surprises such as Key West, Florida’s, decision to close bars on the island after the recent COVID-19 spike in that state are always a possibility. More of a certainty will be cash-consuming regulations such the Healthy Buildings Ordinance being voted on July 7 in San Francisco, which could drive up labor and cleaning costs. Pebblebrook Hotel Trust estimates the measure would increase the required occupancy level needed to reopen from 10% up to 35% or 40%.
Daniel Fay, founder and chairman, Commonwealth Hotels, Covington, Kentucky, cites data that indicates new sanitation measures generally will add US$1.50 to US$7 per room. “This is the new normal as an operating expense,” he says. And it’s one of the few costs that can’t be value-engineered.
One thing that’s not changing: labor costs. “Unfortunately, the biggest savings today is in labor,” Fay says. “With low occupancies, there is not a need for all of our associates.”
Tom Luersen, president, CoralTree Hospitality, Greenwood Village, Colorado, says hoteliers will have to be proactive to control their labor expenses. Leveraging limited staff to cover a number of areas is step one. Flexible hours is another option for linking staffing costs with revenue from sold room nights.
“The biggest mistakes now are the decisions that are not being made,” he says. “Hoteliers have to be willing to reduce fixed costs or overhead labor versus simply adjusting variable payroll.”
Labor may be the big-cash line item, but it’s not the only place to save. Luersen says companies lost money on “premature” mass marketing campaigns launched before people were ready to travel or book. Davy Parsons, senior manager, BKD CPAs & Advisors, Nashville, Tennessee, sees opportunities to improve the revenue/expense balance by taking advantage of 90-day windows for accounts payable, rather than paying them ASAP to get the bill off the books. He also suggests working with vendors to shift from volume ordering to smaller orders delivered twice weekly.
“It may be slightly more expensive per item, but it means you can match your inventory with quick changes in demand and avoid large cash outlays for volume orders,” he says.
The reality is that the pandemic could shatter any modeling any day. Hoteliers looking to reopen have to have balance sheets that withstand a W-shaped recovery. “The question is can you sustain 12 to 18 months with high volatility? To what extent is your downside protected? And, can you defer or withdraw if everything doesn’t play out as you’ve planned?” says James Berkeley, managing director, Ellice Consulting, London.
For some, closure may be the best option. “Run the analysis of the carry cost assuming no labor, minimal utilities and only core building components operational,” says Kim Gauthier, senior vice president, HotelAVE, Providence, Rhode Island. “Certain hotels may be better off being closed until sometime next year or even closing permanently.”
Controlling cash burn isn’t just about whether to reopen; it’s about how. “We can no longer look at an asset as the sum of its parts,” says Chad Sorensen, managing director and COO, CHMWarnick, Beverly, Massachusetts. Each operations function has to be evaluated on its specific open/close merits.
“For example, truly understanding all of the expenses related to opening a restaurant or outlet is critical. Sounds easy, but you cannot truly determine the profitability of an F&B outlet without factoring in A&G and other expenses that do not show up on a hotel’s F&B departmental P&L. Break-even analyses for all business units within the hotel are must-haves to determine how and when to bring each back online for sustainable profitability.”
To optimize cash management, that same scrutiny should be applied to every outlay. “Sit down and read your management contract, licensing agreements, credit agreement — every contract in your drawer. Familiarize yourself with the stated obligations — from recourse documentation to comfort agreements,” says Alan Tantleff, senior managing director, FTI Consulting, New York City.
Not only will this painstaking review define exactly what’s required to be compliant. It’s also a vital part of the liquidity strategy. Case in point: Many hoteliers are considering using the leverage of COVID-19 to reflag or de-flag as a means of lowering costs or getting better terms. But it may not be as simple as pulling out and paying termination penalties. Tantleff points out that termination could be viewed as default on a loan if the terms reflected the inclusion of a particular brand. Other considerations include whether there was a personal guarantor and whether there was key money.
Negotiations with current or newly adopted brands should go beyond fees to cash management issues such as reserves and operations support.
“Work with franchisors, managers and lenders to reallocate funds in existing reserves to operating costs and and defer capital expenses/projects and brand standard compliance costs,” says Clifford Risman, partner, Foley & Lardner, Dallas, Texas. BKD’s Parsons suggests asking to free up FF&E reserves to invest in sanitation and hygiene, for example.
Ingo Schweder, founder and CEO, GOCO Hospitality, Bangkok, says, “FF&E reserves should be put back into the pot. Bonus schemes for employees need to be delayed/scrapped. Every invoice needs to be evaluated. No cap ex spending should be done unless it is directly linked to a revenue and profit source.”