A recent study conducted on the 7th September by the Hospitality Asset Managers Association (HAMA), has shown that one third of hotels in the U.S. could go under as a result of the coronavirus pandemic and the financial difficulties it has caused.
1. Financial struggles
According to the study 103 hotels, 33% of owners said they expect to have to return the keys to their lender or face a forced sale situation. Larry Trabulsi, HAMA board member and executive vice president of asset management at CHMWarnick, a Massachusetts-based hotel asset management company, explained, ‘this would be for a doomsday scenario where the owner can’t come to terms with the lender… The 33% number was higher than we thought we were going to see’.
The study showed that lender relations have become a top stressor for hotel owners, with 62% of hoteliers stating they were worried about capital stack issues, in other words financing arrangements with a network of lenders and investors. Only 32% of hoteliers said that they felt their lenders were being flexible, with more than half saying that they expected any lender flexibility to stop by the end of 2020.
Trabulsi also explained, ‘there may be multiple levels of lenders’ which means that ‘stress builds when you’re having numerous discussions with all the parties involved and weighing the priorities of investors who will get paid back first.’ Best Western CEO David Kong also explained that, ‘for the hotel industry, we have such heavy investment in the land, the building, the furniture, fixtures, equipment — our debt share there is far greater [compared to other businesses]’.
The study also showed that few hotels are immune to the impact of the pandemic on the travel and hospitality sectors. Less than 3% of hotels are meeting their budgeted revenue per available room for the year, and 78% of hotels are losing at least half of their revenue, whilst most hoteliers expect a 45%-60% revenue decline in 2021 compared to 2019. ‘When COVID first impacted hotels back in March, no one knew how long it would last. Initial discussions with lenders took one to three quarters of impact into account and arranged for forbearance or reduced interest payments’ stated Trabulsi. ‘It’s evident now as we’re coming into the fourth quarter and 2021 that the impact of COVID is going to last significantly longer.’
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2. Special servicing collectors
Another shocking statistic is that according to Trepp, a New York-based data and analytics company, in September an all-time high of 26% of hotel loans were handed over to special servicing collectors. Special servicers are involved when commercial lenders decide to stop working with borrowers, and sell defaulted loans to these special servicers. These then package the loans with hundreds of others and underwrite them into a trust, making repayment schedules significantly less accommodating. ‘In an ideal situation, the hotel owner has a direct loan with a lender who they have a relationship with, so the likelihood of working things out is significantly higher [than with a special servicer]’, explained Trabulsi.
Travel came to a standstill during the coronavirus pandemic lockdowns and has been slow to recover, causing a $415 billion loss recorded for the U.S. travel economy since March. According to the U.S. Travel Association, a Washington D.C.-based travel advocacy nonprofit, travel spending was still 41% lower than last year for the week ending October 10, and lows reached in March and April were at an 88% loss compared to the same period in 2019.
It is difficult to estimate a recovery time, and as Trabulsi pointed out, ‘there are a lot of factors at play, like the health of the economy… It comes down to personal preferences — when will people be comfortable jumping on a plane and staying in a hotel’.
However, according to the study, hotel owners also believe that the industry isn’t doomed forever, with 40% of hoteliers participating in the study saying hospitality would recover by 2023, and 37% predicting recovery by 2024. Although no respondents expected the market to recover by 2021. Kong reinforced this, as he stated, ‘the long-term prospects for the hotel industry is excellent. People always want to travel’ and ‘there’s a tremendous amount of pent-up demand. We just need to get over the virus’.
Prospects in large cities may take longer to bounce back, for example hotels in Houston, Chicago and New York were in the most trouble in September, with delinquency rates up to 72.3%, 54.9% and 31.5%, respectively, year-over-year, according to Trepp. ‘Some markets may come back sooner — drive-to locations have held up relatively well and may recover to pre-COVID revenue levels earlier. But large urban convention hotels may lag a bit’, concluded Trabulsi.