STAY WITH ME: HOTEL OWNERS LOOK AHEAD TO THE RETURN OF LEISURE AND BUSINESS TRAVEL
W/ D.J. RAMA, CHIP ROGERS & BOB WEBSTER [02.08.2021]

 

Download PDF



Spencer Levy
I'm Spencer Levy and this is The Weekly Take the hotel business has taken it on the chin due to the pandemic, historically low occupancy rates, massive job loss, hotel closures across the country. On this episode, we'll talk about the industry's path forward with a particular eye on the loan program designed to help.

Chip Rogers
We found out about 95 percent of hoteliers applied for a PPP. So that's really good. The new version of the PPP is even better.

Spencer Levy
That's Chip Rogers, president and CEO of the American Hotel and Lodging Association, a career legislator from Georgia. Chip has served as a hotel industry leader since 2014 and has advocated for the paycheck protection program in the government's COVID relief packages.

D.J. Rama
What you're finding is that each market is behaving differently. Minneapolis and Chicago assets are running in the 14 percent occupancy. Washington, D.C. is running 16 percent. So I think it's all state by state, locality by locality and what the municipalities are allowing and not allowing.

Spencer Levy
And that's D.J. Rama, the president and CEO of Aurora Hotels, a family owned hotel operator that's been in business for more than forty seven years. Based in South Carolina, Aurora’s portfolio includes more than 30 properties across the United States and two in India. And from the CBRE team, we're also joined by one of the foremost experts on the sector, Bob Webster, based in Atlanta. Bob's been working in the hotel real estate sector since 1985. So he's a real voice of experience when it comes to downturns and recoveries.

Bob Webster
From a capital markets perspective, Spencer, this is a very different crisis compared to, say, when the Lehman collapse occurred in 2008. I've been very surprised at the magnitude of the liquidity in this space.

Spencer Levy
We'll talk about the state and health of the hotel business, trying to do more with less everyday operations amid the lockdown and the climate for investment as we look to recovery. We'll drill down on the relief programs that have come from the nation's capital, as well as the practice and evolving challenges of actually getting money to an industry in need. Coming up, hotels and the 411 on PPP. That's right now on The Weekly Take.

Spencer Levy
Welcome to The Weekly Take. We’re very happy to have you here. And I know we have to talk about hotels, the good, the bad, and what's coming forward. Let's start now just big picture, Chip. How is the hotel industry doing right now?

Chip Rogers
If you only took a snapshot of today and said where is the hotel industry at this very moment here in early February? The reality is, as I'd say right now, is the worst of all. And I've been making that case for a while, that January through April, maybe even May, might end up being the worst of the pandemic that we've seen. The difference is, is that now we know there's a light at the end of the tunnel. Now we can see what recovery may look like, even though it's a ways away. I do believe that people are looking to, you know, June, July as the time when the growth begins to reemerge. And that inspiration of where we may be in half a year, I think makes a little bit better.

Spencer Levy
Thank you, Chip. So what's your point of view? And if you can be a little specific on different types of assets, different locations.

D.J. Rama
Our full service hotels, which relies on meetings pretty much. We're running 20 percent occupancies there. So we're making those full service hotels like leisure hotels and giving a rate discount for us to attract them to stay there. All our select service hotels are running anywhere in the ranges of 55 to 60 percent. So we see some life in the select service, and that's all leisure customer. What's interesting this weekend, Friday, Saturday, Sunday, Florida, we have 21 locations. We ran 82 percent occupancy. So the leisure destinations are where people are going to restrictions are being lifted in Miami. So people are going down there. Orlando, Disney as a park is 50 percent occupancy. They're allowing people to walk in there. So what you're finding is that each market is behaving differently. Our Minneapolis and Chicago assets are running in the 14 percent occupancy. Washington, D.C. is running 16 percent. So I think it's all state by state, locality by locality. And what the municipalities are allowing and not allowing, but leisure is who's sleeping in our hotel rooms right now.

Spencer Levy
Bob, give us your take on the current state of the industry and please give us some specifics on the capital markets state of the industry.

Bob Webster
So from a capital markets perspective, Spencer, this is a very different crisis compared to, say, when the Lehman collapse occurred in 2008. I've been very surprised at the magnitude of the liquidity in the space, looking to acquire hotels and looking to help with the liquidity distress in the ownership side of our business. The trading market is actually three times what it was coming off of the Lehman collapse in 08 following that downturn. I think liquidity really is bailing out values, the discount to value, I say, compared to 2019 a year ago, our discounting probably inside of 20 percent, Spencer. And that's significantly less than what I think everyone was planning for when this began in March of last year.

Spencer Levy
Well, that is pretty remarkable, Bob. And I know that early on in the crisis, I think it's fair to say we did see discounts as much as 30 percent. And for some. More distressed assets, but you also traded some assets inside of 10 percent, isn't that correct?

Bob Webster
We did. We did, but those were durable assets, Spencer, and durable assets trade very differently than vulnerable assets. And basically the definition of a durable asset as a top tier hotel that was doing well in 2019, had very little distress on its capital structure. Burn rate was a fraction of what the burn rate of a vulnerable asset is. And it was in a market where, you know, long term ownership makes sense for investors. So that's a durable asset. Vulnerable asset is an asset that is burning a significant amount every month and also is in a market where the recovery is more questionable. And so that's the tale of two property types. And so the trades that we made in the fourth quarter of last year were all trades that were inside of 10 percent discount to 2019 value.

Spencer Levy
Well, Chip, you've been working on this for a long time, but particularly hard since March. Can you tell us a little bit more about the state of government programs to support the industry, including the PPP?

Chip Rogers
Yeah, so let's start with the PPP, because that's the one that is, I guess, most universal across the industry. It started way back and as you indicated, March of 2020. In fact, President Trump signed it March the 27, 2020. It seems like a lifetime ago. It was an incredible effort by Congress. It was passed unanimously, largest spending measure outside of the normal budget in the history of the U.S. history of any body, anywhere. And so you had to give them a lot of credit. Now they were attempting to respond to something that no one could have ever planned for and in the response wasn't perfect. So there actually was a PPP flexibility act that came after that, that really, I think, was almost as important as the initial one to give owners the ability to extend some timelines on how and when and where they spend that PPP money. To put this into perspective, among our membership, which again, as I indicated, covers virtually the entire industry, we found out about 95 percent of hotelier's applied for a PPP. So that's really good. The new version of the PPP is even better. Under the original PPP, you could borrow up to two and a half times your average monthly payroll. In the new version, what we're calling second drawer, you can go back and get another PPP loan for hotels and restaurants only you can get up to three point five times your average monthly payroll. And that's a big help. Now, it does require that you show a twenty five percent revenue loss compared to the same time, same quarter from the previous year. That should not be a problem for virtually any hotel across the U.S. to be able to show that. It clarifies and this is an enormous tax benefit, it clarifies the money that you receive from the PPP is not included as income to your hotel. But if you spend it on the identified proper expenses, then it is deductible with respect to the IRS. So from a tax standpoint, that's going to be very helpful for folks who get the PPP money and use it the right way. If you do get a loan of under a hundred and fifty thousand dollars, they basically waive any requirements of showing how you spent the money for forgiveness. You just sign a single page saying that you did it the right way. So that's good if you're getting a small PPP. Two other things. The troubled debt restructuring was included in the second package is not necessarily PPP. It's part of the overall relief bill that troubled debt restructuring was extended for the entire year of 2021, which is critical. And then the final thing, the employee retention tax credit was great and just got a lot better under the original PPP if you retain those employees, you get a refundable tax credit of up to ten thousand dollars in wages paid to those employees. Under the new PPP, you get a refundable tax credit, up to 70 percent of the wages. And it's not ten thousand dollars for the year. It's ten thousand dollars per quarter for a total of forty thousand dollars. So from a tax standpoint, that is a significant would it be 28000 dollars per employee over the entire year with respect to an employee retention tax credit? So a lot of good stuff in that in that final version that got passed just after Christmas.

Spencer Levy
Well, D.J., let me flip it to you. What are the real world implications of what Jim just suggested? What are you doing vis a vis the PPP or the other programs right now?

D.J. Rama
So from our perspective, we have submitted all our applications. Right now, the SPAs are taking a little bit of a longer time to deposit the money into our accounts. We are also getting a lot of questions then the first round. Chip, I don't know if you've heard that, but basically there's quite a few questions and answers out there going back and forth. So we feel very good that hopefully the money doesn't run out and all the hotel owners get the money. So what this will do is this will allow us to have a longer runway from a burn rate perspective, because we don't know when business will come back, that means the business traveler and the group, so this PPP money allows us to really help us to have a less burn rate. Second is what Chip mentioned about the Troubled Debt Relief Program. That also is a strong forbearance program for principal and interest that are hotel owners can go to the banks and say, listen, I'm a troubled debt and please help me for 2021. Now, are the banks really going with speed and saying, yes, you can have the forbearance? No, they have the right to say yes and no. We have gone to our banks again and we've pretty much received the answer no, and we've challenged them, but we have to move forward. So, again, PPP money is really helping us from a forecast perspective, burn rate perspective and also the employee tax credit. It's basically any dollars and cents that helps the middle of the page to preserve cash right now.

Spencer Levy
Thank you. So Bob, let me turn to you. A lot of the conversation here revolved around capital structures, a Troubled Debt Relief Program. And one of the things that, Bob, you've been tracking very closely, not just the debt capital markets for new originations, but the debt capital markets for the loan sales. Tell us a little bit about what you're seeing there and what that might bode for, for owners of assets that have their loans being sold.

Bob Webster
I think predominantly lenders are reticent to take back assets. The only asset sales that we've made for lenders to date have been deed in lieu, where the borrower has essentially handed back the keys and released it from their ownership. But in a forced liquidity trade, which is a trade where the lender has to fight for the keys, that hasn't happened yet, Spencer. And the good news about Chip’s efforts and D.J.’s efforts here is they're providing lifelines for owners who are in a difficult liquidity position and might be facing lenders who are not going to forbearer any longer. That's what I love about this program that that they've fought to secure. So as we look forward, there's a tremendous amount of liquidity in the system for new debt, for new acquisitions, not as much liquidity for refinancings, but I do think that the cost of that capital is going to continue to come down.

Spencer Levy
Chip, let me turn to you now and I'm going to go to what I'm told is the most challenged area within hotel loans, within retail loans is the conduit space CMBS loans. When you talk about your troubled debt relief program, what do you say to borrowers of conduit debt? Will they get additional relief? Does this help them? Tell me what your point of view is.

Chip Rogers
Well look, CMBS is a bear if I go into a member of Congress and I say, I really think we should lower the income tax rate, the corporate income tax rate from 30 percent to 28 percent. They understand what the income tax rate is. And that conversation is usually pretty short. I don't have to start at a baseline of explaining to them what a tax is. Right. With CMBS, it's a whole different world. As we began lobbying on this, we had to first explain to people what is CMBS, what does that stand for? What does that mean? That process to do that among hundreds of members of Congress takes a long time. So once we got through the explanation phase, which still continues to this day, it was all right. Now, can we get support for this? When we began getting support and it was balanced, Democrat and Republican, and we got quite a few signatories to the bill. Now, I always remind people that in Washington, D.C. or any legislative body, for every piece of legislation, there's a thousand victories and a thousand losses along the way. It's not just the bills introduced and then it's signed into law and that's it. But here's what I do know is that early on when we started this process of really looking into what was happening with CMBS, we found that hotels were going into delinquency and the folks who were supposed to help work those out were not doing so as the process moved along. And we got a lot more attention to this issue. Now, all of a sudden, there was a little more flexibility. Now it's nowhere near what you would find with the traditional lenders D.J. referenced a while ago, because the whole mechanism of how CMBS is set up, as you know, is a completely different vehicle. But we do know there's been some flexibility around CMBS. Now, we're not stopping with this because the problem still exists. We still believe that the Hope Act is an answer to that problem. And if you look at commercial real estate, as you know, there are still a lot of folks that will be struggling through 2021. This is not over. And so the need is still there. We're going to continue to work on it. But just having legislation sometimes addressed in a very public way can begin solving the problem you were trying to solve from the very beginning.

Spencer Levy
And just for the benefit of our listeners, the Hope Act was going to put preferred equity between the common equity and the CMBS debt as the one structure that was considered to be legal under the remix or the rules behind the CMBS, and that's what Chipper's is referring to.

Chip Rogers
Let me just add to that, Spencer, because some people will tell me that they've been able to use their PPP funds for that or the PPP loans don't violate any of the restrictions on CMBS. And that is true because the lenders or the CMBS folks are looking at PPP more as a grant than a loan. There was a lot of questions about that early on, but for the most part that's been cleared up.

Spencer Levy
So, D.J., let me without getting political here, we have a new administration, new people in charge, new rules from your perspective, tell us what's worked, what hasn't worked and what you'd like to see moving forward to make the process as seamless as possible.

D.J. Rama
I just want to say thank you to the United States of America, because we operate in India, nowhere in the world has money been deposited in anybody's owner's account when there's a trouble like this pandemic has happened. So, you know, obviously we're all grateful that the previous administration came up with this instrument called PPP and now it's going to round two. Obviously, under this new administration, there's a little bit more scrutiny happening with the affiliation rules of who can borrow, who cannot borrow. There's a cap of four million dollars. And at the same time, it's a little bit slow. I haven't heard too many hotel owners because we all call each other like, hey, do you get your money deposited? But it's still getting through the process. So I think what's going on is that there's a little bit more documentation of verification happening. The automation part is all it's all good because we went to the same banks that we went with in round one to make it more efficient. And I think what's happening is the larger the bank, the more scrutiny, the smaller the bank, the less scrutiny. And that's what's happening right now.

Spencer Levy
Let's talk a little bit more about some of the changes that have occurred in your operations during the pandemic and what you think are going to stick post pandemic.

D.J. Rama
Great question. First of all, all the franchise brands have really stepped up to the plate to help the hotel ownership community. And that means taking all the SOPs and saying what's going to work, what's not going to work, and how do we save cost per occupied room for the hotel owners to have a GOP margin available to pay the debt service. So impacts have been obviously the housekeeping program has been very beneficial, where we basically provide one housekeeping full service during their entire stay. And obviously that does help tremendously. We are now pushing all brands to say, let's adopt this. And if a consumer wants a service, they can pay a one-time fee for the service. So that's been a very effective. Breakfast programs have also been modified to lower the cost per occupied room for breakfast costs and making sure how do we execute that? So that has been a good direction. Another one is the amenities program, meaning the soaps, the shampoos, the lotions. You know how we are putting out bulk containers within the shower zone and be able to save costs on the repetitive, throwing away all the amenities, every check-out. So these programs are helping and they're all little programs, but it adds up in our company. What we have found is all the efficiencies that we've placed in 2020. We're carrying that forward in 2021. We just got done with budgeting and it showed up really loud and clear compared to 2019, our rev par is down for 2021 almost by 40 percent rev par, but our GOP margin is same as 2019. In 2021 is what we're projecting. So what that tells you is the efficiencies that we adopted in 2020, we're going to hold on to them. We're going to be very protective with the franchise brands to make sure that they allow us to continue adopting them as opposed to unwinding all those when the markets are back.

Spencer Levy
Well, D.J., I'm going to steal a phrase that I read in the Financial Times about another frequent traveler. And believe me, I was a frequent traveler doing two hundred thousand miles a year. I had the highest status. Mariott. So there's a shout out to those guys, but they talked about the Muffin Mountain that was in the breakfast room that they did because food was cheaper than labor. Putting aside the food safety issue, per say, how much of your operational savings are labor related? How many of them are goods and other things?

D.J. Rama
I would say that majority is labor related. We have all learned how to do more with less. And I'll give you an example of room service. Typically in the past operational model, we would have a dedicated person answering the phone calls for room service. Now, the person was delivering the room service, has a phone on his hip and he's taken the order while they're moving. So the PBX has been disappeared and it's all direct dial in terms of where it needs to go. So. These are kind of little operational items that we have create efficiency on the payroll side in terms of the goods and services. Obviously, we're opening up a hotel in two weeks. I couldn't get supplies to fulfill that hotel. And obviously American hotel register because some of the great companies are no longer around or they're going through bankruptcy process. So we had to scramble finding products to just fulfill into our new hotel that's opening up. But again, going back to goods and services, I'm not seeing a tremendous amount of savings on that. I think those costs are flat on goods and services that we buy, but it's all about labor and the usage is where we're saving.

Spencer Levy
So, Chip, let me turn to you now, and I just want to follow up on a comment D.J. made about maybe the slowdown of the ability to get these loans a little bit more scrutiny right now. Are you seeing that? And you see that just as a short term issue?

Chip Rogers
I do see it as a short term issue. Keep in mind that, you know, the bill got passed and signed into law just after Christmas. A lot of the banks didn't get back under way at looking at these here until January. So I think just like we experienced the first time the original PPP came out, there was a little delay at the beginning. You might be seeing some of that now. There probably is, to D.J.’s point, a little more scrutiny out of this administration. We all learned more about how we were going to operate in a new environment every day. Well, the same thing is happening at the SBA with some of these banks. I mean, the first time around, there was enormous pressure, if you recall, back in like April, early May, to just get the money out the door. What really bothered me last time was and this is a general commentary on the media, was they took their four or five stories of where people improperly got PPP money and made it seem as if the program was a failure. The reality is, nothing could be further from the truth. For every one story where someone improperly got money, I could give you a hundred stories of where someone's business was saved because of that, and they weren't focusing on that. I think it'll speed up here quickly.

Spencer Levy
Well, now I'm going to give you 101 stories because my wife owns her own physical therapy practice and is the recipient of a PPP loan without which the lights would have gone out permanently. So it is a savior not just in the hotel industry, but beyond. Bob, let me turn to you now. Is now a good time to buy? I would like to know your point of view on the is there an opportunity side as well?

Bob Webster
Sure. So let's just talk about our estimates. Our New York team still believes that the permanent closure number will be around 20000, could actually reach 25000 of the 20000, 5000 of those rooms will be changed to alternative use is our current estimate. But, you know, New York City is not a city that you can put down for too long. It's been through struggles in my entire career several times. It always bounces back. And I think from if you look at current investor sentiment towards New York, it is a risk off sentiment. Risk off sentiment creates incredible inefficiency, very difficult to value a hotel, for instance, in New York City today, the bid is just not there. But if you look at any other time where a market like New York has become this inefficient, that's when investors who are truly opportunistic will buck the trend of the risk off and they'll take risk. And those risks typically are rewarded with very high returns. I know that we're marketing a number of assets in New York right now. The interest level is definitely higher today than it would have been and was back six months ago. So I suspect that the truly opportunistic capital is now doing their underwriting. Obviously, there's less risk today than there was six months ago because you've had six months of less burn. Right. And the burn rate theoretically should start to decline as we come out of this, although I think that decline to Chip's point earlier will not begin and probably until the summertime. I think we are at the at the depths of this pandemic right now from an ownership standpoint.

D.J. Rama
What's interesting, going back to Bob's point, we are looking to buy, but we're also looking to sell. So just last weekend, we had 450 rooms we built at ground up and it's only been a year. All three are select service and capital is chasing and we're selling it. We put a price out there and from a bid to ask, price are spread was only in the single digits, five percent. So we said, OK, you know what? We're going to move some chips off the table and shore up liquidity just from a balance sheet perspective. So on the sell side, that's happening because we are seeing liquidity chasing good institutional select service assets in terms of buy. Yes. What we have a thesis. Is that full service hotels, e are not going to be able to replace those or build those in the next five or eight years, construction financing is going to be a challenge. Cost of building a full service is going to be, you know, if yesterday constitute 50, I think that price point goes to 450. So we feel that a lot of the REITs and the institutional owners are going to be faced with that capital renovation dollars that are going to be needed in the next three to four years because the pips are all being pushed back until 2022. So we are right now identifying full service hotels and seeing key markets that will come back. And yes, there's this notion as meetings going to come back are not going to come back. I think meeting will come back. Yeah, there may be an evaporation of about 25 percent that people change their behavior to do Zoom. But you cannot exchange the dialogs of, you know, the annual conferences that we go to and build those relationships. So we really feel full service hotels is where we need to focus right now and also focus on acquiring dirt where it makes sense for replacing some of these key brands that are to the market because they're converting to Sonesta. One hundred and twenty seven of them. And we're also going to the brands right now and saying, can we convert this hotel? You told me two years ago, no, but can you take this hotel and convert to a preferred brand that we like? So we're doing a brand upgrades right now as we speak. And we were successful in one brand to upgrade and we would have never thought we would have gotten that brand. So these are the dynamics that are happening right now and we want to take advantage of the timing.

Spencer Levy
Well, we're just about out of time. So I'm going to ask everybody now for their final thoughts of what their outlook is for the next year or so during the pandemic and beyond. And I'll start with you, Chip. What do you see? And then, of course, the most important question, if you wouldn't mind whispering in the ear of our friends at Marriott to allow me to maintain my high status, even though I haven't traveled in a year.

Chip Rogers
Well, we started that last part. First, I ask a lot of Marriott, and so I'll put your put your request on the list, Spencer, but it's not at the top. I'll just say that, look, I think someone indicated this early on in this conversation, if you can make it to June. You're going to be in good shape, the first half of 2021 in my estimation, is going to be worse than all of 2020. The second half of 2021, we're not going to be back to 2019 levels. That's not going to happen until the end of 2023. But it's going to give people hope. People are going to look once they get to June, July and August they're going to say OK, I made it through that. It's still a struggle. But we now we know we're on the upswing.

Spencer Levy
Great. Bob, final thoughts from you.

Bob Webster
I agree completely with what Chip just said. I personally feel, you know, based on the research that we're seeing from hundreds of calls with owners, that demand will bounce back and be a surprise to the upside. And I would peg that to Chip's timing. Second half of this year is when it begins, and I think 2022 will be an outlier

Spencer Levy
Great. And D.J., final thoughts from you.

D.J. Rama
So I've been conducting town hall meetings with my associates. And number one, we've been all trying to take care of our guests and our associates. And there are so many stories out there. Number one is to be in a therapist for our people and really making sure everybody is safe and doing the best to support them. So we had four pillars that we focused on as a company to say this is what we got to do. We need a good election outcome and a peaceful transfer of power, which we all know that month of January that wrapped up, number two was a PPP money. We needed that. Well, that's behind us. Number three, we needed the vaccine and the vaccine distribution. And now what we're finding is there's a correlation between vaccine distribution and room night pick-ups, which we love that we're seeing that in states like Florida. And fourth, we need our vaccine distribution leading to consumer confidence. And that means our business transient customers and our group meetings. Those are the last two that are going to come out. And we need our legislation to work on the limited liability protection, because at the end of the day, we need Fortune 500 companies to say, let's turn on the lights, let's go to work in our offices and let's travel. But going back to Chip and Bob, we feel very strong. June, July onward, we see a great shining star and we feel very positive that America will travel.

Spencer Levy
Well thank you, D.J.. And on behalf of The Weekly Take, I want to thank three fantastic guests talking about hotels, PPP the present and future of the hotels industry, starting with you, Chip Rogers, president and CEO of the American Hotel and Lodging Association. Thank you for joining us.

Chip Rogers
It's been my pleasure. Thanks so much, Spencer.

Spencer Levy
You bet. And then I want to thank D.J. Rama, president and CEO of Aurora Hotels. Thank you for joining us.

D.J. Rama
Thank you, Spencer and Bob, for inviting both of us here.

Spencer Levy
And then last and certainly not least, our friend and colleague, Bob Webster, vice chairman, head of Institutional Properties for hotels for CBRE. Bob, not only thanks for joining us, but thanks for putting this episode together.

Bob Webster
Thanks, Spencer.

Spencer Levy
For more on our show, check out CBRE.com/TheWeeklyTake. We'd also love your feedback. So if you found us on Apple podcasts, Spotify or another platform, please subscribe rate and review us wherever you listen. Thanks for joining us. Until next time. I'm Spencer Levy. Be smart. Be safe. Be well.

View Additional Episodes of the Weekly Take