There is nearly universal agreement that these are indeed the darkest of days for the hospitality industry, as the entire world struggles with the catastrophic public health and economic consequences of the COVID-19 pandemic. Just as many affected individuals are needing to make difficult financial decisions—food for the family comes first—hotels, too, must implement painful survival strategies in real-time, often turning to lenders and financial advisors for help in exploring their options. Sharing with LODGING some of those options, their assessment of the situation now, and the approaches they recommend going forward were four on the financial frontlines: Lori Tirado, managing director of business development at Access Point Financial; Jim Merkel, CEO, Rockbridge; and, both from Berkadia, director of operations Matthew Dower, and Andrew Coleman, who is both senior managing director and head of the Hotels & Hospitality Group and co-head of the DC Metro Mortgage Banking Practice.

Shocking Turn of Events

All agreed that investment in the hospitality industry has been at a virtual standstill since stay-at-home orders went into effect in mid-March—a shocking turn of events for an industry that had been going full tilt.

“It was probably the strongest capital market for hospitality borrowers that I have seen in my entire career,” says Coleman. It was then, recalls Dower, most definitely a borrowers’ market, saying, “Intense competition for financing deals drove rates down and leverage up.” The pandemic, of course, brought an end to that, he continues, “Financing dried up, drastically changing the balance of power from the need to compete for borrowers to ‘triaging’ to help them access financing available through government programs.”

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Tirado, too, recalls how quickly the scenario changed once dark clouds gathered, even before the shutdown. “Most lenders that were active in hotel finance prior to COVID-19 pulled back completely. Many decided not to move forward with loans in progress or required changes to reduce lenders’ risk.” Some of these changes—which she expects to remain while the pandemic and its aftermath play out—she says, included upfront escrows that would be established at closing for principle and interest for a flat period of time, e.g., 12 months.

“There will be tough days ahead, so you need to be measured, be that calm in the storm for your team. They need your leadership and your faith in where you’re headed.”

— Jim Merkel, CEO, Rockbridge

Similarly, Coleman says, “With the exception of some very high-cost capital debt, the capital markets are currently shut down for any new hospitality financing until we can figure out which way is up and what this thing looks like on the backside.”

Merkel likens the response of shell-shocked hotel operators to grief. “We were in shock. In the course of two weeks in early March, our performance was decimated.” Yet, he says, moving forward requires first reaching the final stage of grief, acceptance. “You have to accept the new normal to make good decisions going forward.”

NEED-TO-KNOW BASIS

 

Andrew Coleman is senior managing director and head of Berkadia’s Hotels & Hospitality Group and co-head of the DC Metro Mortgage Banking Practice. To panicked hoteliers struggling to remain viable in the wake of the COVID-19 pandemic, he says “open and honest communication” with their current lender is key. “The more lenders understand what’s happening at the asset level, the easier it is for them to work through the difficult situations.” To that, his colleague Matt Dower, who is director of operations and specializes in specific capital resources, adds, “To work productively together, you need to treat them as a partner versus an adversary.”

 

They say that before picking up the phone to call their lender, hotel owners should do their homework geared toward providing the information the lender needs about their individual situation—such as their “burn rate,” their staffing needs, and ways they can lower expenses. They should also be aware of the purpose of different financing tools, including new government programs such as Paycheck Protection Program (PPP) loans, which are designed to be forgiven, and the Main Street Lending Program, which is not. They also need to be realistic, says Coleman. “They shouldn’t ask for 20 things when they really only need five. They need to focus on the thing that will help them sustain their business until we get back to the ‘new normal.’”

The Investor’s Dilemma

While making it clear that hoteliers can and should reach out to their lenders, sources discussed the dilemma faced by hotel investment firms, who have their own businesses to consider. As Merkel puts it, “The financial community is trying to help their clients navigate this experience while also being prudent and protecting their own positions.”

Tirado elaborates, saying, “Right now, it’s really difficult to underwrite a hotel loan because of the market uncertainty. We hope that we’ve already reached the bottom in terms of occupancy levels, but we don’t know for sure. There are so many unknowns. It’s difficult to determine how quickly each market will recover, and it’s also difficult to determine what an appraised value is today compared to what it was, say, three months ago.”

Leveraging the Lender Relationship

Of course, hoteliers with strong relationships with their lenders shouldn’t hesitate to reach out to them at this difficult time, but they need to be prepared and transparent, armed with facts and figures and a full understanding of their own situation; and they may need to get in line, because, as Tirado notes, “We are being inundated with requests.”

Merkel says it is crucial to work closely and transparently with lenders, and to heed their advice to buy the time they need. “It’s not the borrowers with the most money, but the ones that are most transparent and trustworthy that have the best outcomes. With those good relationships, you can come up with a longer-term solution that benefits everybody.”

New Normal

Based on feedback from brands, borrowers, and lenders, Coleman believes the leisure market will lead the recovery once people feel safe enough to begin traveling again. “Like any other traveler, I’ll be asking, ‘Do I feel safe bringing my kids into that environment?’ I think that mindset is going to permeate a lot of people’s thoughts.”

Tirado agrees that “aftershocks” are likely to reflect guests’ continuing concern with health and safety. “Hotel owners have always had to adhere to a certain level of quality in that regard, but now I think that bar has just been raised dramatically.” She says lessons learned about infection control are likely to lead to other changes—including the handling of continental breakfast, guest check-in, and access to guestrooms. “We’re already starting to see the industry revamping their health and safety measures, including getting guests in rooms more quickly to limit interactions between guests and staff and one another.” She points, too, to ways technology was beginning to be used before the pandemic—e.g., mobile check-in and room keys—that can be used now to help guests feel safer.

Although Tirado does foresee increased demand once the public begins to travel again, she does not expect lenders to be clamoring for hotel business anytime soon. “I think it’s going to be a while before we get back to where we were even a few months ago in terms of financing.”

Coleman maintains that it is too soon to say how that new normal financing environment will look, but agrees that lenders will proceed cautiously. “We should expect more conservative underwriting, and things like debt service reserves, wider spreads, and less leverage.”

A LITTLE HELP FROM THE FEDS

 

Most hotel owners are already pretty familiar with the Paycheck Protection Program (PPP), which was established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and run by the Small Business Administration, but they may not be as well-versed in an option for medium-sized businesses impacted by the pandemic: the Main Street Lending Program.

 

The Main Street Lending Program is in the process of being established by the Federal Reserve to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The Program will operate through three facilities, the first two of which are new: the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), and the Main Street Priority Loan Facility (MSPLF).

In the Meantime

Merkel says the strategies that served hoteliers well in the “old normal”—networking, meetings, workshops, and industry publications—can still serve them well for the most part. “It’s especially important in these times to seek information and learn about best practices by leveraging your networks through your relationships with your brands, the financial community, AHLA, etc. Get lots of different inputs in order to make the best decisions.”

That said, Merkel also advises hoteliers to try to “stay above the noise” and focus on their team. “There will be tough days ahead, so you need to be measured, be that calm in the storm for your team. They need your leadership and your faith in where you’re headed.”

In it Together

Merkel believes it will be the people who have always gravitated to the hospitality industry who will be its saving grace. “People in hospitality have a certain kind of disposition that is a microcosm of the American spirit, this can-do, service-oriented attitude, and that is what’s going to get us through this.”

“The only way to get through this is for all of us in the hospitality space… to work in unison towards the same goal, which is getting the hospitality industry back to where it was pre-COVID-19.”

— Andrew Coleman, Senior Managing Director, Berkadia

Coleman observes that borrowers, who had been in such a strong competitive position before the pandemic, may feel somewhat isolated by their sudden reversal of fortunes. “They may now feel the lenders, management company, or franchisors are in charge now.” However, he says, in reality, the slogan “we’re all in this together” definitely applies to the hospitality industry. “The only way to get through this is for all of us in the hospitality space—managers, lenders, brokers, advisors, etc.—to work in unison towards the same goal, which is getting the industry back to where it was pre-COVID-19.”

 


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