Monday’s announcement of a possible COVID-19 vaccine likely will have a positive impact on the money behind hotels. This was the general consensus reached during the “Money Machine” panel at the online NYU International Hospitality Industry Investment Conference, which brought together debt and equity leaders to discuss the industry’s financial future.
“It wasn't lost on anyone that upon a vaccine, maybe stocks were going to pop,” said Michael D. Bluhm, managing director, global head of gaming & lodging at Morgan Stanley-Investment Banking, calculating an increase of around 30 to 40 percent—“which is a pretty meaningful move, but you're still a pretty far distance away from when we all started.” With a vaccine offering “one massive step towards recovery,” the industry saw a “meaningful shift” in bond pricing and preferred pricing. “It’s one of the first moves to start opening up this mortgage market,” he said.
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Access Point Financial CEO Dilip Petigara said the vaccine would help fix the imbalance between business and leisure travel. “The Wednesday-to-Saturday differential still exists,” he said, noting that Wednesdays—usually a busy time for urban, business-focused hotels—still are down in terms of both occupancy and revenue compared to Saturdays, which are busy with leisure guests. And while occupancy has improved since the pandemic’s nadir, occupancy hovering around the 50 percent mark only covers basic operating expenses, he added. “So the challenge is, what's the source of the debt service that's required that the lenders like myself are looking for, particularly after having given six months of forbearance or deferment?”
Bidding and Asking
As a publicly traded company, Park Hotels & Resorts has access to some of the corporate markets that have been “very supportive” of the industry, particularly the bond market, said Sean Dell’Orto, the company’s EVP and CFO. “And with the help of the [Federal Reserve] coming through on the high-yield side, we're able to tap that market to help address some liquidity to get us out a couple more years of runway, as well as push out maturity.”
While the vaccine is certainly positive news for many industries, Mitesh Shah, CEO and senior managing principal of Noble Investment Group, cautioned that U.S. hotels still have “a long way to go” before they reach $60 revenue per available room and profitability. “So what happens in the next round of forbearance?” he asked. “For a lot of these folks that ultimately build these great hotels a year or two years out, they were generating 9, 10 percent unlevered yield, and they had an opportunity: either take it on the [commercial mortgage-backed securities] market or sell it to [MCR] and me.” Owners need at least until the second half of next year to be able to deal with long-term debt, he added, but they simply don't have that long to wait without further support or a rapid uptick in business.
“There's a huge bid/ask spread right now,” said Tyler Morse, chairman and CEO of MCR. “Everybody wants a 30 percent discount when they're buying something, but the seller only wants to do a 10 percent discount, and nobody's gonna capitulate until they have to. That's how capitalism works. You're gonna hold on with your fingernails until the end. And it's a question of, will there be an end? Can you live through this thing by taking on rescue financing preferred equity?”
Morse noted “a lot less competition” between owners like himself and Shah. “We used to bid on the same deals, and there would be 15 competitors,” he said, noting that he and Shah would bid against companies like Blackstone and Starwood Capital. “But a lot were just local and regional players. The local and regional players are out. They are no longer competition. So there's a lot less competition.” Now, he noted, the competition is “all the vultures and the sharks that want to give you preferred equity and rescue capital at 12 percent.”
Recovery, Shah added, will probably not look like a hockey stick or a Nike swoosh—“but more like a butterfly that will kind of meander around and will ultimately get there, but it might go sideways for a while.”