What does hotel investment look like post pandemic?

The COVID-19 pandemic has rocked the hospitality world and created a lot of questions around hotel investing and ownership. Hotel Business reached out to REIT executives Mark Brugger, CEO, DiamondRock Hospitality, and Dennis Craven, EVP/COO, Chatham Lodging Trust, to find out how their companies fared during the turmoil, their focus going forward and where they are investing.

Dennis Craven Chatham Lodging Trust

This past year has been one like we’ve never seen before. How did your company handle the pandemic and the disruption it caused?

Brugger: DiamondRock responded to the onset of the COVID-19 crisis by executing on a rapid-response action plan that included as its top priority putting in place safety protocols for the protection of workers and hotel guests. Other action items included protecting the business by reducing cash losses at the hotels and working with the company’s long-term banking relationships on sensible amendments to its loans. The truth is that last spring no one knew if a vaccine was going to be successful and, therefore, the business needed to be run in manner that protected it from the downside scenarios.

Craven: Since the outset of the pandemic, in an effort to preserve long-term shareholder value, we focused on the following:

Maximizing hotel operating results through aggressive sales strategies and expense controls. We were able to keep each of our hotels open throughout the pandemic. We generated the highest RevPAR of all lodging REITs during the pandemic. We continue to generate some of the best operating margins in the industry.

Minimizing cash burn through reducing headcount at the corporate and hotel levels, implementing temporary salary reductions and significantly cutting capital expenditures. At the corporate level, for the final nine months of the year, the CEO and COO volunteered 50% salary cuts, and every other corporate employee took a 25% pay cut. It was important that we led by example, acknowledging the precarious situations faced early on in the pandemic. As the saying goes: Put your money where your mouth is. And every one of our employees did that.

Additionally, we reduced our capital expenditures by approximately 40% in order to preserve cash flow. Along with our impressive operating results, we were able to minimize cash burn and reach cash flow breakeven the second fastest of all lodging REITs. This automatically translates into saving equity value as companies to this day are still borrowing money to operate.

Improving liquidity through the opportunistic sale of hotels at non-discounted pricing. In the fourth quarter, we sold our 192-room Residence Inn Mission Valley to the San Diego Housing Commission for $67 million or almost $350,000 per key, an incredibly attractive 6.5 cap rate on 2019 results. As investors look back on lodging transactions in 2020, this sale stacks up as one of the best.

We are seeing light at the end of the tunnel, so to speak. What is your focus going forward?

Brugger: The success of the vaccine and the rollout exceeded our initial expectations, and we are optimistic for a full return of travel demand over the next few years. The focus of DiamondRock now is to set the stage for future success. To do that, we have sold underperforming hotels; invested heavily in the existing hotels on high ROI opportunities and repositionings; and are actively working on new acquisitions.

We believe that public lodging REITs are uniquely positioned to prosper over the next few years as demand surges and our access to the capital markets provides an edge in the competitive hunt for new deals.

Craven: The lodging industry is quickly improving, and we expect to have a really strong summer. Although only a bit here and there, we are encouraged by the return of the business traveler already.

As we move through 2021, our focus is on generating as much profit as possible on the rising revenue. We believe that our stabilized operating margins post-pandemic will be higher compared to pre-pandemic margins, and it is important for us to not allow certain expenses to creep back into our business.

Which types of properties are REITs looking to invest in currently? Are you looking for bargains?

Brugger: Public lodging REITs are not all the same, and they are looking for different types of institutional-quality hotels. The most flashy trades have been on luxury hotels. There is certainly a shared belief that leisure-oriented assets are safer investments.

If you are looking for bargains, that is going to be in the hardest hit urban markets where buyers will need to take the risk on returning business transient demand and elevated cost structures. DiamondRock will continue to focus—as it has for a number of years—on leisure-oriented hotels in unique micro markets like Vail (Colorado), Sedona (Arizona) and Lake Tahoe (California).

Craven: Chatham is going to stick to our knitting, which is premium-branded, select-service hotels with a focus on the extended-stay brands in markets with diverse demand generators. Some REITs and other owners have sold a few hotels at a price that might be a bargain, but those hotels have a longer road to recovery. For hotels similar to our portfolio, we are not seeing any “bargains.” Yes, they might be selling at a discount to pre-pandemic pricing but, again, pricing is not bargain-basement pricing.