The following article is the perspective of Ed James, managing principal, Mumford Company.
Hotels still have value even in the darkest days of the COVID-19 crisis. While it may be hard to see, as we pass through the bottom of the cycle, the lifting of stay at home orders and the eventual return of the business and leisure traveler to hotels globally will push revenue back toward pre-crisis levels over time and allow the temporarily stalled transaction market to resume. The challenge for buyers and sellers alike will be figuring out the timing of this recovery and creating the most profitable strategy to move forward.
Hotel transaction volume is fueled by property-level revenue generation, both actual and forecast, and the willingness of lenders to provide acquisition capital in each case. While it is clear the current declines seen in revenues are a demand problem created by the COVID crisis and most in our business expect a full recovery down the road, the actual revenue component in this equation is going to be artificially low through the better part of the next year and cannot be fully discounted. Buyers will, no doubt, rely on these declines to push for lower purchase prices as the deal flow starts again. The key for sellers will be to focus on forecast revenue improvement and overall industry fundamentals as we emerge from the crisis. The middle ground between these positions will be where deals are made in the short term.
Assuming we reached the bottom in terms of property-level revenue and occupancy in April, we should continue that recovery in earnest later this year and see it continue through 2021 and 2022 before returning to record pre-COVID levels in 2023.
On the demand side, there are already some signs of recovery in short- and medium-term projections for the balance of 2020 as postponed events from the spring and summer have been rescheduled into the fall and winter. This rebooking activity, when combined with returning business travel and what will undoubtedly be a fair amount of pent-up demand on the part of the leisure traveling public, should make Q3 and Q4 busier than the same periods a year earlier and push us forward on our path to recovery.
Initial data indicates the economy, mid-market, and especially the extended-stay segments of the industry are faring the best in the crisis environment. While the recovery in meeting and business travel is expected to lag behind leisure demand and inbound international travel is off the table, for now, it is likely leisure “drive-to” destinations will lead the way. Assuming we reached the bottom in terms of property-level revenue and occupancy in April, we should continue that recovery in earnest later this year and see it continue through 2021 and 2022 before returning to record pre-COVID levels in 2023.
The availability of acquisition capital is the second driver of transaction activity and is dependent on the lender’s ability to become comfortable with a property’s value at present and revenue projections looking forward. Both are hard to nail down today since the landscape is changing rapidly. There are still many unknowns as we navigate our way through the crisis. One value range and set of projections can be clearly defined based on consistent progress against the virus in terms of flattening the curve of new infections and making solid gains towards a vaccine. If we don’t take those steps forward and face a second wave of infections, the results for both will come in lower. A most likely scenario is a gradual improvement of property-level operating results through the end of 2020 and into 2021, restoring confidence of both buyers and lenders and resulting in increased transaction volume as we move forward.
The week of May 3, Mumford Company conducted an informal survey of lenders focused on the hospitality space. We found roughly 85 percent of these lenders are still willing to consider loans for hotel acquisition. However, almost all of the respondents indicated underwriting criteria would include consideration of lower projections for the first 12 to 24 months and less leverage as a result of the crisis. Almost all of them expect transaction activity to remain stagnant through the summer and gradually increase as we move into the fall and winter. Several respondents indicated they would look for additional steps from management to improve property-level sanitation and housekeeping and expect more focus on cost control measures.
Americans want to go back to work and to travel again. Hotel owners and operators are preparing to safely welcome them back. While certain aspects of our pre-crisis business and personal lives may be changed forever, we will recover from this crisis and return the hotel business to profitability in what may well be a stronger and more sustainable business model. Looking forward, Mumford Company is bullish on a very robust recovery and a return of a very active transaction market as we make progress and put COVID-19 in the rearview mirror.