Financing hotels through periods of negative cashflow has become more difficult as banks tighten credit. A recent panel of industry experts discussed survival strategies for hotel and franchise owners. Read more in this article from Blue MauMau.
A panel of hotel experts—a chain’s CEO, a researcher and consultant and a franchisee—discuss the credit crunch and how hotel owners can cope.
Scott Smith is senior vice president with hotel consulting and research firm, PKF Consulting. He has an extensive background in the areas of hotel lending and appraisals.Roger Bloss is the CEO, president and founder of Vantage Hospitality, a chain of some 800 hotel properties. And C.K. Patel is a franchise owner of several Day’s Inn hotels around Atlanta. Patel has been a banker, helping open Quantum National Bank in 1996. He is also currently serving as the secretary for the Asian American Hotel Owners Association, the hotel industry’s largest franchisee association.
Question: There’s a credit storm raging right now. Some hotel franchise owners say they cannot obtain loans for operations, payroll, seasonal dips or purchase of new equipment when old equipment breaks. They cannot get funding for expansion too. What’s your take on what is happening in the industry?
[Bloss, chain CEO] There is money out there with the right amount of capital influx, with the right operator, the right location, the right product. But I will tell you that it is extremely difficult to find. It is difficult to qualify. But conventional loans are out there. We have a strategic alliance with Hotel Brokers International. It is tough. There’s no question. But there is some still out there.
The credit crunch will hurt the industry. However, we learned after September 11 about cutting and slashing rates and then having years of pain to get those rates back up. What we are learning through this down cycle is that supply and demand are allowing us to keep our rates in check so that when times turn again we don’t face resistance to get our room rates back where they need to be to operate effectively and profitably.
Frankly, it’s an adjustment. Hopefully what people are doing now is going back to some old-fashioned hospitality in taking care of their customers and reinvesting into the properties that they have and making sure the assets that they are operating are at the highest level of competitiveness that they can be.
That’s where we really come in and work with our operators during these difficult times. I have a philosophy for the company and for our members. Let’s not retreat. Let’s not die a slow death. Let’s charge forward. Let’s attack and make sure we are positioned in these times. And when times improve, to really take advantage of that as well.
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[Smith, consultant] From an operational point of view, for those properties that were not overleveraged (75 percent LTV), we believe that hotel operators should be able to weather the storm through 2009. Nationally, we project (see graph below) a 7.9 percent decrease in profits next year. Top line room revenue will decrease as a result of declining demand and rate growth will be flat as new supply already under construction enters the market. For those operators situated in a market with no rate integrity, profits will continue to erode further. If labor unions have their way with pending legislation, hotel profits may decrease even further in 2009-2010.
With the tight credit market, those loans coming due in 2009 face a tough hurdle. With higher low to value and debt service coverage ratios, increasing capitalization rates, declining net operating income and the increasing risk premium associated with hotels in the short term, property values will decline. Some lenders will require additional equity, others will simply refuse to renew the loan. This will provide a great opportunity for equity funds to acquire undercapitalized hotels at discounts of up to 25 percent to 50 percent of replacement costs.
[Patel, franchisee] The banking industry is not giving any money to hotels. I’m a good customer for them and I’m having a difficult time.
Frankly, loans to cover periods of negative cash flow from hotel operations are the toughest to obtain. My take on the situation is that banks won’t lend any money for a hotel’s operational needs.
Loans for hotel expansions are a little easier. If banks know the area very well, they see that occupancy has not gone down (as a general rule it has gone down), that a property has good cash flow and that hotel wants to capitalize on the market by adding more rooms to the hotel so they can make more revenue, then yes, my bank seems to be interested in lending.
Question: Can you tell me where a hotel operator should be focusing to best cope with the current downturn in the business cycle?
[Bloss, chain CEO] Right now you don’t want to go to the point where it puts a burden on expenses. Hotel owners need to reinvest in areas that really affect guests, but that are not typically capital intensive. Capital intensive is not as prudent as being more attentative to customers and property. Let’s face it, you can pull up to the most beautiful property, but if the grass is dead and brown up front, your first impression is that management is lackadaisical. Now spend a hundred dollars on fertilizer and pretty flowers, that perception changes for very little money.
We are innovative and we care about our customers. I told you that we are nine years old, but our agreements are year-to-year. Our average member has been with us seven years.
In California there is news of a drug cartel, border control and gang wars going on in Tijuana, Mexico. We have an ABVI premier property an hour south in Ensenada, Mexico that has been a member for seven years. He called me up and said, “Roger, I’m dying.” He says that normally he’d be running 98 percent occupancy. "I’m lucky if I have 17 percent now. The only people I get are locals. Tourism has dropped. Can you help me through these difficult times?”
"Send me a letter. I’ll send it to the advisory board [that is made up of members]," I told him.
What they’ve done is deferred membership fees until he gets back on his feet. What other brand would do that?
I’m not waiving them, I’m just deferring the fees without interest. It’s an interest-free loan. What other company is going to do that?
Anyhow, you probably can tell that I love who we are and I love what I do and I’m thrilled what we were able to do to the industry.
[Smith, consultant] Keeping your property in good condition and maintaining guest satisfaction. Work with employees to arrange flexible work hours based on peak demand periods.
[Patel, franchisee] I think the best thing to do nowadays is to make sure that my hotel ADR (average daily rate of a room) does not drop. In regard to occupancy rate, Atlanta is down about 10-15 percent. Florida is down about 40 percent. The Myrtle Beach area is the same story-about 40 percent down. A lot fewer people are traveling, so if I cut my room rates, I am double dipping into my bottom line. I may get a few more guests, but competition will soon catch up. And raising prices again when this soft economy is over is slow and difficult.
The best thing to do is to reduce costs. I’m trying to be more conservative with my utilities. I’m trying to cut down on overtime. I’m also trying to manage cash flow as best I can by cutting supply costs. I want just enough inventory so my cash isn’t tied up on the shelves.
This article has been reposted from Blue MauMau. View the article on Blue MauMau’s small business and franchise news website here.