Download the Transcript
Enter your name and email below and we'll send you the full transcript for this episode.
‘ANOTHER PIECE TO THE PUZZLE:’ CHMWarnick and Pinnacle Advisory Group in April announced their decision to strategically align their businesses and bring more services and solutions to a hotel industry still in the throes of the coronavirus crisis. The businesses’ leaders say the partnership connects more pieces of the pandemic-recovery puzzle. It also signals what lies ahead for the hotel industry in the coming months.
The coronavirus pandemic last year put a halt to or slowed a lot of hospitality-related businesses. It also gave hotel owners, operators and just about everyone involved in the industry time to think.
Chad Crandell, CEO of CHMWarnick, and Rachel Roginsky, owner of Pinnacle Advisory Group, are both based in Boston. Last year, the industry veterans had time to meet and talk over their post-pandemic business plans. In April, the companies announced their decision to strategically align their enterprises and bring more services and solutions to a hotel industry still in the throes of the coronavirus crisis.
While properties in many markets are experiencing a business revival led by leisure travel, many others continue to work their way out of a maze of financial challenges. The CHMWarnick-Pinnacle Advisory Group alliance may signal what’s ahead for the hotel industry’s post-pandemic rescue and recovery and whether hotel owners and operators should consider turning to outside expertise as the industry emerges from the trough of the pandemic recession.
Crandell explained the genesis of the partnership, noting the decision’s timing as it relates to the coronavirus pandemic is “probably just coincidental … but certainly I think the pandemic created the opportunity for us to step back and rethink.”
“We thought we could help each other,” he said. “Rachel wanted to keep her firm intact and we wanted to keep our firm intact, but we knew that we didn’t share a lot of clients. And so therefore we could go to our existing clients, explain this alliance and relationship that we have, the trust and respect that we have as to how Rachel runs her company. And I think she feels the same about ours and we can offer our existing clients and Rachel’s existing clients a broader spectrum of services.”
Roginsky said the alliance has already attracted new business.
“As a sole owner of a company for 30 years, I wanted to make sure that this was the right move,” she said. Pinnacle Advisory performs a lot of due diligence for clients seeking its guidance on hotel investment and development. The partnership with CHMWarnick adds “another piece to the puzzle,” she said.
“Obviously I think the alliance will allow Pinnacle to get more business and vice versa. And it’s working. We already have significant clients on board that we would not have worked with in the past.”
The hotel industry has a lot of moving parts and a wide variety of investors, owners and operators. Many believe they have what it takes to make their own decisions. But the coronavirus crisis has challenged even the most experienced hoteliers and they might want to bring in the support and expertise firms such as CHMWarnick and Pinnacle Advisory Group can offer.
MAKE A NEW PLAN: A photo illustration of the new strategic partnership between CHMWarnick and Pinnacle Advisory Group. In April, the Boston-based companies announced a strategic alliance in which they’ll combine their expertise and services to help hotels emerge from the pandemic recession stronger than before. Episode 326 of Lodging Leaders podcast explores the reason for the partnership and whether it’s a tell-tale sign of what lies ahead for lodging in the months to come.
What They Do
Roginsky’s team specializes in feasibility studies on the business strength of a market as well as financial returns on investment in that market. Currently, clients include developers who are coming out of the pandemic hibernation and seeking to invest again. Pinnacle is also advising prospective buyers who see a frothy acquisition landscape.
“There’s a lot of repositioning going on now where a client is saying, ‘Should I change the brand or should I put in money to change something?’ It usually involves market and financial due diligence,” Roginsky said.
Once Pinnacle’s client works through the initial due diligence, CHMWarnick can step in with its asset management expertise.
“What’s interesting today is that there are a lot of firms that generate data,” Roginsky said. “And what we’re finding now is somebody needs to interpret that data and advise on that data.”
CHMWarnick often has to clarify what a hotel asset manager does and when is it a smart business move to enlist such a service, Crandell said.
“There are really two types of asset management,” he said. “You have a third-party operator, maybe an independent hotel or a branded hotel with a franchise, or you have brand-managed hotels.
“We take on the fiduciary responsibility of the owner. So we’re an owner’s fiduciary, an owner’s representative, if you will. We’re there to help and collaborate with the operator’s third-party or brand-managed hotel to achieve the goals or the financial objectives the owner has set forth, which led to them to invest in the hotel to begin with.”
An asset manager such as CHMWarnick is involved in all the capital-generating decisions of the hotel operator. It keeps track of revenue management and cash flow.
Sometimes, Crandell said, cash generation comes from a current or new investor. “They’re doubling down, if you will, on that investment.” CHMWarnick works to generate an ROI on the investment.
NEWLY CHALLENGED: The Candler Hotel in downtown Atlanta, Georgia, opened a few months before the coronavirus pandemic devastated the U.S. lodging industry. Full-service hotels in urban markets have yet to recover business lost to government restrictions on travel as well as guests’ changed behavior. CHMWarnick asset manages the boutique property that is owned by R.E.M. Associates and is a member of Hilton’s Curio Collection, a soft brand.
Both Crandell and Roginsky anticipate a surge in hotel owners in search of help as the pandemic rolls back and reveals weaknesses in business structures or where new opportunities may lie.
In the April 28th news release announcing the strategic alliance, Roginsky is quoted as saying that “lenders are demanding loan payments now and strategic plans on how properties will emerge stronger and better positioned.”
Crandell is quoted as saying “The new pandemic reality has resulted in a tremendous surge for assistance from an increasingly larger pool of hotel owners, investment groups and lenders.”
During the news conference, Crandell also talked about hotel owners facing the end of lender forbearance, lenders exercising their rights to foreclose and capital waiting in the wings.
In a separate interview with Lodging Leaders, Crandell said, “The lenders in forbearance are really asking for a plan. If they’re going to continue to provide forbearance, (owners) need to have a plan. And in many respects (lenders) are also asking to see capital: ‘Where’s your cash? How are you going to continue to fund the operation until it turns positive?’
“After a year of this, it’s reasonable to think that they’re going to start looking to get a little bit more strict with the terms of covenants that they have with their loans, and that’s beginning to happen.”
Many CHMWarnick’s clients are reevaluating their situations, Crandell said. Options include selling the hotel or continue to fund it. The big “if” is the billions in cash waiting in the wings and searching for hotels in financial straits.
“I’ve seen reports that there could be upwards of $25 billion of equity on the sidelines to invest in the hospital hospitality space. That is creating, obviously, a high demand for good assets. Many of the assets in our portfolio and others are distressed – not because of bad performance or bad operations or deferred maintenance; they’re distressed because of the pandemic.
“You’re going to start to see it and we’ve begun to see more of these assets come to market.”
LENDING OUT LOOK: The Hunter Hotel Investment Conference on May 12th featured a panel discussing the state of hotel lending. The panelists are, from left, Andrew Hibbard, moderator, and senior vice president of finance and investments at Vision Hospitality Group Inc.; David Turley, president, Cronheim Hotel Capital; Laurie Ivy, senior vice president of lending at PMC Commercial Trust; Peter Berk, president, PMZ Realty Capital; and James Petty, managing director of hospitality franchise finance, Western Alliance Bank.
What’s the Plan?
The biggest turn of events now are lenders asking owners and operators if they have a plan to either sell or continue in business. The plan needs to include access to cash. “On the other side of that,” he said, “you have folks that are stepping up and saying, ‘OK, we’re in it. We can see the end. We’re going to continue to fund. Give me a little bit more of a break in my debt service, maybe six more months. And then we should be good.’”
Crandell’s take on the money that’s available for financing, refinancing and acquisitions, is in line with what was discussed among a panel of financing experts at the Hunter Hotel Investment Conference.
On the May 12th panel on hotel lending, David Turley, president of Cronheim Hotel Capital, said the “go-to” lenders that were available pre-pandemic are “not there the way they were before.” Banks have curbed their enthusiasm for new loans and “new types of capital have stepped in to fill the void.”
“(It’s) obviously a much different world out there,” he said.
“We’re finding a need to source capital from a much broader universe of capital providers.”
Last summer, Turley said, “capital was too conservative and wanted too much yield. That gap has narrowed considerably; the yields and the underwriting, the capital [available] to do new deals or justify new deals is a lot more aligned with the realities of refinancing construction, acquisitions.”
Turley said as the COVID-19 vaccination rate has increased so has hotel business.
He anticipates a summer of high demand as leisure travelers make up for the vacations they lost in 2020.
Fellow panelist Peter Berk, president of PMZ Realty Capital Hotel Finance Group, said while leisure demand is improving the financial health of a large number of hotels, properties that heavily depend on corporate and group business continue to struggle.
This has opened the door for new investors seeking refinancing opportunities. It’s changing the way lenders, including private equity firms, gauge the risk of a deal.
“A lot of lenders now are looking at 2019 numbers. They’re taking some sort of discount off that. And the initial discount early on in the pandemic was 25 percent off of 2019 numbers,” Berk said.
“Now they’re looking at 2019 numbers and taking anywhere between a 10 to 20 percent haircut off those, saying, ‘All right, well, if you at least perform to 80 to 90 percent of what you did in 2019, we can underwrite this loan.’ And then they’re looking at 2020 to see how you’re actually doing and putting an interest reserve in place.”
An important consideration for lenders is the location of the hotel. A property seeing a lot of leisure demand is easier to underwrite than a hotel crossing its fingers on the return of corporate demand. Berk called it the “big unknown.”
“How do you underwrite a hotel that’s an 80 percent corporate driven? What’s the Zoom effect? How many people are going to return to the office? All these questions are unknown. Those are the hotels that are generally harder to underwrite and involve a lot more structuring and new things that you’re probably not used to seeing in your loan documents and maybe higher rates, at least initially.”
Combined, CHMWarnick and Pinnacle Advisory Group asset manage a portfolio of nearly 80 hotels.
The portfolio is a mix of full- and select-service hotels in urban and resort markets, near airports and in college towns. The price tiers are upper-midscale to luxury.
Many of the hotels continue to struggle financially and their owners are looking to experts to guide them through some difficult decisions.
Roginsky said she’s helping owners in forbearance focus on crafting new strategies in the advent of a post-pandemic business revival.
She agrees with Crandell’s use of the word “plan.”
“We have two lenders that we’re working with that I’ve asked for different plans and they’re both very different.
“The first one is a much more leisure-oriented, smaller property that’s actually doing pretty well. But they had not paid their mortgage. They had been given about six to eight months of ‘let’s just see how things go.’ But now that they’re starting to improve in their performance, the lender is now saying, ‘Where’s my money?’
So we’re working with both sides on a plan to extend the loan one more year to allow for time, knowing that things are starting to get better and they can start paying.
“That’s different than another lender we’re working on, which is in a major urban market that has not yet recovered. And the plan is very different. It’s, ‘Should we sell the hotel? Should we keep it closed? (It’s currently closed.) Should we reposition it so that it comes out stronger when the market recovers?’
“There’s no one answer. It’s a property-driven question. It’s a market-driven question. And it’s, frankly, whether or not the owner is able to meet all of the lender’s requirements. We are a long way from where we were a year ago, but we’re not necessarily out of it yet.”
STRATEGIC TREND: To learn about other kinds of business partnerships forming amid the pandemic crisis, check out Episode 319 of Lodging Leaders podcast that features leaders at companies carving their own plans to survive and thrive in the post-pandemic economy.
Though there are new sources of capital emerging, Crandell does not think the money will flood the market. Rather, it will be deployed systematically over time.
“Rachel and I have talked a lot about this. We don’t think necessarily it’s a floodgate situation. We see it more as a rising tide. That’s sort of what’s happening in this recovery,” he said. “Some of the smaller boats – select-service hotels – they’re in the water already. The tides lifted them up. The downtown convention center or big group hotels? The tide hasn’t hit them yet. It’s not happening all at once for all different types of hotels it’s happening in different stages.”
The coronavirus pandemic is not over and Crandell expects the hotel industry will continue to face unprecedented challenges that will drive the creation of new solutions.
There is nothing to which we can compare this crisis, so there is no clear answer to what shape the industry will be in once it fully recovers.
The Great Recession was a financial crisis. The pandemic is a health crisis that has changed people’s behavior and led to government-mandated restrictions on travel and public gathering.
“The combination of that has made this pandemic exponentially worse because it involves so many different areas of our lives,” Crandell said. “We will come out of this. There’s no doubt about it. Do we get back to some of the things that were what we call normal? Sure, we do. But there’s going to be a new normal, too, as they say, there’s going to be things that are going to be different most likely on a permanent way.”