With domestic travel rapidly slowing, occupancy dropping and hotels closing—American Hotel & Lodging Association President/CEO Chip Rogers said Tuesday half of U.S. hotels may close during the year—owners are facing a tough near-term.
In a webinar Wednesday hosted by AAHOA, PMZ Realty Capital President Peter Berk advised hoteliers on how best to handle loans in this environment. Though Berk said he’s heard rumblings of how lenders may respond to the current crisis—they may decide not to put borrowers in default for late payments, they may put people in forbearance for three months, they may defer some payments—his chief recommendation right now is to begin communicating with lenders as soon as possible.
“It's too early to know exactly how the lenders are going to respond,” said Berk. “But if you see problems going down the road, coming down the road, I always think communication is the best way to go.”
What to Include in a Letter to Your Lender
If hoteliers have taken out portfolio loans, and especially if they have taken out commercial mortgage-backed securities loans, Berk said they should send a letter to the lender to explain who they are and what their situation is. This letter, he said, should include six things:
- Property location and property ID number: “So they know who you are,” explained Berk.
- History of good payment: “’I’ve had this loan for three or four years, I’ve never missed a payment, I’ve been on time,’” he said as an example.
- Guest satisfaction survey and quality scores: “Pump it up a little bit so they understand what a good operator you are,” advised Berk.
- Good things in the local market: Here, Berk said borrowers can list any new demand generators coming into their market, such as Amazon opening a warehouse nearby or a local college expanding. “Whatever is going on in your local market, so they get kind of a feel of your market,” said Berk.
- STAR ranking: Borrowers should let lenders know if their hotels are always at 105, 110 or 130 percent revenue per available room penetration. This way, Berk explained, the lender can appreciate how the hotel performs compared to its competitive set.
- Ask to start communication: Finally, borrowers should tell the lender what they are experiencing. “’Up until Feb. 15, the hotel was doing great, then this COVID-19 virus came along, it’s not doing so great,’” Berk said as an example. Then, he said, tell the lender what steps the hotel has taken since, whether it’s going from 15 housekeepers to seven, cutting down on breakfast options or reducing the hours of the front-desk person. “Say, ‘Nevertheless, I still am anticipating trouble ahead and I just want to open the dialogue to work with you because I might need some relief down the road, possibly.’”
Looking to the Immediate Future
Reflecting on his experiences from 2008 to 2011, Berk said one of the keys to success during that time was going to the lender and presenting a two-way street, whether that meant offering to switch to recourse or paying down the loan by a certain amount.
“In other words, not going to the lender and saying, ‘Hey, I can't pay anymore, what can you do for me?’” said Berk. “It was always a much better discussion, and the results were always much better, if you went to the lender and said, ‘Hey, I can't pay anymore, but look, this is what I want to do.’”
These discussions are still a little way down the road, said Berk, “because we need to see what the lenders are going to offer.”
Lenders Holding Back Due to Uncertainty
Berk said hotels will “definitely be able to take advantage” of the Federal Reserve cutting rates to nearly zero. Right now, though, he said lenders are nervous about lending into hospitality due to uncertainty. “Lenders don’t like uncertainty,” he said. “They don’t know if this virus situation is going to last 30 days, 60 days.” If they knew that for certain, they simply could underwrite around it. ‘We can underwrite around anything,” Berk said.
Berk offered several ideas of what this certainty could look like. It could be “a leveling off in cases like we've seen in China and South Korea, it could mean there's a new antiviral that works, a lot of different things,” said Berk. “You'll probably know it because all of a sudden the stock market will level off and start to recover some of the losses. And once we start to see one of those elements, I think lenders will start to lend again.”
As far as a timeline for when things will get better, Berk said his guess would be sometime after Memorial Day. The drumbeat of bad news, he predicted, will get worse over the next four to five weeks as testing increases. That will keep people socially isolated up until Memorial Day, at which point things will level off, with things returning somewhat back to normal in early June.
“Remember there's also going to be a lot of pent-up demand,” said Berk. “So, on the loan area—you know we're a hotel financial intermediary, we arrange hotel loans—we're anticipating a very busy third and fourth quarter.”