The COVID-19 pandemic has been a huge blow to the hotel industry, affecting every performance metric—from ADR to RevPAR to occupancy. It has also changed the role of asset managers, making them more important than ever.
To see just how much it has impacted them, Hotel Business spoke with Larry Trabulsi, cham, president of the Hotel Asset Managers Association (HAMA) and EVP at CHMWarnick.
“The hotel business has always been cyclic and, unfortunately, this impact has been—pick your metric—three times, four times worse than the last one,” said Trabulsi. “We have never seen this type of impact in the lodging industry. What is interesting is you think back to a year ago, and the expectation was for 2020 to be sluggish with 0-1% RevPAR growth coming off roughly 10 years of unprecedented RevPAR growth. The party was coming to an end, but nowhere near where we would end up the year.”
The pandemic has caused the role of hotel asset managers to shift. The first major change, according to Trabulsi, is that they are dealing with a lot more stakeholders—and more often. “Your lenders who may have been in the background just getting paid and being happy about it are more at the table now,” he said. “They may not be getting paid, or there are discussions about repayment plans. Other investors or investor pools that may have been more passive in the past are more at the table now as well… An ownership group that you might have been talking to twice a month, now you are talking to them three or four times a week.”
With the drop in occupancy and all related hotel performance indices, for asset managers, the bottom line has been critical, and analytics have been more important. “We all have a much better sense now of our true cashflow burn,” said Trabulsi. “When we were flush with cash, it was just as simple as ‘How much are you going to send me and how does that compare?’ Now, we are looking at cashflow schedules on a daily and a weekly basis. We have never been more in-tune with cash cycles for our hotels and cash needs. That has taken a lot more time, and that has taken a lot more forecasts and cashflow forecasts, as well. I think we have all come to realize that EBITDA and cashflow are not necessarily the same thing. They are spending time to understand those key measures.”
Since COVID hit, the focus of every owner has been on cash conservation. “For operating cash, it’s working with your capital partners in terms of understanding and restructuring that,” said Trabulsi. “But if you think of the flow of funds, it’s cash for operation, cash for fixed costs and cash for capital partners. The goal is, to be blunt, how quickly can owners stop having to write checks for operations? How quickly can they stop having to write checks to pay property taxes and insurance and, eventually, get money back to capital partners as well? It is going to be step by step.”
Furthermore, the focus has changed for asset managers and the owners they represent. “The immediate focus is on the cash draw and the cash needs,” he said. “But we do have to be thinking about going forward. We’ve always said in the past, that for our operating partners and management companies, their typical focus is year-to-year. It is ‘What is my budget for the year? Am I going to make it, yes or no?’ With COVID, we have seen that focus become much more narrow—it’s week-to-week, month-to-month, day-to-day.”
Trabulsi continued, “For asset managers, we still have to live in that mode because we still need to know what our cashburns are for this month and for next month. But it is also important for us to be thinking about what we call the ‘path to success.’ How do we get out of this mess? Particularly important for the bigger hotels is ‘How do we get back to whatever our pre-COVID group levels were?’ It is not going to happen overnight, but what does the path look like to back to those levels by 2024 or 2025?”
Trabulsi said that the need for an asset manager is more important than ever, especially given that it has been so long since a downturn took place. “We offer a different perspective, particularly for those of us who have been around and have been through downturns before,” he said. “This is an unprecedented downturn right now, but there are lessons learned from 2000-2001 and from 2008-2009, that are still applicable today—things like focus on cash and cash conservation, and trying to maintain ADR because, as we learned from the last two downturns, if you sacrifice too much on rate, it can take years to come back at all.”
While the pandemic has caused so many problems for the industry, there is opportunity. “There are new sources of capital on the sidelines that are looking to pounce,” he said. “We are spending a fair amount of time with those new players by helping them understand the nuances of hotel investing. It’s not just a form of commercial real estate, but it is an operating business as well. For those main reasons, the role of the asset manager is critical now—not just the ongoing assets, but we are doing a fair amount more advising and counseling our new acquisitions as well, giving that boots-on-the-ground perspective that maybe they don’t have.”
The potential new buyers are looking for discounts, and Trabulsi said that the bid-ask spread between buyers and sellers didn’t narrow enough, causing transaction volume in 2020 to be low. “As the year progresses, the buyer and the seller will eventually find pricing and get together,” he said. “It is a question, though, of rate. Everyone wants to know what the pre-COVID discount is. If the asset was worth $100 million before COVID, what is it worth now? The answer is: It depends. For some resort market destinations, the impact may be negligible. For a group, urban hotel, the impact could be significant. There is a lot of room in between. That is really where, again, the pricing parameters are still being defined.”
Trabulsi joked that asset managers are the center of the hotel circus. “Where there might have been us, the operator and an owner, now it is us, the operator, whoever is left on the brand side, the owners, the lenders, the mezzanine lender, the attorneys, everybody,” he said. “We are the center of the circus on some occasions regarding how many people are around us. It is good, and for those of us who are a little more seasoned, and have been through this before, we are adding value for our clients by monitoring every dollar that goes out and, hopefully, we’ll start getting some dollars coming back to our owners here over the course of the year. The role of asset management continues to evolve, and it is more critical now than it has been in the past—just being able to have eyes and ears on the ground and folks looking over their investments.”