299 | Conserve Cash, Save the Hotel: What asset managers are doing to survive the long COVID winter

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Since March 20, the early days of the coronavirus crisis, more than 1,700 hotels in the U.S. reportedly have closed, most of them temporarily. For the other 55,000 properties that have remained open, owners, operators and advisers have been decisive in implementing strategies that have cut costs and conserved cash. Long Live Lodging interviewed two asset managers who share what they’re doing to keep the industry alive as a vaccine offers hope for recovery in 2021.

With vaccine rollout amid virus surge, lodging industry positions for recovery

‘The mandate from the ownership is: “If I can lose a half a million a month being closed, I better not lose more than that by being open.” And so that sort of became a true benchmark…’ – Larry Trabulsi, CHMWarnick

By mid-March Robert Cole knew the U.S. hotel industry was in for a year so “ugly” it would defy all other downturns he had witnessed in his storied career.

However, at the end of the third quarter, Hospitality Ventures Management Group, the company Cole founded in 2001, announced its portfolio of 50 owned and managed hotels had outperformed the overall industry amid the coronavirus crisis. It cut operating costs by $16 a room compared to the industry average and generated a gross operating profit of nearly $10 a room over the industry norm.

Cole, chief executive at HVMG, credited his company’s decisive actions in the early stages of the pandemic. He also acknowledges the crisis is far from over, especially as the rate of COVID-19 infections has surged over the past few weeks.

The coronavirus crisis has tested the mettle of Cole and his cohorts, veterans of a hospitality industry that looks nothing like it did at the beginning of this year.

As 2021 emerges with a vaccine and more federal relief, Long Live Lodging interviewed Cole and Larry Trabulsi, vice president of asset management at CHMWarnick, about the strategies they deployed to keep hotels open and operating over the past nine months.

CONSERVE CASH, SAVE THE HOTEL: Episode 299 of Lodging Leaders podcast explores what owners, operators and asset managers are doing to survive the long COVID winter.

In the beginning

“I still remember to this day, it was a Sunday night and the second week of March where we had a team meeting with my executive team and we unfortunately saw a lot of the writing on the wall,” Cole said.

The HVMG team knew “this was going to be very ugly; business was going to contract in an unprecedented fashion,” he said.

HVMG’s headquarters is in Atlanta, Georgia. As it strategized how to save its business, Larry Trabulsi and others at CHMWarnick, an asset manager in Beverly, Massachusetts, mobilized to advise its clients on how to navigate through the COVID-19 storm.

Today, Trabulsi and his cohorts are grappling with the reality that recovery is a distant port. “I think the duration (of the crisis) is the big wild card here,” he said.

Trabulsi recalls attending the Americas Lodging Investment Summit in Los Angeles in late January and hearing a little about a new viral outbreak in China. “No one really knew what it was and a few people in the airports were wearing masks, but that was about it,” he said.

Some people wondered if the illness would mimic the SARS outbreak in 2010. Whatever it was, most people figured it would impact a few markets for about two months.

“Fast forward to mid-March – absolute devastation,” Trabulsi said. “And even from mid-March, it was, ‘This could be a one quarter, two quarters type of downturn, but by the second half of the year, we should be trending back. And obviously that’s not where we are.”

While CHMWarnick quickly created a 90-day business plan to guide its clients at the start of the crisis, HVMG leadership instituted what Cole acknowledges as draconian cost-cutting measures at the hotels it owns and manages.

The first order of business? “Conserve cash,” Cole said.

HVMG looked immediately to its payroll. Salaried positions at hotels were converted to hourly to give the company flexibility with labor costs as employees’ worked according to the pace of business at each hotel.

Corporate executives saw their salaries reduced and the company ceased matching 401(k) contributions and stopped other benefits.

HVMG is co-invested in some of the hotels in its portfolio, but for the most part it is a third-party manager of others’ assets. Cole’s team ended or renegotiated contracts with suppliers and service providers.

The overall goal, he said, was to avoid bleeding out by a thousand cuts. The strategic action was decisive, swift and all-encompassing. “We felt it was in everybody’s best interest to get out in front of the curve and to get all the changes implemented in one swoop.

“We focused on things that we could control,” Cole said.

The first phase of survival was to do what it took to “save the patient,” he said.

OCEANFRONT STRATEGY: Hospitality Ventures Management Group manages the Embassy Suites by Hilton Resort St. Augustine Beach, which opened in 2018 in St. Augustine, Florida. Pre-pandemic, the property catered to leisure guests as well as meetings and large social gatherings such as weddings. To generate revenue during the coronavirus crisis, HVMG has repositioned some of its full-service hotels to attract guests who book longer lengths of stay for staycations or to blend leisure with remote work.

Long-Term Crisis

The next phase was to do what was necessary to “stabilize the patient” followed by a recovery plan. “In some cases, we’re still in phase two,” Cole said.

The coronavirus continues to rage throughout the U.S. and the world, even as the release of vaccines have provided a glimpse of recovery.

“I don’t think anybody anticipated that we’d be sitting here still to this day with industry occupancies almost half or in some cases more than half of what they were this time a year ago,” Cole said.

PERSISTENT DOWNTURN: STR reported in early December that average hotel occupancy has decreased as the COVID-19 infection rate surged throughout the U.S.

HVMG’s first phase of business preservation lasted from mid-March to June.

The next step was stabilization as the markets where its hotels are located began to see some business traction.

“When I say traction, I use that on a relative term,” Cole said. “In April or May, we were running low, double-digit occupancy levels of 9, 10, 12 percent. We started seeing a pickup, especially in the leisure destinations where we were gaining occupancy and we would top 50 percent to 60 percent in the summer months.”

Meanwhile, HVMG’s large, full-service properties were seeing occupancies stuck in the 20 percent to 30 percent range. “But it was certainly better than the 9 or 10 percent back in April and May.”

In its second phase, HVMG remained in its cash-preservation mode.

It could not compare revenue or even budget according to the previous year, but it could focus on its RevPAR index or the level of business it was doing compared to its market competitors.

Group business was out. Corporate travel was practically non-existent. So HVMG shifted its marketing to attract leisure travelers and essential workers who needed long-term stay options. It invested time and energy in marketing via online travel agencies or OTAs, channels where these guests typically shop.

HVMG’s portfolio is a mix of premium-branded full-service and select-service hotels, including extended-stay and all-suites. But it also has Courtyard by Marriott hotels that target business travelers. And Fairfield Inn & Suites by Marriott hotels that cater to transient guests. To attract guests who were booking longer lengths of stay, HVMG repositioned its hotels to cater to folks booking staycations or blending work and leisure time.

Through digital marketing that used search engine optimization or SEO to tell a new story to prospective guests, HVMG let it be known its hotels could serve the pandemic-era guest.

“From June through September, based on the latest results we have from (STR), our company ran a rolled-up 26.9 percent house profit margin versus the industry for those four months. Our expenses were about $38 per available room versus the industry of $54. We also had a gross operating profit per available room of just over $14 versus the industry average of $3.77.”

Cole credited his entire team from corporate to the properties for doing what it takes to keep the hotels open and operating at higher-than-normal levels.

The company has reinstituted paid time off and will soon revive its matching 401(k) benefit. In January, salaried employees who shifted to hourly pay schedules will return to their previous compensation status.

The next step is to ease back into business as the nation’s pharmaceutical and health care industry rolls out the COVID-19 vaccine, which Cole and Trabulsi believe is the key to lodging’s recovery.

To Close Or Not To Close

At the start of the pandemic CHMWarnick created a 90-day action plan, part of which included guidance on whether to close a hotel or keep it open.

“Unfortunately, as we’re seeing the number of cases rise, in some cases we’re going back and revisiting actions we did back in March April,” Trabulsi said.

While HVMG worked to keep its hotels open, CHMWarnick oversaw the closure of hotels under its purview. It was not alone.

Of the approximately 57,000 hotels in the U.S., a little more than 1,700 or 5 percent across the entire chain scale have closed since March 20, according to a recent report by Kalibri Labs.

CLOSED HOTELS: Kalibri Labs, an analytics company that serves the hospitality industry, reports regularly on various performance metrics, including the number of hotels that have closed since March 20. Its last update was Dec. 21, when Kalibri, working with Hotel Compete, reported nearly 5 percent or 1,750 of the nation’s 57,000 hotels are closed.

CHMWarnick is an asset management company with oversight of about 70 hotels. Most of those are big-box, full-service properties in the luxury, upper-upscale and upscale segments. It has 15 convention-center hotels.

CHMWarnick’s ultimate responsibility is to maximize the value of an asset for its owners or investors, who include family office, institutional investors, corporations and pension funds.

As hotel management teams laid off employees because of low occupancy, Trabulsi said, the big decision that awaited owners was whether to keep the property open. “Underlying all of that was an open-close analysis of understanding, do we want to keep these hotels open? Yes or no? And that analysis involves multiple facets. Financial was certainly one part of it. We certainly had some clients who were adamant and said, ‘I don’t want to be open; I just don’t want the risk,’” he said.

For the most part, decisions to shutter the assets “skewed primarily toward the financial side of understanding: ‘If we skim back the operations as much as we can, are we better off being open at say 4, 5 or 6 percent occupancy or totally closed?’

“And the results of that varied by hotel and by market, but in general, the decision skewed toward the bigger the hotel. And if it was urban, it was a tougher decision financially to stay open. And so we closed a fair amount of our convention hotels.”

At one point, Trabulsi said, about a third of its 70-hotel portfolio was closed.

Many of them have since reopened and those that remain closed are exploring reopening in the second quarter of next year. “But that’s fluid at this point in time,” he said.

TEMPORARY HOLD: CHMWarnick, a hotel asset manager and business adviser in Beverly, Massachusetts, features on its website as case study involving the Hotel Commonwealth in Boston. The full-service hotel, owned by Boston University, is closed because of the coronavirus pandemic. The messaging on the hotel’s website indicates it plans to reopen in late March.

When it comes to deciding whether to close a hotel, there are several factors to consider.

Trabulsi advises owners and operators identify the business’s fixed costs such as minimal payroll, taxes, insurance and debt payments. Then determine how much revenue the property can generate to keep operating – know your break-even costs.

“For one hotel, which would be closed and then reopened, we know our rock bottom is minus $500,000 a month. And so the mandate from the ownership is: ‘If I can lose a half a million a month being closed, I better not lose more than that by being open.’ And so that sort of became a true benchmark, something we monitor on a weekly and monthly basis.”

On its website CHMWarnick notes it can help hotel owners with several issues related to the coronavirus crisis. Those include navigating new brand standards, negotiating with franchisers over fees and fee deferments and helping owners work through debt payment deferrals with lenders.

After helping owners and managers execute on cash-savings strategies, the company discussed fee reductions or deferrals with third-party managers and the brands. Of particular concern was identifying shared services provided by the brands and the costs associated with those.

Hotel franchisers provide a menu of services to franchisees, including sales, marketing, property management, customer relationship management and revenue management programs.

But most of the franchisers cut their own workforces at the start of pandemic. Therefore their support for owners was significantly reduced.

“We’ve seen probably pretty meaningful reductions in above-property, shared-service expenses for a lot of our hotels, particularly the brand managed side,” he said.

Dealing with lenders is the third prong in CHMWarnick’s crisis management program. Though most lenders were willing to defer mortgage payments for two to three months, the pandemic’s longevity has challenged that decision.

“When everyone thought this would be much further behind us that was a good decision,” Trabulsi said. “It bought you time, it minimized your cash burn for six or seven months. But, unfortunately, the money is running out in a couple of cases for hotels. Now they’ve got to go back and renegotiate with the lenders.”

Many franchisors waived the required FF&E reserves, which freed up cash for owners to pay lenders.

From its unique perch as an asset manager, CHMWarnick can chart the impact the coronavirus pandemic and the subsequent business downturn has had on hotel values.

“We’ve seen a significant loss of value for clients who get their assets of value appraised every year,” Trabulsi said. “For other clients who are long-term owners, it’s just about riding out the storm, and trying to put together a plan in place to make sure we’ve got enough cash to get through, say 2022 or for as long a period as possible.”

As the year comes to a close, the pandemic is far from over, but there is hope on the horizon in the form of a vaccine. And recently passed federal government relief might buoy the lodging business and hopefully prevent more closures.

Trabulsi advises on what hotel owners and managers should be doing right now.

“As we’re coming through 2021 budget season, who knows what’s going to happen, but let’s at least have a plan. No one really knows where the revenues are going to be. So the focus of our discussions for the budget was let’s make sure our operating model is aligned and that we’re not bringing expenses back before revenues come back.”

Resources and Links

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  • Robert Cole

    Founder, president and CEO

    Hospitality Ventures Management Group

    LinkedIn Profile
  • Larry Trabulsi

    Executive vice president of asset management


    LinkedIn Profile
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