Embattled hotel owners are beginning to reassess relationships, as they struggle to contain cash losses, further trim costs and wonder when large scale business and events income will return.
US Reits Park Hotels and Host Hotels both continue to juggle reopenings of their large footprint properties, in the face of demand that improved through the summer, but is now flatlining once more.
At Park, more heavily leveraged, a new USD750m bond issue helped to reshuffle debt and give the group more breathing room. “During the third quarter, we made significant improvements to our liquidity and balance sheet by reducing our monthly burn rate, completing another successful senior notes offering to pay off our 2016 term loan and extending our Revolver, pushing out significant debt maturities until 2023,” said CEO Tom Baltimore.
“On the operations front, we continue to make significant progress reopening hotels, and witnessed a steady increase in demand across our portfolio during the third quarter as September occupancy topped 42% for our opened hotels.” Park has opted to keep its city centre properties closed until spring 2021, at the earliest. It had more success through the summer with drive-to properties, which picked up decent leisure business.
Baltimore said Park was in active discussions to sell further assets, in a bid to reduce borrowings, but deals are not imminent. “We thought the COVID discount was too wide – but we do believe that COVID discount is going to narrow, and we are cautiously optimistic that you will see asset sales from us in the coming months. We do not, at this point, see the need for any operating partners this time, and we certainly do not see the need for a dilutive equity offering at this time.” He confirmed his commitment to large, events-driven hotels, which he felt would deliver once more in the medium to long term. “More painful for us today, but as we get to the other side, that advantage for Park will be a huge tailwind.”
Baltimore also had a warning for the brands. “I think we were getting out of balance right before COVID, and… I think this crisis is forcing a reset and a wake-up call. While their businesses are capital light, their businesses are also dependent on having a really healthy ownership community. The owners and the franchisees have been hurt, and they’ve been hurt hard.”
“I suspect that you will see these supply numbers continue to reduce over the near and intermediate timeframe. I think there’ll be less debt capital. I think you’re going to see less development, and so I would respectfully refute some of those pretty optimistic growth scenarios the brands have. In the select-service side, that business has become more and more like a commodity and newer, fresher wins. So for those older assets, I do think you see a replacing. But in terms of the supply growing at the kind of clip that we’ve seen in the past, I just don’t think the math will compute. And I feel pretty strongly about that.”
In contrast, Jim Risoleo, CEO of Host, was in expansive mood. “We continue to focus on opportunities where we can leverage our competitive advantages, such as deep owner, broker and operator relationships and our ability to do large transactions.Our reputation for providing speed and certainty of closing and ability to offer tax-advantaged structures to sellers are additional distinguishing factors.”
“We entered this crisis as one of the lodging REITs with the lowest leverage and greatest balance sheet capacity and believe these remain key attributes that are necessary to create meaningful long-term value in this new lodging cycle.”
Quizzed on the opportunity to share equity investments, Risoleo commented: “I think we would be very open to exploring club deals and JVs, off-balance sheet formats, if it makes sense to us. We are in a unique position where, under our existing credit facility waiver agreement, we can acquire up to USD1.5bn of hotels out of existing liquidity. We were very successful in putting together a club deal in Europe with GIC and APG, the Euro JV, where we acquired over 20 hotels as general partner, and we would be very happy to do something like that again in the US, if the opportunity presented itself.”
He said the opportunities would present themselves before too long: “A record 26% of CMBS hotel loans were in special servicing in September 2020, compared with 1.9% in December 2019, and 70% of hotel loans are either in special servicing or on special servicing watch list according to Trepp Research.”
Hyatt, as an operator with substantial assets, reported a net loss of USD161m for the quarter, but CEO Mark Hoplamazian remained in high spirits, looking ahead. He pointed to a record tally of new openings in the quarter, while the pipeline grew year on year by 9.8%.
With Hyatt’s Chinese hotels performing strongly, he was also encouraged by the return of corporate business – and hopeful that by using similar safety protocols, events could be encouraged to return to the US hotel market.
“On the group business front in China, we continue to host new product launches for car manufacturers as well as luxury goods companies with extraordinary new programming that leverages our deep strength in banqueting and events.”
We’re cautiously optimistic about recovery in business travel in the second half of 2021, and we are encouraged by the advances in rapid low-cost testing. We’ve seen events in Southeast Asia facilitated by testing protocols, and travel authorities in the US and Europe continue to advance the procedures that would be put into place for bilateral market travel without quarantine requirements. Having said this, we’re prepared for the first half of 2021 to be challenging.”
“We’re spending a lot of time on looking at how we can use rapid testing platforms to basically create highly assured bubbles, environments where all the people that you interact with when you come into a venue have been tested. And we effectively can guarantee that nobody is infectious as you walk into that space. And I think that’s going to make a big difference with respect to leisure group travel, weddings and other gatherings, but also very importantly, business.”
In Europe, asset-heavy PPHE reported it was cashflow positive in the third quarter, at the operational level – if debt service and lease expenses were excluded. Total revenues of GBP31.2m came from an average occupancy of 29.8%.
“Performance throughout the summer months which was driven predominantly by domestic leisure travel,” said CEO Boris Ivesha. “Whilst this demand unfortunately slowed following further government restrictions imposed during the second half of August and September, the performance during this period is testament to the Group’s excellent customer proposition, flexible model and readiness to capitalise on customer demand once the trading environment normalises.”
The group’s cash position slipped from GBP137m in June to GBP132.4m in September, though PPHE has an undrawn GBP63m overdraft facility in place. It is keeping a few properties closed, and operating others in more restrictive, limited service mode.
HA Perspective [by Andrew Sangster]: If you were to pick a segment you would not want to be in, it is surely high-end, big box hotels. But this is precisely the segment that is the focus for Host and Park, and to a lesser extent Hyatt. Even PPHE, with its big full-service properties, is in an unenviable position.
At Hyatt, the reaction has been to cut capex (it has halved to an expected USD125m in 2020) and it has reduced SG&A (corporate expenses) of USD320m by 25%. Owners have been offered fee reductions in return for a reduced level of services and brand standards have been relaxed.
Although Hyatt has 80% of its owned and leased hotels open by the end of the third quarter, revpar levels were down a symmetric 80% too on Q3 last year.
Hyatt generated 57% of its EBITDA from fees compared to 37% 10 years ago and this proportion is set to climb further as it sells down USD1.5bn of assets. Its move towards a fee-focus has not been diminished by the pandemic and it remains committed to selling its earmarked assets by March 2022.
CEO Mark Hoplamazian did admit, however, that “there is not a lot of price discovery going on” in what is a stalled market. Where transactions had taken place, discounts on 2019 prices were in the range 10% to 30%.
Not diminished is the desire to grow the pipeline. Hyatt outshone its peers in 2019, adding 7.4% net rooms growth, (against 6.6% for Hilton, 4.9% for Marriott and 3.8% for Choice). In the NUG wars, Hyatt has the upper hand even if it has arguably the most vulnerable portfolio in terms of market segment.
But Hyatt’s vulnerability in the depths of the pandemic also makes it the most geared to potential upside. And there is going to be an upside despite all the talk of fundamental changes to business travel.
Host was explicit about this. CEO Jim Risoleo quoted stats from a 2013 Oxford Economics report showing that there for every dollar spent there is a USD3 return on profit and USD10 on revenue. Travel makes up just 2% of operating expenses for US corporates.
Risoleo said: “We continue to believe that business travel will recover in line with the broader economic recovery because of the ROI it generates for businesses.”
Risoleo was also complimentary about how brands “get it” today. “They’re at one with us when it comes to understanding the challenges owners face,” he said.
Marriott has restructured and reduced above property shared services for sales and marketing, revenue management and IT. Hyatt has reduced the fixed component of their above property IT costs by 15% and chain marketing fees by as much as 50%.
“Moving forward [Hyatt is] really committed to making their fees more variable, so that the cost is actually tied to [..] the value proposition to the owner,” said Host CFO Sourav Ghosh.
Host reckons that it will see between USD100m to USD150m shaved off expenses from its operators. On recovery, there will be a permanent reduction on the fixed portion of above property cost of as much as 10% to 20%.
Less complimentary about brand companies, however, was Tom Baltimore of Park. His comments reflect a widely held view that the relationship between brands and owners is out of balance.
While the brands are going to need to work harder on addressing some of the concerns, I think he is profoundly wrong in expecting growth rates of brand companies to slow. It is in the interests of owners just as much as brand companies for there to be a gap between what a property flagged under a big brand can generate and what a similar property under either no flag or a more minor brand. This brand premium is at least partly a function of market power and bigger companies are critical to this.
The bigger the brand premium, the bigger the amount owners and brand companies can haggle about. This is always going to be an area of contention but unless the brand premium grows, nobody is going to be a winner.