When the coronavirus hit the United States this past March, the subsequent cessation of travel was devastating to the hospitality industry. Governmental regulators quickly adjusted classification requirements for performing vs. non-performing loans. This allowed banks to be proactive in providing relief to borrowers. Many lenders even called borrowers before the hoteliers called the lender.
The most common offer from the banks was a three-month deferral of debt service payments. This helped provide immediate relief for hoteliers struggling with suddenly closed or empty properties. When coupled with governmental help such as Paycheck Protection Program loans, hotel owners were able to weather the storm in the short run. It also created significant differences between bank debt and securitized debt.
Fast forward to today, and there are still significant longer-term issues for the industry. Hoteliers with bank loans have often found their lenders to be less friendly to discussing a longer-term solution to manage debt until there is a sustained return to travel. This is especially important as summer leisure travel is the prime demand segment in the market today. The fall is typically dominated by higher-rated business and group travel, but that seems unlikely in 2020.
What Hoteliers Can Do
Hoteliers should focus on their debt restructures for the next 12 – 24 months. This is a prudent strategy but typically will require the borrower to "give something" to the bank. The banks that were quick to provide 90-day forbearance and payment deferral are now seeking more typical structures seen in previous market downturns.
The difference today is that there is more capital available to help them through until demand returns. There are sources of rescue or runway capital, ready to invest in hotels that performed well prior to March and have good prospects for recovery.
Data has shown that select-service assets and extended-stay properties have performed better over the past three months. These assets are more attractive to the capital than full-service hotels with significant meeting space and F&B revenue. Drive-to markets are also a focus.
Hoteliers looking at rescue or runway capital as part of their overall restructuring with lenders/special servicers should know these investors are looking for double-digit returns, but, in some cases, have been agreeable to foregoing true participatory ownership or management changes for deals that meet their foregoing requirements.
In addition, there are a variety of investors with management capabilities who have been strongly bidding to invest in deals that do not have an owner/operator component. So far, there is still a disconnect between the expectations of the capital providers and capital users, but this should begin to narrow over the balance of the third quarter.
Industry pundits are talking about a recovery potentially four to five years away. Owners need to ensure their properties and portfolios are prepared to survive the downturn until the market returns, or they are able to transact in the capital markets. Therefore, the most crucial factor for an owner to consider when looking at options for restructuring and deciding on the best options for their property or portfolio is to determine the long-range strategy for the asset. Owners typically have a finite amount of capital available (whether directly or from third-party providers), and the most effective restructuring strategies involve additional investment by the borrower in conjunction with relief provided by the lender.
Michael Sonnabend is managing member and co-founder of PMZ Realty Capital.