Contracts, operations and more will change in the post-pandemic future for the hotel industry, but clear communication among stakeholders will smooth the process.
GLOBAL REPORT—As hoteliers around the world weigh the future of their business under different scenarios, stakeholders agree that keeping communication lines open and transparent will facilitate the best possible outcomes for individual hotel assets.
On a panel during the In Sync online conference, produced by Questex, representatives of brands, lenders, operators and owners shared what their biggest challenges are now, and how working together can alleviate pain points.
First, speakers agreed it’s important to put the current pandemic into perspective.
“This is a big difference from the last crisis in 2009, when distress came from over-debted real estate, then problems with banks and overleveraged deals,” said Peter Ebertz, managing director and head of hotels at Art-Invest Real Estate, a development and investment company.
Christof Winkelmann, member of the management board at Aareal Bank, agreed the global hotel industry is at “a much better starting point” to come out of the coronavirus (COVID-19) pandemic than it was during the Great Recession.
Still, all agreed communication and transparency will help keep all hotel stakeholders in alignment over the coming months.
“In a crisis, real character is shown, and this relationship between lender, landlord, brand and operator is very important” said Thomas Willms, CEO of Deutsche Hospitality. “Short-term it’s all about liquidity; long-term it’s about shareholder value.”
Ebertz said transparency about expectations is critical.
“We have several institutional investment funds investing in hotels and … we want to be in solidarity with operators,” he said. “It’s also about establishing transparency. It’s the time for owners and operators to show our numbers, share recovery scenarios and share assumptions. Most of our tenants agree to that and share the transparency, which helps establish trustful relationships in the future.”
So far, transparency has helped on the banking side, Winkelmann said. He said he had conversations with all of the bank’s borrowers within the first three weeks of the crisis about providing visibility into future timeframes and projects, with good results.
“After having 10 to 15 years of a pretty good run, a lot of our owners are very willing to provide the cash despite hotels being closed, to service debt,” he said. “The frequent request I would say is amortization postponement … so owners can manage their liquidity needs.”
Granting that “has worked very well,” he said. “If you don’t do that, owners and operators will be faced with very tough capital projections moving forward.”
Financial pressures are top-of-mind for all stakeholders, speakers said. Depending on the region and the structure (management contracts vs. leases), deals may or may not be happening.
Operational cost issues play a big factor, Willms said.
“Looking at all the (new) regulations and hygiene regulations, we calculate from €7.50 ($8.24) to maybe even €10 ($10.99) in resorts, on extra cost per key,” he said. Adding in the logistics of keeping rooms vacant between stays and lower mandated occupancies means business sometimes doesn’t pencil out, he said.
“The peaks are gone, the costs are up and the leases are still there,” Willms said. “We are trying to keep associates. We’ve had no layoffs at the moment but how long can we keep that?”
Ebertz agreed that changes are inevitable in operations as well as in deal structures.
“You need to be flexible,” he said. “Let’s say you have a new hotel that opened in January or February—and there are lots of those in Germany. You should manage together with the operator the next two years on the basis of (your lease coverage ratio) then maybe stick to a fixed lease as of 2022.”
Future contract changes
Panel moderator Andreas Ewald, founder and managing partner at Engel & Völkers Hotel Consulting, asked speakers whether the industry could expect to see “corona contract hybrid models” moving forward.
Ebertz said further widespread legal understanding by all stakeholders could go a long way in preventing unnecessary legal battles between tenants and owners.
“I would not exclude the possibility that the owner takes part of the pandemic risk in the future,” he said. “For the moment, the majority say it’s the operator’s risk, but I would say in the future, tenants would require it.”
He said he predicts “further hybridization of a lease contract where you still have a fixed component—because our institutional investors need that from a financing perspective.”
“I think we’ll see more hybrid contracts,” he said.