Hotels' Reversal of Fortune

In January of this year, Han’s Holdings Group traded its 18-story, 35-room Hilton San Jose in the heart of Silicon Valley, CA reportedly to GEM Realty Capital for roughly $117.5 million. The hotel was located near multiple demand drivers, including the San Jose Performing Arts Center, San Jose State University, SAP Center and Levi’s Stadium. With more than 10 million square feet of office space, the property is connected by a skybridge to the 550,000-square-foot San Jose McEnery Convention Center.

The hotel is also close to many Fortune 1000 corporations, including some of the most recognizable names in technology, which was another appeal of the property. But the major draw, according to JLL Hotels and Hospitality, which worked on behalf of the seller, was that hotel development opportunities in the area were very limited. The hotel represented a rare opportunity for an investor to acquire a high-profile full-service property in the heart of Silicon Valley, JLL EVP Mark Fraioli said at the time.

Then the coronavirus came. As of this writing, Hilton San Jose is closed to guests. Instead, the property is now representative of a bygone era for hotels when investors sought out well-located properties that boasted a solid RevPAR.  It is hardly alone. As the coronavirus swept the US, hotels and the travel industry were the first to suffer as people stopped moving from their homes.

As of April 8, nearly 8 out of 10 hotel rooms were empty across the country per STR. Since the public health issue began escalating in mid-February in the US, hotels have already lost more than $10 billion in room revenue, according to the American Hotels and Lodging Association.

These figures will only worsen as the US works to bring the coronavirus under control. Hotels are currently on pace to lose more than $500 million in room revenue per day based on current and future reported occupancy rates, AHLA says. “This pace means a loss of $3.5 billion every week and will only further escalate as the situation worsens.” It adds that most hoteliers are already reporting projected revenue losses of greater than 50% for the first half of the year. “Individual hotels and major operators are projecting occupancies below 20% for upcoming months. At an occupancy rate of 35% or lower, hotels may simply close their doors,” it said.

Until the coronavirus hit, the outlook for lodging fundamentals was positive, “resulting in continued deployment of domestic and foreign investment, and institutional capital into single assets and portfolios of all types and locations of US hotels,” according to LW Hospitality Advisors’ year end 2019 Major US Hotel Sales Survey. Prior to COVID-19’s spread across the US, Q1 2020 transactions totaled $1.97 billion and included approximately 7,600 hotel rooms with an average sale price per room of $259,000.

Since then deals, not surprisingly, have all but ceased, as has lending for the sector. Hotels are surviving the coronavirus with a mix of strategies that range from shutting down properties and tapping credit lines.

Properties that are well-capitalized with relatively sane leverages and access to capital are seen as having the best chance of survival. Pebblebrook Hotel Trust, for example, is sitting on a little over $700 million, which should allow the REIT, with a fairly significant cash burn, to get through the better part of next year, CEO Jon Bortz told Nareit, an industry association. All but eight of Pebblebrook’s 54 hotels had been suspended and more than 7,500 employees furloughed.

In the meantime, hotel companies that can afford to be generous are repurposing their rooms for healthcare providers without charge. At the beginning of April, as just one example, Hilton Hotels and American Express revealed they would donate up to 1 million rooms to medical workers on the frontlines of the coronavirus pandemic. Many hotels are also being recruited to house the homeless by various cities and states during the pandemic.

Beyond these signs of activity, it cannot be ignored that the vast majority of hotels will struggle to remain afloat during this crisis period. Many will fail.

Analysts that specialize in the space say the industry needs to have courage. “Although the world is currently in unchartered territory, having recovered from prior economic and demand shocks, America’s hotel industry has a proven track record of resiliency,” says Daniel H. Lesser, president & CEO of LW Hospitality Advisors.

On its website, Joseph David International, a hotel recruiting firm, reminds hotels that there are steps they can take to prepare for the recovery, when it does come. For instance, it noted that after the 2008 financial crisis, hotels made dramatic price-drops, which resulted in lost revenue and a struggle to recover ADRs. If at all possible, maintain pricing, the site urges. “Studies have shown that hotels that are the fastest to drop their rates and who drop their rates the deepest can be the last ones to recover when demand comes back,” Dan Skodol, a hospitality and travel industry revenue management expert, told JDI.

Hotels can also incorporate long-term strategies aimed at improving operational efficiency when the impact of COVID-19 lessens, says Ralph Hollister, travel and tourism analyst at GlobalData. For instance, upskilling remaining team members could be invaluable in the longer term, he says. “Companies could also re-evaluate services and policies. Management should take the time to look at where the company has received negative feedback in the past and see if they can rectify it to enhance its reputation for the future.”

It may also pay to remember the trends that were directing hotel investment before the coronavirus hit. A JLL lodging report that came out at the time, for example, said that US hotel projects are focusing on specialization to fit a particular location and target market including much smaller room sizes, lobbies with integrated bars and restaurants, and more outdoor space, all of which impact the cost to build and type of materials needed for a project.

Companies, like Ashford Hospitality Trust, for example, focused on diversifying their portfolio geographically, which, at least according to Douglas Kessler, president and CEO of Ashford Hospitality Trust, provided a huge advantage with respect to operating performance.

Those in the trenches are not underestimating the road ahead. Pebblebrook’s Bortz says the hotel industry will likely be one of the last to benefit from an eventual upturn. “We think it’s going to be a very slow recovery,” he told Nareit.

He predicts that leisure is likely to be the first hotel segment to recover, especially resorts within driving distance, while group travel will be “very slow” to see any improvement.

As hotels slog through this period, resiliency seems to be a byword that they are clinging to. Marriott Vacations Worldwide is another company girding itself for a sharp drop in visitors, but according to Stephen P. Weisz, president and CEO, the company “has a resilient business model” with nearly half of its adjusted EBITDA contribution coming from recurring revenue streams. It says it can manage through the disruption.

“We expect that we can make the changes needed so that we can run the business at close to cash flow neutral until the business returns to a more normal level,” says Weisz. “Thanks to the resilience of our business model and the extremely difficult decisions we are making, I firmly believe that we will come through this an even stronger company.”