Finance & DevelopmentDevelopmentSpend or Save: What To Do in the Post-Pandemic Investment Environment

Spend or Save: What To Do in the Post-Pandemic Investment Environment

A group of hospitality professionals agree that a kind of spring awakening is gaining momentum in the industry after a tumultuous year, and that government aid and lessons learned by lenders from the Great Recession have largely averted the dreaded distressed property fire sales many opportunistic investors were poised to exploit. However, they also agree that the free spending ways of the pre-pandemic will simply not do while margins are razor thin at best. These four executives shared with LODGING their perspectives on how to allocate scarce revenue dollars to get the most bang for the buck using best practices to make the most of tough times now and the better times they anticipate.

The Lay of the Landscape

The executives’ perspectives on the lay of the landscape and their respective paths forward depend somewhat on their individual positions in the hospitality business mix. Sightline Hospitality President Kirk Pederson speaks both from the vantage point of one running a management company and a sometimes-unofficial matchmaker between buyers and sellers. Although the hybrid property management company suffered along with the properties it managed while revenue was sharply down or nonexistent, he observed that throughout the pandemic, investors–many of whose funds were already designated to the segment–continued to compete for hospitality opportunities, much to the surprise of many. “While we’re not seeing the significant discounts that everyone expected, there’s a lot of money out there chasing hotel deals. Investors who have funds earmarked for the hospitality space are eager to put that capital to work.”

The Witness Group Partner and Chief Development Officer Aakash Patel has also noticed how many big players with ample funding are poised to pound opportunistically on the hotel segment but says his medium-sized real estate investment and development company, which recently offloaded management of its portfolio of 36 self-built hotels, will not be joining the chase described by Pederson. Due to the high cost of construction and what he regards as his company’s overexposure to hospitality–after opening five hotels in 2020 with another two set to open this year–he plans to focus less on development and consider recycling and divesting outside hospitality. “New development will not be as central to our strategy as it was in the past. We’re considering new types of development using our scale and knowledge of hospitality, but finding groups experience in different spaces and finding interesting ways to collaborate,” he explains.

As national debt and equity investors who underwrite the executive value-add opportunities in the lodging space, Arbor Lodging Partners Sheenal Patel and Vamsi Bonthala plan to continue growing their portfolio through acquisitions but are considering their options more carefully now. Bonthala, a lawyer who is CEO of the investment arm of Arbor Lodging, leads the company’s efforts related to acquisition, dispositions, capital markets, joint venture partnerships, and asset management. He says one of their greatest challenges now is evaluating the pandemic-battered properties they are considering–a complex task under normal circumstances. “We try to forecast future cash flows based on factors such as past performance, the state of the marketplace, and performance of competitive assets, plus a variety of things that we can do once we take over the asset, such as boosting operational efficiencies and controlling expenses to improve margins and making physical improvements so it competes better in the marketplace.” His partner, Sheenal Patel, CEO of Arbor Lodging Management, the management arm of Arbor Lodging, leads all efforts related to property management. Among operational issues, he mentions the delicate task of controlling labor expenses while providing the services guests demand.

Managing Relationships with Stakeholders

Sources found that good business practices such as maintaining relationships with lenders, vendors, employees, and the community, and keeping an eagle eye on expenses, helped sustain them as the pandemic arrived and then dragged on. Both Pederson and Aakash Patel discussed the premium they place on transparency in their relationships with all stakeholders, including guests, who may still be reticent about traveling. “Transparency is always the best policy. Whether the news is good or bad, you need to let people know what’s going on,” says Pederson.

According to Aakash Patel, clear and consistent dialogue was an important element in finding solutions and providing comfort during a time when The Witness Group was transitioning to a management company. “Our internal associates are the lifeline and lifeblood of everything we do. It’s important to take care of the team and provide transparency, no matter how difficult it may be.” He described how The Witness Group stayed in touch with staff via calls and messages, and made gestures such as providing gift cards to help employees impacted by reduced hours and salaries to make ends meet. Aakash Patel adds “over-communicating” with lenders–i.e., providing them with all available information–stood them in good stead during the pandemic, as did being ever cognizant that the relationship goes both ways. “We appreciate their understanding, but we understand that banks have their own stakeholders to consider, their own challenges to face. Although we needed relief for a time, we voluntarily turned our payments back on when we could and caught them up on interest.”

He says it helped that these relationships were generally established long before the current need arose. “We typically have multiple leans with banks we’ve worked with, many for 10-plus years. They understood this lack of performance was beyond our control, so most gave us three to six months of relief. And because we kept them constantly updated, when we had to ask for a second round of relief in certain scenarios, they were aware of why we were asking.”

Pederson expects the good-faith type of relationships Aakash Patel describes will change the way people do business. “People will place a priority on doing business with partners who will work with them when circumstances change. Predatory lenders will have to change their ways to get business as borrowers turn away from them and toward their local lenders,” he says.

The Spend vs. Save Balancing Act

In the strictest sense, says Pederson, investment covers beyond asset purchases and capital expenditures to all expenses, which is why, during this time of reckoning, he believes every invoice and item on the P&L should be subject to scrutiny. Sheenal Patel agrees. As he ruefully points out, “There’s nothing like a good downturn to help clean up sloppy spending practices and get back to what is needed to keep a property running as efficiently as possible.” He recalls how he re-examined expenses last March and April to identify those that could be cut. “I went through every invoice, every contract, and challenged our operations folks on whether a particular service or good was providing a benefit to our guests or helping to increase revenue. So, what are the expenses that passed the “value” test?

Bonthala earmarks for the spend column “places we think we can get immediate return on investment; anywhere that helps keep costs under control as we build back labor; and anything that helps us be better revenue managers, such as doing a better job of managing inventory and rates.”

Like his colleagues, Bonthala supports continued investments in technology, especially those that enable social distancing and improved convenience for guests, like keyless entry and remote check-in and check-out. As for other aspects of pandemic-spurred hygiene spending, Bonthala says hotels should not cut back on measures that mitigate virus transmission but expects that as people get more comfortable traveling, hotels can relax the constant public cleaning that is designed to reassure guest. “We’ve always taken our cue from the CDC and local health guidelines as well as brand standards, but don’t see that guests require much more than that.”

Those interviewed say they are also are willing to invest in people. Pederson, who says, “Your people are your number one asset,” considers the investment he continued to make in his sales force while others cut that expense a good call. “Keeping our entire regional sales team on the payroll is really paying off now. Base contract business relationships that were established throughout the pandemic are enhancing our ability to yield during the recovery,” he says.

Yet, while Pederson stresses the importance of investing in staff, he also puts rehiring under the microscope, as far as determining which positions that have been eliminated or furloughed should be added back. “While in most management contracts, owner approval is required for hiring the GM, director of sales, and controller, these days you need permission before all hiring.”

Among expenses that can be eliminated for now, Pederson includes digital marketing while demand is low and suggests deferring major projects while revenues are down. Aakash Patel, who would put OTAs and unprofitable food service on the chopping block, points out that brands have been more understanding about enforcing standards other than those pertaining to CDC guidelines, and believes such give and take between brands and owners may be here to stay. “They really did give us a lot of flexibility, even on the capital expenditure side, in either delaying or renegotiating them, and I think future conversations on spending will be more collaborative.”

Bonthala adds, “Overall, we have to be thoughtful about ways to invest in the asset, especially given that pricing on acquisitions hasn’t dropped dramatically. Therefore, we plan to be more strategic about spending on items that do result in a nicer-looking hotel and happier guests.”

As Pederson puts it, “I think there’s going to be a reset on all expenses.”

Up Next

Just as their view of the present depended somewhat on their own participation in the industry, the sources interviewed had different expectations for the future.
Aakash Patel predicts that financing will not be readily available for new development in the near term and that signed projects will be delayed and pursued mainly in strong markets with higher barriers to entry.

But Pederson and Bonthala were more optimistic about current and future investment in hospitality, partially due to their expectations about increased travel—already apparent in leisure and expected in business travel in 2022. What may also drive investment is what Pederson calls “better checks and balances” due to the abundance of data that makes hospitality a less volatile investment. “Even people who don’t really understand the space have more confidence in the space because there’s more data,” he says.

Bonthala has a view of the future that is both positive and hopeful. “We have come back out of a bad year and we see a lot of positivity going forward. We ourselves are leaning in on acquiring more hotels because we have a bullish view on hotels on a long-term trend basis.”

Going into Labor

Contrary to what might be expected after industry-wide layoffs, there is a different kind of labor problem now as the hotel industry begins to recover.

Sheenal Patel describes how his company is meeting two major labor challenges related to the pandemic. First is the difficulty of finding hourly workers—mainly housekeepers—in the midst of what he calls “an inconsistent ramp up in revenue” as leisure travelers book weekend stays. This problem, he says, was so severe that GMs struggling to run properties with skeleton staffs needed help from corporate. A second problem, also related to reduced staffs at the property level, was team member morale.

The approach Arbor took, he says, started with some TLC via site visits from executives like himself to provide encouragement and efforts to remove obstacles to their ability to do their jobs. Luckily, he says, the company also had the opportunity to test a proprietary labor model called ALPINE, whose premise, he explains, is cross-training but also takes into account how hours are split up and where people need to be at certain times.

He calls the “experiment” a win-win in that it helped pave the way for employee raises and job growth while rewarding the company with a 16-20 percent drop in labor costs where it was tested.

The Fire Sale That Wasn’t

The vultures were circling. As hotels were shuttered and revenue evaporated, owners were hard-pressed to meet their financial obligations. Yet, unlike in the Great Recession, there were not massive foreclosures by properties that were clearly in distress.

As Vamsi Bonthala describes, “We had anticipated there to be some significant pricing reductions on hotel performance, given what’s happening on the ground level, but outside of a very short window last spring-summer, that hasn’t really come to fruition.”

He specifies three reasons for this: “First you had lenders giving breathing room to owners, who in turn, put additional capital into their assets, assuming this was a short-term event.” Then, too, was government support, primarily through the Paycheck Protection Program (PPP) program. He says the breathing room this created for owners kept them from being forced into sales, thus creating a floor on pricing.

The other thing that didn’t happen, says Kirk Pederson, is that banks were generally avoiding the mass foreclosures that left them in a business they didn’t want to be in during the Great Recession. Instead, he says, they are finding other solutions, such as what he calls “consensual foreclosures,” whereby they sell the note with pre-negotiated workout or foreclosure terms or transfer the asset to special servicing while considering what to do. “Most have decided to hold on for a little bit, because they expect values to rebound sooner than later,” he notes.

As Bonthala describes, “Really what’s happened along the way, as the community has gotten more confidence that we are on our way out of this, is an immense amount of capital has been raised and is looking to come into the hotel business.”