Is there perceived value in aligning with a well-known brand with strong COVID-19 safety protocols?
Data and conversations thus far throughout the pandemic-related downturn have illustrated that the performance metrics of the wider-known brands have fared better. With or without a vaccine, we are moving toward a time where hygiene and health safety are paramount. The perceived risks to health and well-being while traveling certainly will transfer to how and where many people will plan to travel to, as well as how much they are willing to spend on their experiences. The value-add that branding often provides, whether to the developer, the ownership or management, or other stakeholders, has been constant throughout the years. Branding brings financial comfort to many; as these brands continue to develop and implement strong safety protocols, this benefit will continue to translate into value.
Do you think we have seen the worst yet?
Speaking directly to lodging demand, I believe so. As long as we, as a society, continue to respect science, research, and those who implement guidance to keep people safe and the economies healthy, as well as work hard to keep ourselves and others safe and healthy, then I think we absolutely have the worst behind us. Data suggest that the worst performance recorded by hotels, which share their data, happened in the second week of April 2020. Hotel supply and demand is still very much depressed, with many hotels having suspended their operations, and many areas still in protected phases recovery; however, there are glimmers of hope for the return of hotel demand. As demand continues to return and as occupancies rebound, more hotels will be able to reopen.
How is the risk spread across different hotel segments? Who has been hit the hardest?
There are two ways to look at the answer to this question. There is risk associated with demand capture at the hotels, an occupancy metric, and then there is risk associated with the revenues, costs, and bottom line of a hotel. Data over the past several months indicate that economy, midscale, and extended-stay hotel offerings have fared better in terms of occupancy, ADR, and RevPAR; conversely, the upscale, upper-upscale, and luxury hotels have illustrated much more significant declines in performance. Much of this decline can be directly tied to the amount of group business that these types of hotels typically accommodate; thus, the lack of group business given government restrictions on group gatherings has severely disrupted performance. Location is another risk factor; urban and resort hotels have fared the worst, while suburban and rural hotels have been able to retain much of their business in certain markets. Hotels that have been able to weather demand and supply fluctuations or economic downtowns in the past have been hotels with positive operating leverage and less overhead, such as limited- and select-service hotels. These hotels are also typically less expensive to construct. These types of hotels are more protected from the risk of not being able to cover departmental expenses when revenues decrease given that they have a more modest level of service or fewer departments within the hotel (e.g., F&B, wellness, etc.), thus allowing for higher operational efficiency.
How have luxury hotel valuations and transactions changed and how reliable are they?
Given the situation that we have been experiencing over the past several months, it has been very challenging to know for certain where hotel valuations land. Mathematically, given that we have seen a significant decline in revenues and EBITDA, it goes without saying that current valuations have declined. However, every market and hotel should be evaluated on an individual basis. At this time, the bid-ask gap between buyers and sellers is substantial. Sellers are citing value declines of between 10% and 15%, while buyers are seeking much more significant discount, even upwards of 40% in some cases. The risk associated with the market rebound and the operational rebound for each hotel is very challenging to pinpoint. This current dynamic is causing very few transactions to be carried out. It is certainly expected that the continued financial pressure on the lodging market will compel some sellers to exit their investment, the gap will narrow, and then transaction activity will resume. Moreover, leisure-heavy hotels, especially in secondary and tertiary markets and/or drive-to resort destinations, should perform better and are anticipated to return to 2019 levels faster than those in other markets.