The second two panels of the third Hotel Optimization virtual event—presented by Hotel Management, with parent company Questex Hospitality Group and AAHOA—focused on the need to mitigate risk and on opportunities for growth.
Insurance, Lawsuits and Risk Management
The third panel, sponsored by Bureau Veritas, examined the evolving nature of lawsuits and how hotels can protect themselves from litigation, especially as debates continue over a business’s responsibility to protect staff and customers from COVID-19.
Read about the day's first two panels here.
“It's going to vary on a case-by-case basis and depend on the language and your actual policy,” said Jackie Collins, senior director and VP of real estate and hospitality practice at Arthur J. Gallagher. Collins said hoteliers should be aware of their liability policy response to property damage and bodily injury to third parties—“which would be your deaths, from a liability standpoint, involving the coronavirus or a similar health emergency,” she explained. “What we're running into, from a property standpoint, is that you must have physical loss or damage at the insured property in order for coverage to be triggered.”
Sherry Orel, president – certification, audit & assurance, Bureau Veritas North America, said her company has a six-step process for certifying hotels for safety and cleanliness. The first step is to develop hygiene protocols at the individual hotel level. “We've done 5,000 specific safeguard protocols since COVID started,” she said. The next step is training: “Anyone that's going to be involved at all in the health and hygiene process has to be thoroughly trained,” she said, adding that Bureau Veritas has created e-learning modules to facilitate education. The third step is to ensure compliance, with “thousands” of regional auditors who can take the customized protocols and physically or virtually conduct an audit to ensure compliance, identify gaps in the system from a consistency perspective and help to close them.
The fourth step is displaying the Bureau Veritas safeguard label so that guests are aware of the certification. “It has a QR code that can take that guest to a website that further explains the rigorous methods that your hotel is using to ensure their safety and the safety of your staff,” Orel said. Marketing the certification is the fifth step, and the company can work with hoteliers to further promote awareness of their efforts. “And then the last thing that we recommend is really creating a continuity plan. Have high-, medium- and low-touch engagements that could happen on a weekly, monthly or quarterly basis.”
Read about June's Hotel Optimization Day 1, Day 2 and Day 3. Read about the September panels here and here and here.
Insurance companies are focusing on what hotel companies are doing and the protocols that they are taking, Collins added. “They want to know exactly what you're doing at each of your properties. And that'll make a big difference in whether the carriers have interest or not.”
Mike Marshall, president and CEO of Marshall Hotels & Resorts, said his company went to renew its insurance policy in November, going through 25 carriers and finding only two or three willing to offer a quote. As part of the applications, he said, his team had to specify the policies and procedures they had in place at each and every hotel for cleaning and caring for employees. “We felt very lucky to get an insurance program in place,” he said, noting that the 24 percent increase Marshall is paying is significantly better than the 40 to 60 percent increase other businesses are facing. “The insurance industry has really folded up on the hospitality industry right now,” he said. “They're scared. They don't know what's going to happen.”
Where the Opportunities Are
Kicking off the final panel of the day, Daniel Lesser, president and CEO of LW Hospitality Advisors, presented some statistics on hotel transactions over the last year.
While 2019 was a record year for hotel deals, everything “fell off the cliff” after March 15, 2020. There were six transactions of $10 million or more in the second quarter of the year—and all of these, Lesser noted, were single-asset trades rather than portfolio deals. In the same quarter of 2019, 35 deals passed the $10 million mark—a decrease of 83 percent year over year. Total transaction value for the quarter was $246 million compared to $2.6 billion in 2019, a drop of 91 percent, while price per key dropped 41 percent. The third quarter was somewhat better, with a 70 percent decline in trade volume and an 80 percent decrease in money changing hands. The fourth quarter of 2020, however, saw activity pick up, with 32 deals—much better than the previous two quarters, but still down from the 54 transactions a year earlier and a 75 percent decrease in price.
“We can see that transaction activity is clearly moving up as time goes on,” Lesser said. “But when you look at the full year—2020 versus 2019—there were 79 trades in 2020, compared to 164 in 2019. That's a 52 percent decline. Total transaction volume [was] $5.3 billion in 2020, compared to $17.7 [billion]—that's a decline of 70 percent. And then the average sale price per key [was] $273,000 in 2020, compared to $364,000 in 19. That's a 25 percent decline.”
The best gauge of distress is the commercial mortgage-backed securities market, said Alan Tantleff, senior managing director at FTI Consulting, noting that nearly 20 percent of all CMBS hotel loans are in default, compared to 1.5 percent in January 2020. Now, as the six-month and one-year forbearance agreements expire, he expects to see “a lot of distressed product hit the market.” Still, he said, investors will want to capitalize on levels of distress, having seen fortunes made by savvy buying after the global financial crisis and 9/11. “That's what's keeping pricing up,” he added. “It's still pretty competitive out there for better quality assets.”
Almost half of last year’s were in the economy and midscale chain scales, said Eric Guerrero, managing director, brokerage and advisor at HVS. “I think you'll see that trend continue this year, especially with the [Small Business Administration] debt relief that’s open for the sub-$10 million transactions.”
Notably, Guerrero said about 8 percent of trades last year were assets that were going to either be repositioned or turned into an alternative use like residential use, independent living or small apartments.
Duncan Miller, a partner at law firm Morris, Manning & Martin, said the bidding for hotel assets has become “very competitive,” particularly in the fourth quarter and particularly in the limited/select-service and extended-stay segments.
The spread between the buyers and sellers is slowly going to start to compress, and Guerrero expects to see way more deals happening this year than last.