GLOBAL REPORT—The discussion that will dominate the hotel industry when it emerges from the COVID-19 crisis is that of risk sharing, sources said.
During a Hospitality Tomorrow online panel titled “The post-corona age,” Keith Evans, chief investment and development officer at Ennismore, said several parties would be a part of the risk-sharing discussion.
“There’ll definitely be a third leg, too, a loud voice, which is the banks,” he said. “Do they want hotels to open as soon as possible? Will they be waving debt payments, and for how long? When will they enforce shortfalls and non-disturbance agreements, and will they be moving from what their positions were to this new world?
“Will hotels be allowed to open only when cash flow can be shown?”
Thomas Page, global head of hotel and leisure at legal firm CMS, said banks are being inundated with requests for help.
“(Hoteliers) are looking for better liquidity and/or government-backed loans. Banks are concentrating on the here and now, but they are better-capitalized and secure than 2008/2009,” Page said. “Banks cannot be aggressive on loans, as they do not want to own those businesses, and they have no one to sell them to, at least not at a good price.”
Panelists said banks possess liquidity and flexibility and are lending to existing customers. Collectively, bank capital—in other words the difference between assets and liabilities—is high.
Paul Pisani, SVP of hotel development at Corinthia Hotels, agreed banks are focused on the immediate problem.
“We have found banks to be open to discussion,” he said.
Evans said he doesn’t expect banks to change their business strategy despite being government-backed in several markets. For example, the United Kingdom’s government needed to push banks to lend in terms that work in a crisis, not in a manner that is akin to normal commercial terms.
Page said banks were kicking the can down the road and that a holiday on higher interest rates will not work for hotels getting no revenue now.
In the U.K., hotels that have a ratable value of more than £51,000 ($63,136.78) can access loans, but not grants, Page said, who added that valuation applies to most hotels.
Elie Younes, EVP and chief development officer for Radisson Hotel Group, said hotels have not been helped by the fact that disruption insurance has not yet kicked in.
“In some jurisdictions, this might happen soon, but I have not seen anyone paid yet, or who has been promised to be paid,” he said.
Some insurers in the U.K. already have announced COVID-19 is such an outlier form of disruption that it does not apply to policies, he said.
“I think the big challenge overall for hotel development will be bank financing, with more equity being required to finance projects,” Younes said.
Friction ahead
Dirk Bakker, CEO of the Netherlands and head of hotels in Europe, Middle East and Africa for Colliers International, said the alignment among third-party managers, franchisees and brands might be strained once hotels reopen.
“We will see more friction. Brands might prefer to see fewer hotels opens but with greater occupancies, while operators might want to reopen hotels where there is not the market demand,” Bakker said. “That would be the classic fees-versus-revenue debate, with operators not wanting to fund losses over time.”
He added the challenge involves lack of communication.
“Take those decisions jointly. Too much self-interest will cause problems,” he said.
Pisani said he only had one lease on his books.
“Lessees and lessors have to get together to make this work,” he said. “Operators traditionally stayed away from leases because of this risk, but both sides are bleeding badly.”
Page said leases would continue to be unpopular among some due to hotel companies’ stock-exchange valuations.
“There is a need for a new model, one not systemic of being lease-heavy,” Page said. “Landlords have to be flexible, such as in the U.K. where there is a moratorium on evictions.”
He added that paying back rent will not be simply a case of asking operators to do so as soon as the crisis is over.
Bakker agreed.
“Tenants with ground leases have the impetus to continue to fund them so that they do not lose the capital value of the asset, but there might be problems here if the crisis carries on for long,” Bakker said. “Landlords are discovering that rental income is not always secure. Of course, they might have learned that in the last recession.”
Panelists said ground leases will remain as pension funds favor their long-term, index-linked returns.
Younes said he doesn’t anticipate a move to management contracts as European institutional capital generally does not like them.
“We will see leases being renegotiated,” he said.
Lessons
Pisani said for most the world has fallen off the cliff in the last three weeks. There are huge amounts of capital wanting to be invested, but the dynamics of funding will change, he added.
“It was only a short time ago we (at Corinthia) were congratulating ourselves on a good year,” he said.
Ennismore officials are similarly revisiting their strategies.
“We have to reprice risk in our underwriting,” Evans said. “It will be about downside protection and looking at downside volatility.”
Panelists added that interest rates remain at historically low levels, so debuts might not increase in value, even though their spreads will.
Younes said no one could underestimate the importance of the proper control of working capital.
That is not always so easy in every market, Evans said.
“I have friends across Mediterranean, and we all know how every summer is critically important to them,” Evans said. “Some are still hopeful for a summer season, although nowhere as good as a normal year. There is a lot of exposure there, as there has been a lot of bank refinancing.”
Page said he learned those lessons when he was involved in the opening of hotel with underwriting valued at $2 billion weeks before the 9/11 terrorist attacks.
“Ensure you learn and keep the cash,” he added.