REITs Respond to COVID-19 Impact

INTERNATIONAL REPORT—As the COVID-19 pandemic continues, companies have taken measures to minimize the effect it has on long-term operations. Here’s a look at two REITs who have changed course during the crisis:

American Hotel Income Properties REIT
American Hotel Income Properties REIT LP (AHIP) has provided the following business update regarding the continually evolving COVID-19 situation and government initiated measures.

“These continue to be unprecedented circumstances, and like all businesses, we are actively navigating the resulting challenges,” said John O’Neill, CEO. “After evaluating the market viability of certain properties during this pandemic, we have made the decision to temporarily suspend guest operations at four hotels, and consolidate operations at 15 properties with other adjacent AHIP hotels. In conjunction with our hotel manager, we have also significantly reduced staffing levels to preserve cash flow. To date, more than 1,600 hotel staff have been laid off or furloughed, which represents 65% of our total hotel workforce. These decisions are always difficult, but we have ensured key roles remain in order to maintain the properties and be well positioned for a rapid recovery when regular travel patterns resume.”

He continued, “We continue working to ensure we have sufficient liquidity to meet the challenges this pandemic has presented. Our 60 hotels that remain open for business—and are often catering to government, military, medical and logistics sector guests—are contributing to our revenue and are, in aggregate, providing positive cash flow to support our overall business during this period of uncertainty.”

Hotel Operations
60 of AHIP’s 79 hotels (76%) are currently open for business, generating revenue and serving guests in compliance with government health guidelines. Business levels at these properties continue to positively contribute, in aggregate, to AHIP’s cash flow. The company has made the decision to temporarily suspend guest operations at four properties and consolidate operations from 15 hotels into other adjacent AHIP hotels, due to reduced occupancy levels in those regions and to gain operating efficiencies. While these properties will remain staffed with minimal employees to ensure their maintenance and security, they will not be accepting guest reservations for at least the next 30 days. These hotels are well equipped to reopen quickly when regular travel patterns resume, according to the company.

Occupancy levels at the 60 hotels that continue to operate have stabilized at reduced levels and are primarily benefiting from lodging contracts from government, military, medical and logistical sector organizations. AHIP is continually evaluating each property to ensure the most efficient use of resources. The company’s 24 extended-stay hotel properties continue to operate at higher occupancy levels than other properties in the portfolio.
AHIP’s hotel manager is working diligently to effectively cater to these changing occupancy levels by sharing staff resources among several AHIP properties, wherever possible, and reducing staffing levels where appropriate, the company reports. To date, the total hotel employee count across AHIP’s 79 hotels has been reduced by 65%—from approximately 2,500 employees to approximately 875, which will generate more than $3.5 million in monthly cost and cash flow savings. AHIP’s hotel manager, Aimbridge Hospitality, has also provided fee reductions for hotel management services until at least June 30, 2020, which are expected to result in approximately $0.7 million in cash savings during the second quarter.

AHIP’s hotel brand partners—primarily Marriott, Hilton and IHG—have been accommodating in these circumstances by adjusting brand standards to meet current business levels, while still maintaining positive guest experiences. In addition, franchisors have deferred capital projects into 2021 and have approved the use of capital reserves to fund operating expenses. This, together with the potential temporary elimination of FF&E reserve funding, is expected to enhance AHIP’s liquidity during the coming weeks.

Corporate Initiatives
As a result of the current economic environment, AHIP has also reduced its corporate staffing levels by approximately 27% and all senior management has taken an immediate 15% salary reduction for the remainder of 2020. O’Neil has agreed to an immediate 50% salary reduction for the remainder of 2020 and will continue to receive all of his compensation in units (equity). In addition, AHIP’s board of directors has agreed to receive 100% of their 2020 retainer fees in units, rather than cash.

Cash Conservation
AHIP is taking all prudent measures necessary to reduce its expenses and conserve cash during this period of economic uncertainty, according to the company. More than $100 million of annualized cash flow savings have already been identified through the following initiatives:

  • $40.0 million of annualized cash flow savings from reduced hotel staffing levels
  • $36.0 million of annualized cash flow savings from the suspension of distributions on AHIP’s units
  • $15.0 million of 2020 cash flow savings from deferred capital expenditures to future years
  • $12.0 million of potential annualized cash flow savings if AHIP temporarily stops funding FF&E reserves
  • 1.5 million Canadian dollars of annualized cash flow savings from reduced corporate staffing and salaries
  • AHIP has also already submitted formal applications for the Payroll Protection Program through the U.S. Small Business Administration, as part of the announced U.S. CARES Act, which may provide added financial support for hotel operations and employees. AHIP is current on all of its debt payments and remains onside with all debt covenants.

March 2020 Distribution Payment Deferment
In light of the recent reduction in business levels due to COVID-19 impacts and AHIP’s strategic focus on cash conservation during this period of uncertainty, the company will be deferring until a later date the payment of its March 2020 distribution previously declared to be payable on April 15 to unitholders of record on March 31. The payment will occur when business levels improve and AHIP’s board of directors, in consultation with management, determines it is appropriate to pay. AHIP will update unitholders who are on record to receive this distribution of the new payment date via news release, when the payment date is determined.

Insider Buying
In the past three weeks, AHIP executives and board members have collectively purchased more than 500,000 units through open market transactions, representing their belief in the long-term value of the company. These insider purchases have been disclosed through regulatory filings.

Condor Hospitality Trust
Condor Hospitality Trust has provided an update on measures taken to mitigate the impact of recent changes in the general economic and industry conditions relating to COVID-19. Condor is taking actions at the corporate and hotel levels including, but not limited to:

  • Amending its bank credit facility to provide extensions options out to March 1, 2022; waivers/modifications of certain covenants; and establishment of interest reserves for near-term debt service payments as necessary.
  • Asset management working with hotel management companies to reduce all hotels operating expenses including, but not limited to, closing off multiple floors; staffing reductions and furloughs; utility consumption reductions; purchasing reductions and eliminations; contract services reductions and eliminations; food services closures; exercise facilities closures; and certain reduction and elimination of certain marketing expenditures.
  • Seeking potential alternative revenue sources through healthcare providers, government agencies, universities and airlines.
  • Applications by Condor and its hotel operators for Paycheck Protection Program loans authorized under the recently congressionally approved CARES Act.
  • Seeking potential recovery of certain losses through insurance coverage
  • Pursuing corporate cost reductions, including staffing reductions, resulting in an approximately 20% decrease in non-consulting expenses compared to historical operations
  • With its bank credit facility amended, representing more than 53% of Condor’s loans, Condor has approached three of its remaining lenders for potential modifications to provide interest reserves or accruals during the second quarter. Two lenders representing approximately 26% of Condor’s loans have agreed, while discussions are in process with the third lender representing approximately 15% of Condor’s loans.
  • Capital improvement projects have been suspended except for emergency circumstances and will remain on hold for immediate future, with the potential for the suspension to continue through 2020.

“The continuing support of the bank credit group and our other lenders is greatly appreciated during this unprecedented period with severe disruption and widespread uncertainty in the markets and our own industry.” stated J. William Blackham, Condor’s CEO. “After a comprehensive review of all of our hotels, the market conditions where they are located and near-term projections, Condor has temporarily ceased operations at two of its hotels and continues to monitor the status of three additional hotels that are potential candidates to be temporarily closed. Since our portfolio is comprised of select-service hotels, we have been able to adjust operations quickly to existing conditions and will be able to reopen any closed hotels quickly and efficiently when market conditions justify commencing operations. However, our current mission is to continue to take actions to contain costs and maintain adequate liquidity.”