Hotel execs talk development delays, breaking even
Hotel execs talk development delays, breaking even
29 JULY 2020 8:19 AM

Hotel executives during the ALIS Summer Update—Dallas explain how they’re keeping their companies afloat during the pandemic and what’s likely next for the hotel industry.

REPORT FROM THE U.S.—It will take time before the hotel industry sees performance return to levels seen before the coronavirus pandemic, but executives have been working with their teams to figure out how to survive through to the recovery.

During the online “Views from the boardroom” panel for the ALIS Summer Update—Dallas, hotel executives shared what their companies are doing to navigate the pandemic and what they expect in the years to come.

Construction on hold
Newcrestimage has several hotel projects they feel need to be repurposed to multifamily or other forms of real estate, said Chairman and CEO Mehul Patel. Any prospective hotel projects are on hold for the next three to five years, he said.

“It’s going to be a long journey for development,” he said. “Realistically, when we look at our industry, it will take 24 to 36 months before we see our (revenue per available room) prior to COVID-19.”

The company needs to position itself in a way that it will take about 24 months before it touches new hotel development, he said.

Virgin Hotels has seen a couple of delays in its hotel projects, said CEO Raul Leal. Its property in Nashville, Tennessee, was supposed to open in April, but its opening was delayed until right before 4 July. The Las Vegas property was closed but construction on the property hasn’t stopped and is on pace to open near the end of 2020 or in the beginning of 2021. The New York project has been delayed three or four months. The Miami hotel to be built at Brickell Avenue was supposed to break ground in June, but that has been delayed as well.

The company signed a couple of domestic projects during the pandemic, but those won’t be ready to be announced until September, he said.

Remington Hotels is a partner in a deal in Steamboat, Colorado, that was supposed to open in July and would have opened in August, but it was waiting on cabinets from China, said President and CEO Sloan Dean. Any project sourcing products from China is going to see a logistics problem, he said. The property will open in October or November ahead of ski season.

Sometimes delays arise from problems getting the subcontractors to show up, which might be because of local work rule restrictions, he said.

Projects are falling into a couple of categories at this point, Dean said. There are projects that will have their openings delayed while there are some that will never see the light of day because there’s no depth and it’s a challenge to get new construction financing.

“We’re part of several projects that won’t open until 2022, 2023, and we’re seeing they’ve moved forward, the capital stack was pretty well put together,” he said. “We’re optimistic those will come to fruition.”

Demand is expected to recover by 2022, but there will be a big lull in new projects next year because of the lack of financing, he said. The industry will be well into the occupancy recovery before many lenders will want to return to hotel construction.

Breaking even
Mehul Patel said his team has been working hard to figure out the strategy they need to survive going forward. Each hotel is different, with occupancy ranging from 20% to 40% and having lost average daily rate by 30% to 50% depending on the market. They’re trying to figure out how to provide the necessary services and keep guests safe while staying afloat.

“If you look at (gross operating profits) with at best 35% occupancy, you could get to a GOP where you can take care of your expenses and still be OK,” he said. “That’s where are company’s focus is on, making sure we fine-tune that part but not compromising the guests’ safety.”

Ridgemont Hospitality is closely monitoring cash flow analyses, said CEO Sima Patel, and they’ve been fortunate enough to break even across the portfolio the last month. That is partially due to the state program providing assistance as well as cost-saving measures and a team that includes managers taking up more front-desk shifts and housekeepers stretching their days. Their loan deferment is also helping them stay afloat, she added.

The American Hotel & Lodging Association’s “Stay Safe” program is helping the company’s marketing efforts by reassuring guests they are staying in safe and clean hotels, she said.

“All those things have been working,” she said. “We broke even last month, but with the new lockdowns, we’re not sure what's going to happen this month. We'll take it one day at a time.”

Most hotels before the pandemic had a breakeven point between 40% and 55% occupancy, Dean said. With Remington’s ADR and labor markets, its breakeven point was about 35% to 40% occupancy.

“Now we can get GOP positive on 25% occupancy,” he said. “That’s just how the numbers beat it out.”

In June, the company’s RevPAR was down 76% but was several million dollars in the black on GOP, Dean said. His goal going forward is to get its net operating income positive. For Remington, it’s about doing a lot more with a lot less, he said.

By March 2021, consumer confidence will be stronger, leading to a stronger 2022, Mehul Patel said. In that year, the industry will probably be past 50% occupancy and will be stable. He expects corporate and convention center business to return by that point.

There are a lot of hotels between extended-stay properties and full-service hotels that will either tank or never open if they’re under development, Leal said.

“Demand will come back because you’ll have less supply,” he said. “Supply will dim significantly over the next 18 months, or at least projects that were going to get financed aren’t going to get financed.”

Based on current trends in leisure, occupancy will come back if there are effective medical treatments within the next 12 months, he said. It will be interesting to see if the rate comes back, because people are still traveling and will start to travel for business.

Having a vaccine available is what will increase consumer confidence in travel, Sima Patel said. She hopes one is available by 2022 and the industry will see more traveler confidence, particularly from business travelers. The convention markets have a long way to go before there’s enough confidence to book a conference in a downtown city center for a few thousand people.

Consolidation is the play, said G6 Hospitality CEO Rob Palleschi. The industry will see fewer brands, because companies will collapse some of them, he said. There will be consolidation in real estate as some of the private equity firms come back into hotels, and there might be some with real estate investment trusts.

The guest experience is going to improve because their stays will be more personalized and better targeted, he said.

“I think we’ll see personalized targeted messaging for those customers,” he said. “Yeah, there’s going to be a smaller number of customers, but we’ll know them. We’ll have a better relationship with them. I think we’ll embrace them.”

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