Debt and equity lenders are hopeful to see a recovery in business travel with the news of an effective vaccine, with one lender stating the recovery could be “butterfly”-shaped and another stating what is happening to hotel companies “is not an American tragedy.”
REPORT FROM THE U.S.—The news of Pfizer’s creation of a 90%-effective COVID-19 vaccine led to slight moves in the financial sector last week and pushed the industry closer to a return in business travel.
Michael Bluhm, managing director and global head of lodging at Morgan Stanley, said during “The money machine” session of the 42nd Annual NYU International Hospitality Industry Investment Conference webinar series, that “aside from just incredible timing and the releases of vaccine, what you saw (last week) was a pretty interesting unwind trade of what was really happening over the past couple of months with the hedge funds, where it was very, very heavy to lean in on the COVID beneficiaries.”
Over the past couple of months, dedicated investors have started to “trickle back” into some of these hedge funds, “and what you saw on (9 November) was really an unwind of that trade,” he said.
On the debt side, the vaccine announcement did not lead to meaningful improvement in bond pricing, Bluhm said.
While there’s still not a clear view of the path to recovery, the vaccine news did give investors hope that “we’re one massive step toward the recovery,” which led to a meaningful shift in bond pricing and preferred pricing, he said.
There’s also a CMBS deal on the market in the budget extended-stay sector right now, he said.
“As one of the first moves to start opening up this mortgage market, I think it’s pretty meaningful,” he said.
There’s hope for the business traveler
As a lender in the hotel industry, Dilip Petigara, CEO* at Access Point Financial, said the vaccine news is “helpful, particularly for the business traveler to come back.”
“I was looking at some slides from (STR), and the Wednesday-to-Saturday differential still exists and Wednesday being down relative to Saturday, which shows the leisure travel is still there, but the business travel hasn’t fully come back yet,” he said.
Rolling out the vaccine and the widescale distribution of it is going to help get the business traveler back on the road, he said.
(STR is the parent company of Hotel News Now.)
State of the public markets
Sean Dell’Orto, EVP, CFO and treasurer at Park Hotels & Resorts, said the public companies are “looking for money everywhere when you’re burning cash every month.”
Park has 60 hotels that mostly fall in the full-service and upper-upscale segments in urban markets that see a lot of leisure travel, but the real estate investment trust does have big hotels in New York, Chicago, San Francisco and Hawaii, “which all are very troubled, challenged markets,” he said.
Given the scale of the company and the size of Park, Dell’Orto said the company has been fortunate to receive help from the bond markets, and “with the Fed coming through on the high-yield side, we were able to tap that market to help address some liquidity that could help get us out a couple more years of a runway as well as push out maturity.”
There’s money out there, but it’s money that is sitting out there waiting, said Mit Shah, CEO of Noble Investment Group.
“I think that this is the interesting part of our business,” he said. “We know there is a pathway forward. I tend to believe it’s not a hockey stick or a Nike swoosh but more of a butterfly that will kind of meander around and eventually get there, but it might go sideways for a while.”
Figuring out what the use of the money is going to look like is the big question ahead, Shah said.
“I think we looked at the public markets, and all those immediately, you were able to buy at a 40% discount when this pandemic hit … Friday (6 November) we went from a 15% to 30% discount to what research consensus NABs (that were lower than actual NABs). … Then on Monday (9 November), you closed the day and it was basically on top of NABs and now it’s traded off,” he said.
The ultimate question to answer is what is going to be the trade that’s going to happen, Shah added.
‘This is not an American tragedy’
There’s approximately $262 billion of equity capital “out there looking for a home,” but “everybody has a cost of capital,” said Tyler Morse, chairman and CEO at MCR Hotels.
There’s a huge bid-ask spread right now where buyers want a 30% discount and the sellers only want to do a 10% discount, and “nobody’s going to capitulate until they have to … you’re going to hold on with your fingernails until the end,” he said. “It’s a question of will there be an end? Can you limp through this thing by taking on rescue financing, preferred equity at 12%? Does that get you the hope note, or do you just throw back the keys?”
Morse added that no one is throwing back the keys right now, and he doesn’t think that’s likely to happen.
For companies like MCR and Noble Investment Group that have mostly select-service and extended-stay properties, there’s less competition right now, Morse said. There’s a lot less competition because the local and regional players are out, he said.
“It’s all the vultures and the sharks that want to give you preferred equity and rescue capital at 12%,” he said. “Should you take it? I don’t know.”
Morse said all the hotels struggling right now will come back in a few years, but they might have different owners.
“This is not an American tragedy. This is not a disaster,” he said. “It’s equity capital. It’s called risk capital. And sometimes you lose it, and you live to fight another day with somebody else’s money.”
*Correction, 16 November 2020: This article has been updated to correct Dilip Petigara's title.