From a professional standpoint, as difficult as this pandemic has been, everyone learned fundamental lessons by watching how the hospitality industry responded, from navigating how to operate a property with a skeleton crew to planning a budget on the heels of the lowest top-line in recent history. This has, of course, presented challenges to the planning of 2021 operating budgets where historically our industry has relied on previous year’s performance, padded for inflation. Today’s environment has set the stage to adopt a zero-base budgeting model and to rethink and question the fundamentals of hotel labor modeling entirely. Despite all efforts, we are submitting budgets that, at a gross operating profit level, are down 85 percent from 2019.
While there is a collective optimism as to a demand rebound for the second half of 2021, there’s also an acute need to look at every dollar within this year's budgets and medium-range forecasts, focusing on keeping cash burn down and to slowly and responsibly start adding back services and staff as demand recovers. We anticipate that there is probably still between nine to 18 months of continued depressed performance. With that in mind, our approach to the budget season has been straightforward. We took the view that each ancillary service (spa, private dining, restaurants, etc.) is a stand-alone business module and will reopen when they can break even and be accretive to the bottom line. Within our entire 100+ property asset management portfolio, we’ve requested no padding with a focus on having a realistic top-line view. As stated earlier, a lot of energy was placed to build staff and expenses from scratch.
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While everyone was expecting a resurgence in COVID-19 cases leading to new restrictions in the winter, no one was predicting a mid-November surge. Budgets were built in September, and then suddenly, new restrictions and closings with more quarantine requirements have made the budget process all that more interesting. Many properties are coming back to us asking for more money off the top line. Many owners are delaying their reopening timelines or considering shutting down their hotels again for the winter. This is making the budget season more intense and lasting longer than ever, with more rounds of deliverables and tough negotiations.
Reforecasting
A few big brands and some ownership groups have been especially amenable this year to a second-look budget process. While these groups, for example, are working on a full-year budget for 2021, they intend to look at it again in June and reforecast for the remainder of the year. Our view is that operators always have the option to reforecast, but reopening budget discussions mid-year will only pull focus away from hotel operations and much-needed attention to aggressively pursuing market share.
The most difficult part of the budget this year has been labor negotiations for 2021 payroll expenses. Hotels expect to keep a skeleton crew for the foreseeable future, provide no consumer price index salary and wage increases, no 2020 bonuses payable in 2021 and no budgeted bonuses for 2021. Executive committee salaries are being kept around 80 percent of base salary through the end of the second quarter in 2021. If occupancy doesn’t reach a certain rate, it will remain at 80 percent through year-end. With all these tough decisions, the budget conversations have been significantly more challenging than in previous years for everyone involved.
Another point of negotiation in our portfolio has been around reserve contributions. Generally speaking, in a hotel, 3 to 5 percent of the gross revenue is set aside for future or current capital expenditures. The total gross revenue of a representative set of hotels in our portfolio is down 60 percent. In 2020, the major hotel brands waved the requirement of funding. Marriott International recently announced that it will be waiving furniture, fixtures and equipment reserve contributions for the full year 2021. We’re continuing to negotiate with brands' and operators' reserves waivers and pushing back on the return of costly brand standards. This might be making asset managers very unpopular right now, but most hotels don’t have a choice and I’m seeing that after many conversations, our team is getting the right concessions for our owners. Capital expenditures for cycle renovations have all been canceled and CapEx will be limited to emergency, life-safety and compliance projects.
From an operations standpoint, we saw how much hotels have been able to flex during this time. We have been impressed with the hands-on commitment of everyone involved in making things work. We are collaborating, from the brands, property teams to the hotel owners and the asset managers; everyone is committed to working together with a realistic view of sobering ramp-up outlook. As the vaccine begins to roll out worldwide, and we are hopeful that will spur the initial upswing in recovery, we will not discount the idea that things may get even worse in the first few months of the year. We have prenegotiated contingency plans with circumstances laid out for more shutdowns. We have defined actions if occupancies go below certain thresholds. And while these contingency plans have complicated the budget negotiation process, it has been necessary to provide the comfort of a safety net to feel prepared for any situation that may arise. At the end of the day, planning operations for the year will have to remain fluid and flexible, responding to challenges as they arise and taking advantage of any opportunity for rapid rebounds as the vaccine rolls out.
Andrea Grigg is managing director of JLL's Hotels & Hospitality Group.