Crisis: Management

Navigating the front line of operations

Over the past six weeks, the hotel industry has changed dramatically. First, meetings and events were rescheduled for later in the year or were canceled entirely. Then, amid stay-at-home orders from various states and municipalities across the country, the industry saw precipitous drops in occupancy and shuttered hotels. But, there is still some opportunity to be found, and management companies are working hard to weather the storm, to make strategic decisions, and to ready their properties and the industry as a whole for the eventual recovery, aiming to hit the ground running.

While management companies operate properties across the country, amid both the hardest hit regions and those where the coronavirus was slower to take root, the story has largely been the same. “The first wave started with cancellations of meetings and conventions,” said Jerome Cataldo, president/CEO, Hostmark Hospitality Group. Then, he noted, came the city and state regulatory mandates.

“With very few exceptions, all of our hotels are down,” said Bob Rauch, founder/CEO of RAR Hospitality. “The extended-stay properties are doing better. We have a Homewood Suites that’s been between 20-30% occupancy, and the rest of the hotels are about 10-12% occupancy.”

Mike Nixon, chief development officer/president, Expotel Hospitality, agreed. “We saw occupancies at our corporate and interstate properties drop to levels that are crazy,” he said. “I had a hotel last night that rented four rooms, and another that rented one room.”

These companies, of course, are not alone when it comes to those numbers, instead representing the situation for most hotels. For hotel management companies, coming up with a plan of attack to deal with this situation has been critical.

“As we saw the depth of the impact of the cancellations, we immediately assessed each property as to how to staff it minimally if it were to remain open, and an alternative plan of closure if things were getting bad,” Cataldo said. “We were fortunate that we jumped to that mode quickly because when the edicts came out in various states where we have properties, we were prepared with our owners to navigate through those options the best we could.”

“Obviously, you have to be ahead of the situation,” Nixon said. “Not being ahead of the curve and taking care of those owners in the best way we know how goes against what you agreed to do when you took on the management contract.”

Pat Mitchell, EVP, Marin Management Inc., noted that the goal is to keep assets maintained and secured. “To do this, it is critical to have a plan in place where the measures you take now will ensure that you emerge from this global crisis a more resilient organization with a solid financial footing,” she said.

Top priorities include “protecting the physical, moral and financial health and well-being of employees; ensuring adequate supply inventory required in this new environment that can be shared across properties; and ensuring hotels that have shut down or are at extreme low occupancy continue to maintain and keep their distribution systems in order,” she said.

Donald J. Urgo Jr., principal/managing partner, Urgo Hotels and Resorts, said three of the top operational challenges have been cash, stabilization and physical limitations. “Working capital and liquidity are the biggest challenge at both operating hotels and those that have suspended operations, not to mention our own corporate needs,” he said. “The overwhelming process of developing an austerity plan for numerous hotels, handling the human resource aspects of implementing that plan (i.e., trying to deal as compassionately as possible with our associates), and coordinating those plans with owners has been all-consuming.”

Rauch noted that the first step RAR took was to preserve cash. “I reviewed every single expense, seeing what I could cut,” he said. “My second move was to meet with hotel employees. We told them we’d have dramatic cutbacks that I felt would last about six weeks, but it could be less and it could be more, and that we were going to furlough almost all employees at that time, but we’d continue to pay their insurance…and we’d try to get them some hours if we could.”

Nixon noted that the cost savings didn’t stop at the property level. “At the management company level, all of the partners gave up 100% of their pay,” he said. “Everyone else gave up 50%. We didn’t put an end date on it. It’s until we can get some relief or recovery.”

Expotel has been working to secure funds from the Small Business Administration (SBA), with the goal of restoring those whose salaries had been cut by 50% back to their original amount.

And, at the property level, every salaried employee is now working shifts on the desk, cleaning rooms and doing tasks previously done by hourly employees who have been furloughed or laid off.

Mitchell said that not every property is in the same boat. “We have some hotels that continue to perform at an occupancy level that supports the staffing with consistent operating cash flow,” she said.

For others, “We encouraged employees to use their PTO, and assisted where needed with unemployment. We also worked toward placing some out-of-work team members at other locations in an effort to continue their earnings.”

And many companies, like Aimbridge Hospitality, have charitable organizations to assist employees. “Something we’re very proud of is our new nonprofit foundation, Aimbridge Aid, created as the charitable arm of the company for one sole mission: to support our associates and the communities we serve,” said Mike Deitemeyer, global president.

“Taking care of our associates, who in turn take care of our guests, is the core of our culture,” Deitemeyer added. “We accelerated the launch of Aimbridge Aid due to the deepening impact that COVID-19 has had on our associates around the country. The foundation will activate programs allowing our associates and partners to make donations and assist our fellow associates in hardship.”

Two of the biggest expenses that a hotel has are labor and energy—so energy reduction was the next step for many management companies.

“I started cutting wings of the hotel off,” Rauch said. “A lot of newer hotels automatically shut off energy when there’s no guests around, but I cut down the size of a four-story hotel to one story, so I was dealing with 25-30 rooms and not 100-120 rooms. That allowed me to reduce my expenses quite a bit.”

In addition to cutting staff and cutting energy costs, cutting services at operating properties was important, too. Cataldo noted, “All of our guests are understanding of the situation; they may not be able to sit in the restaurant and have a meal, but if they have grab-and-go available to them, they know they’re being taken care of.”

Additionally, hotel companies have been looking for relief wherever they can find it. “With every lender, I tried to get relief in the way of a forbearance agreement…[such as] taking the next six months of loan payments and putting them on the back end of my loan,’” Rauch said. “So far, it’s been received well by all but my CMBS lenders. Because they sold off those loans to bond holders, they won’t give me that kind of relief; the kind of relief I’m getting from CMBS lenders is reserves and taxes.”

Next, Rauch said, was to seek relief from brands, utilities, local and state governments, and vendors.

For her part, Mitchell added, “We immediately started working with our owners with forecasting and constantly updating this based on the newest information available. We looked at their cash flow and helped them to determine how to prioritize. We started looking at expenses that could be eliminated or delayed, and contacted government agencies to reduce or defer transient occupancy taxes. We’ve been assisting owners as needed in completing Paycheck Protection Program (PPP) and Economic Injury Disaster Loan applications through the SBA.”

“From a financial standpoint, we’re being very selective about vendors that we’re paying, asking for them to be patient with us as we go into a 30-, 60- or even 90-day category with them,” Nixon said. “It’s not business as usual when it comes to accounts payable. We’re looking at every bill, asking, ‘Is this something we really need?’ Simple things like if your dumpsters were being picked up three times a week, are they still being picked up that often even though occupancy is down to nothing? Those are basic fundamentals.

“This gives us an opportunity to sharpen our pencils and make sure we’re doing right in every department, looking at the way we’ve always done things,” he added.

With regard to government relief, such as the CARES Act, most agreed that it’s a good first step, but the industry will need more. “Almost every hotel management company similar in size to ours is likely going to rely heavily on the government relief packages to keep our key personnel employed for the next few months and, more likely, several months,” Urgo said. “That relief will also be needed to try to retain laid off or furloughed employees. This is the case at both the corporate and property levels. It will be critical to our ongoing operations for the government to supplement the relief packages that have just been implemented. The relief is enormous, but the industry will need a lot more help to survive.”

Dave Johnson, CEO of Aimbridge Hospitality, added, “As an industry, we’re working with AHLA to advocate for additional packages that address relief specific to hotel owners and affected associates.”

For his part, Rauch noted that when the loans were first offered, there was a lot of confusion surrounding the best ways to go about utilizing them. “It’s not easy to navigate. I’m not blaming anybody; it’s unprecedented,” he said. “Truthfully, it’s easier to go to the lender and franchise company and ask for help, as opposed to navigating all of these grants and loans and trying to figure out what’s best. It would be a lot easier if this were set up in a way where you could just work through this and the federal government would require banks to be flexible.”

From an operational perspective, while hotels have always been focused on cleanliness, those still in operation have had to really think about steps to take to ensure the safety of guests and employees. “Clearly, operationally, following all of the guidelines and recommendations from the CDC and others, and best practices to help safeguard our guests and employees, were immediately put into effect,” Cataldo said.

“We’ve got policies about distancing from guests and distancing from other associates, cleaning your work area before and after your shift, and making sure you report if you don’t feel well so we can take appropriate actions,” Nixon added. “Before, if someone went home sick, they just went home sick. Now, we have a questionnaire about how long you’ve felt sick, who you’ve been around the last four days, what area of the hotel you’ve been working in, etc.”

While all hotels weighed the option of whether to stay open or close for the duration—and some properties were legally required to close—remaining open is far preferable for long-term success.

“Keep operating if possible,” Urgo said. “It’s not possible for many, particularly the big-box hotels, but we’ve found that the revenue needed to cover the incremental variable cost of staying open at most of our properties is much lower than one might expect. There are short-term benefits for the asset itself and even bigger long-term benefits for the business. For those hotels that must suspend operations, maintaining a minimal on-site operating presence to conduct basic preservation maintenance tasks and provide some level of security is critical.”

Staying open, he said, is important for morale. “Do what you can to maintain an infrastructure that will support some level of ongoing operations and project confidence to your personnel that there is short-term business now to sustain operating hotels at a minimal level,” he said. “Your teams need to understand and believe that we will weather this storm as we’ve done previously and come back strong the moment that the traveling public turns the faucet on again.”

Mitchell agreed. “Stay open if you are able to,” she said. “Maintain your teams as much as possible and focus on sales efforts with a solid plan to move forward into the future. As tough as it may be for us right now, today’s efforts are more important than ever in building tomorrow. If you are closed, you can’t be proactive.”

Sales force

While staying open is the goal for management companies, sales efforts can’t be business as usual. With nonessential workers staying at home and leisure travel at a standstill, demand drivers have radically changed during this pandemic.

“We continue to be aggressively robust in our sales efforts in communicating with our partners and reaching out to new ones, maintaining relationships and developing new ones, maximizing existing business and looking for new business too,” Mitchell said.

“We quickly pivoted our entire sales organization to source and bid on business from the essential industries that are traveling to support the pandemic response,” Deitemeyer said. “Our teams in sales, operations and legal are working differently to realize these new types of business while ensuring safety protocols are in place.” 

“We are fortunate (and, in some ways, unfortunate) to have several hotels in locations where these needs exist,” Urgo said. “The situation is, perhaps, more difficult for the properties that have suspended operations. The uncertain situation makes it difficult to develop a specific strategy for those properties in terms of trying to book future business and plan appropriately for the personnel that are needed both before and at the time the recovery begins.”

Urgo noted that after implementing an austerity plan to drastically reduce operating expenses and discussing the cash situation and outlook for each hotel with their owners, the next step was to gather the sales leaders. “We launched a company-wide sales initiative to book first responders and disaster relief teams,” he said. “Our sales team generated 3,000 room nights from various organizations in just three weeks. There are thousands of room nights pending over the next few weeks.”

“I’d recommend completely revisiting where demand is coming from over the next three months to get out of this more quickly,” Rauch said. “The same people who were traveling last month are not traveling at the moment and probably won’t be for a little while. You can’t just open up the regular playbooks. Find guests using community organizations, churches and synagogues, healthcare organizations, hospitals and universities—those are the drivers of demand for the next 90 days. You don’t want to come out of this too slowly, so do this today.”

It isn’t just alternative groups companies are looking for; they’re going after them in alternative ways. Rauch noted, “I told my salespeople, ‘I want you to think in terms of being more digitally focused, being more social media focused, and finding those pockets of demand that include the healthcare sector and people who need to be away from their families because they want to do a 14-day quarantine, or they just came from a hot spot.’ That’s tough because a lot of those salespeople are not social media experts. We boosted some Facebook posts within 10 miles of the hotels; those posts told the community, ‘We are open.’ We gave everyone premium WiFi at no cost, we eliminated parking expenses and had a special rate for healthcare workers. We did everything we could to stimulate enough demand to keep the lights on.”

What’s next?

The most difficult part of coming up with a recovery strategy is the uncertainty regarding how long this will last and how deep the impact will be.

“We’re fraught with uncertainty,” Cataldo said. “We try to concentrate on things you do know or do have more clarity on, and try to make wise decisions, and then prepare for some of the outcomes that are uncertain at this time but could be possible. We are looking at it from a perspective of bringing help and capital solutions to our clients and others that may benefit from our help.”

“[The uncertainty] is the hardest part dealing with this situation,” Mitchell agreed. “No one knows what the future holds, but we do have plans in place to prepare for different scenarios as they may unfold. Our plans have target dates based on certain events taking place.  These target dates will shift as needed until expected events happen.”

Regardless of how long the situation lasts, Johnson noted, “Our continued focus is on supporting our owners and mitigating the effects of this global crisis on our properties and associates. Early on, we took proactive cost-containment initiatives to prepare us for the long term, to be on the front of this recovery, whenever it happens… Constant communication and engagement with all stakeholders and associates has been, and continues to be, very important.”

Looking at the rest of 2020, Urgo said, “Our goal is to stabilize each operating hotel and sustain, at a minimum, breakeven occupancies with a continued focus on finding more crisis-related business for the next several weeks. Booking new business for the last two quarters of this year is critical at both the open hotels and the properties that have suspended operations. So, management companies need to maintain both corporate and property-based personnel to continue that sales effort. If that effort stops, the hotels will be at a huge disadvantage when the time comes for recovery mode.”

For his part, Rauch believes the recovery is going to be steady and not as rapid as some think. “April is going to be a lost month, as the second half of March was,” he said. “But in May, I think restrictions will be lifted where social distancing will be important, but there will be businesses open, beaches, state parks; I think events will come back in June or July, but there will be travel again in May, especially close to home.”

Regardless of when the recovery happens, Cataldo said companies need to make wise decisions.

He added, “We’ve been forward-thinking, not just reactive. We’ve begun to have our plans for bringing properties back online or ramping up, and how we will look at each of the properties on a going-forward basis because the rules are out the window. An example would be F&B: Are we going to bring that back in the same manner at a particular property? Will it be somehow modified, whether that’s in the outlets available or the menus? There’s a lot of evaluation because it’s not going to be all of a sudden the switch flips and everything goes back to normal; it’s going to take some time to evolve out of this scenario.”

One thing hotels can do now, if they’re financially able, is renovate. “We are doing preventative maintenance and renovation work so the hotels will be primed and ready for guests,” Mitchell said.

Cataldo added, “If you’re able to do renovations during this down time, do it. We have properties in that scenario, and we’re not displacing business. They’ll be even better positioned to benefit when the recovery starts because they’ll not only be ready to take business but they’ll be in tip-top shape.”

Lasting impact?

While the current effect on RevPAR is unprecedented, will COVID-19 have a long-term impact on the hospitality industry?

For his part, Urgo said, “Clearly, those of us who are living it will never forget the experience and will forever be impacted by it. Some hotels will likely never rebound, especially if the recovery is prolonged and gradual. History suggests that a recovery back to pre-crisis occupancies and, particularly, ADRs, could take many months and possibly a couple of years. This will obviously be compounded if the country enters a recessionary period.

“What we as management companies can do between now and the return of stability and beginning of recovery will have a huge impact on how quickly that recovery and growth will occur at our properties,” he added. “This will require the cooperation and confidence of our owners to support our efforts, financially and otherwise, during the downturn. For flagged hotels, the brands will serve a more critical role than ever before to help promote travel.”

“People will be very much clamoring at some point in the future to have life come back to more normal,” Cataldo added. “That will lead to the success of our industry, because we’re an industry that will deliver that normalcy.”

One thing management companies must do, he said, is remain calm and make the right decisions. “Don’t make rash adjustments; we’re not going to induce demand by doing stupid things in our rate management,” he said.

For his part, Nixon believes the industry learned that lesson during the Great Recession. “From what I’ve seen, we’re not reacting to this like we did to the recession in 2008 and 2009. I do not see a lot of rate slashing, which I think hurt us in those years,” he said.

One long-term impact, Rauch said, is how this could affect labor. “What I’ve thought about is much more of a flat organization,” he said. “I suspect if I flatten my organization in sync with the way business returns, I don’t know that I end up hiring back five employees out of five; I think it’s closer to four out of five. The way I see it, I’m going to have my general managers at the front desk, sitting at a desk in the lobby, being way more hands on. This will serve to reduce employment levels and that’s mostly bad news, but it’s good news if we retrain those people to work in the tech sector.”

Rauch noted that with the rising minimum wage and the advent of new technology, smaller staffing levels will be a trend that sticks. “We won’t go back to previous levels. We’ve become much less profitable as an industry because of the rate transparency and vacation rentals. Since we’re not as profitable and labor costs have gone sky high, we’re going to have to deal with that in a new way,” he said.

For her part, Mitchell noted, “Not everyone is going to make it out of this crisis, and operating models may permanently change.  Frankly, it’s too early to really know the lasting impact as a lot will depend on how long the pandemic will last.”

While the current situation is painful for the industry, Rauch noted that notwithstanding the devastating medical and health situation, “I do think this will actually serve as a recession we needed. We were due; it’s been 10-plus years. This will be a short, but extremely deep recession.”

Going forward, preparation will be key. “If you aren’t taking steps now to be in the best position possible as we emerge from this pandemic, you may be subject for a longer recovery,” Mitchell said. “Individual operators may be in a difficult position coming out of this if they have not been taking action or do not have an active sales and marketing effort in place. Hotel management companies are able to support hotels with an expanded sales network to ramp up business leading up to the actual recovery.”

Nixon added that over-preparation is good too. “My advice would be to stay on the pulse of what your hotels are doing daily, to make sure the directives you’re giving are being followed, and to do more than you think you should because we don’t know how long this will last,” he said.

Cataldo added that the industry should also continue to be good corporate citizens. “You’ve seen hotels becoming part of the solution for some of the treatment and care, for some of the individuals who have to be quarantined,” he said. “Our industry isn’t just there with its hand out; it’s also there to help work through this.”

“The hotel business is a strong industry,” Nixon said. “We always find a way to let situations like this go through us and come out stronger, we do learn lessons and we do react well. I’m sad about the current situation, but I’m super optimistic about the future.”