Hotel Online  Special Report

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  Hotel Crisis Strategies
by The Plasencia Group, Inc.
September 25, 2001 

The Plasencia Group has reviewed potential steps which hotel owners and asset managers may wish to take to preserve asset value given current market conditions. Several such suggestions are found below, following our latest set of Industry Observations.

Industry Observations
 

- Falling interest rates typically mean one thing to hotel developers: build! However, two items that are sure to curtail new development: lenders will have no appetite in the near term; and, hotel brands and owners will save their capital for renovations and for the massive marketing effort it will take to entice people to travel again.
- Speaking of lenders� many are already getting a handle on potential technical and monetary defaults. Several major lenders are quickly taking proactive steps aimed at avoiding future defaults by requesting significantly more detailed reporting from their borrowers. Their goal is to stay ahead of problems and quickly establish stronger working relationships with their borrowers.
- In a previous issue, we reported that one of the largest contemplated mergers in the industry was expected to close next month. Unfortunately, conditions in the current financial and lodging markets have taken their toll on that transaction. The FelCor / Meristar transaction has been called off� for now.
- Transportation Secretary Mineta recently stated that, �if Reagan National Airport [Washington, D.C.] doesn�t reopen within the next ten days, a major U.S. airline would soon go under.� It is assumed Sec. Mineta was referring to USAirways since it is the largest carrier at DCA. USAirways has announced the closing of its MetroJet operations, based at Baltimore/Washington International.
- According to a major Washington D.C.-based travel industry  obbying group, unless the general public gets back in the air in relatively large numbers within the next 30 days, the lodging industry may be laying off as many as 500,000 employees during the next 60 to 90 days. Such layoffs, coupled with the over 120,000 announced airline industry layoffs or furloughs will have a ripple effect on many, many other facets of our economy.
- Discussions with general managers at over twenty hotels around the country indicate that major layoffs of line staff are already taking place. In addition to those hourly workers, workweeks for management level associates are being reduced to 30 hours or less and many are now taking comp time or vacation time.
- The Convention Industry Council has announced "Operation Cancellation Rescue," created to support the industry in the aftermath of the attacks. Its one main objective: to re-book and fill cancelled hotel rooms and meeting space, easing the economic burden on those whose meeting space was booked and now cancelled. Hotels or meeting planners interested in posting or searching cancelled space, respectively, can access "Operation Cancellation Rescue" at http://www.conventionindustry.org.
- Our firm has conducted interviews with association management firms in Washington, D.C. and Chicago. These are the people that plan the meetings and conventions. They indicate that beyond October 31 st , very few meetings are being cancelled. On average, these firms reported a cancellation rate of 4% to 7% for meetings or conventions booked November 1, 2001 through June 30, 2002. And if a rescheduling must take place, they will likely return next year to the hotel where it was originally booked.
- Hotel Business magazine reports total rooms booked by Hyatt Hotels for transient and group business between September 11 and 20 actually increased as compared to the same period last year. And from Steve Bollenbach of Hilton: �Since last Sunday we have seen a significant rebound for Christmas travel and small corporate business. We are cautiously optimistic for October.�
- Several hotel CEOs meet today with Commerce Secretary Evans and members of Congress to discuss relief for the industry. They will seek incentives and benefits somewhat similar to what the government has done for the airline industry.
- Some bi-coastal good news� A survey of hotel group bookings in San Diego in the West and Tampa in the East indicates that guest room pick-up for the citywide conventions in both venues is holding up very nicely for October. So far, no cancellations of any significance for November or December.
- Those visiting Orlando�s theme parks this weekend, expecting to find it empty, were surprised to instead find queues of 30 to 45 minutes at Disney World�s Space Mountain and Big Thunder Mountain. Meanwhile, Orlando�s airport was eerily quiet.
- Normally, it would not be big news to read in the New York Times that a Saudi family was bidding to buy a New York hotel, unless of course, the bidder happens to be the Bin Laden family. Amazingly, Bin Laden Associates, a subsidiary of the Bin Laden Group of Saudi Arabia, offered to acquire Pakistan Airlines' stake in New York�s Roosevelt Hotel. The biggest holding company in Saudi Arabia, made it clear it has no links with Osama Bin Laden, spurned by the family years ago and stripped of Saudi citizenship in 1991.
- Smith Travel Research has just announced its revised 2001 year-end forecast for the U.S. They indicate full-year occupancy will be 60.7%, down 4.7% from 63.7% in 2000, while average daily rate in 2001 is expected to be $86.41, an increase of 0.5% over 2000. Revenue per available room for 2001 is expected to be down 4.3% from the previous year.

Preserving the Value of Your Hotels

Subsequent to the terrorist attacks of September 11th, the lodging industry could easily be on the upswing in the number of hotel defaults. Several Industry analysts and participants are predicting that the eventual default rate for this cycle will quickly exceed the previous historic high of 16%. How did the lodging industry take such a dramatic negative turn?

Demand Softening Was Already Evident

Prior to the tragic events earlier this month, hotels were already experiencing a slowdown. Coming off a performance peak in 2000, the industry began to report year over year RevPAR declines as early as the 2nd quarter of 2001. In fact, PricewaterhouseCoopers, in a report dated July 2001, projected that RevPAR for FY2001 would decline by 0.3% -- only the second instance of annual RevPAR decline in 32 years. The investor universe had also begun to discount hotel values. Going-in cap rates grew by as much as 75 to 150
basis points as hotel NOI flattened or declined. Acquisition underwriters quickly began to ignore 2000 performance data as a non-recurring �spike�, and instead have been utilizing 2001 annual forecasts as well as 1998 and 1999 data to establish market values.

Unprecedented Downward Velocity

After September 11th, hotel occupancies have plummeted as travel has come to a virtual standstill. While anecdotal accounts now point to some re-booking momentum, many of these postponed meetings are being pushed into 2002. Nevertheless, several major hotel brands are advising their hotel managers that there will be continued softness for the balance of 2001 and into early 2002.

The Anatomy of Default

The Plasencia Group has recently examined the performance of several hotel assets on behalf of our clients in order to identify potential debt-related or technical default issues. The following table shows data on one of those assets (as of September 19), providing empirical evidence of the severity of the negative performance velocity being experienced subsequent to the recent terrorist attacks. The subject hotel was originally financed at acquisition at a 65% loan to value, and a then-market competitive interest rate of 8.0% with a 25-year amortization. Such financing would normally be considered a �reasonable and supportable� debt burden.

This historically stable full service hotel, located in a major U.S. market, has now projected a 21.5% decline in RevPAR, a 17.6% decline in total revenue and a 44.0% decline in Net Operating Income for the twelve-month period ending July of 2002. Property management reported that while cost containment initiatives were being effected, the time lapse in complete implementation, as well as overall lack of public confidence would surely dilute the near term effects on profitability.
 

9
Original Forecast 
thru 7/02 
Revised 
Forecast 
thru 7/02
Occupancy 73.0% 64.0%
Average Daily Rate $133.00 $119.00
RevPAR $97.09 $76.17
Total Revenue $30,048,099 $24,760,666
Gross Operating Profit $8,981,717 $5,661,507
Net Operating Income $7,068,793  $3,960,080
Debt Service $4,052,887  $4,052,887
Debt Coverage 1.7X 0.98X
Theoretical Value at 10% Capitalization Rate $70,687,930  $39,600,800

It is clear that the effects of recent events have seriously diminished asset value at this point in time. It is highly likely that as property performance improves, so too will its value; however the hotel asset has now suffered some degree of value impairment. Absent any aggressive, proactive intervention, we believe this hotel will deteriorate from a very healthy 1.7 debt coverage ratio to a default position within a few months. At present, very specific cost containment and expense reduction efforts are being implemented.

Proactive Steps to Preserve Your Assets

Lodging demand and revenues have contracted with amazing rapidity. Failure to act quickly to drive down break-even levels and preserve profitability could significantly impair the near- to medium-term value of a hotel. The Plasencia Group provides the following table of items taken from our Strategic Asset Value Enhancement® program, to highlight some of the issues hotel owners should be considering in these troubled times.
 

Revenue Enhancements
Are property marketing and sales activities adequately organized, focused, and intense so as to increase market share during this downturn? 
  • Sales force redeployment (small meetings)
  • Prompt lead generation and follow-up
  • File management and trace systems
Are all the resources of the hotel brand being effectively utilized for revenue enhancement?
  • Sales force redeployment (small meetings)
  • Prompt lead generation and follow-up
  • File management and trace systems
What are the property�s surcharge practices in comparison to its direct competitors � do they create a competitive advantage or disadvantage?
  • Service Charges
  • Amenity Surcharges
  • Set-up Charges
How is the hotel handling cancellation charges for group contract cancellations?
  • Public relations implications
  • Partial forgiveness as incentive to rebook
  • As compared to competitors
Expense Management
Are the actions of property management adequate to quickly constrain costs, overhead and operating margins?
  • Line by line review of P&L statement
  • Renegotiation of vendor agreements
  • Review of chain allocation charges
  • Reduction/elimination of �discretionary� expenditures by managers
Are all the resources of the hotel brand and management company being effectively utilized for operating efficiency?
  • Benefits of master purchasing agreements
  • Advantages and disadvantages of cluster sales efforts
  • Assistance from chain corporate specialists
Are brand or management corporate charges in compliance with management/franchise agreements?
  • Purchasing rebates
  • Corporate bill-back caps or ceilings
  • Incentive fee recalculation
Human Resources
Are staffing guides up-to-date � reflecting the current operating environment?
  • �Stretching� labor
  • Cross training of employees
  • Shortened work weeks
Have creative alternatives to employee furloughs and layoffs been explored and evaluated?
  • Eliminate bonuses
  • Reduce employee meals
  • Part-time status
  • Voluntary use of vacation time
Are opportunities available to out-source non-core functions of the property?
  • Landscaping
  • Preventive Maintenance
  • Gift Shop
  • Health club or pool cleaning service
Physical Plant
Have repair, maintenance and capital expenses been reprioritized to assure
fiscal efficiency, competitive guest experience and asset quality
  • Deferral of F&B outlet upgrades
  • Equipment repair versus replacement
  • Alternatives to third-party contract services
Have operations been reconfigured to allow for immediate efficiency gains? 
  • Closing full floors or wings
  • Alter pre-cooling/heating of rooms
  • Reduction of outlet operating hours
Security/Safety
Are property staff members adequately trained to respond appropriately to current circumstances?
  • Bomb threats
  • Guest injuries
  • Key checks at elevator portals
Have emergency response contingency plans been reviewed, updated and
communicated to all necessary personnel? 
  • Emergency and evacuation drills
  • Coordination with local police and fire
Is worker�s compensation experience closely scrutinized? 
  • Safety Committee
  • Prompt investigation of every incident
  • Scrutiny of all open cases

Take Action

The current environment has created unprecedented challenges to hotel operators that may result in significant value impairment risk to hotel owners. Whether or not current economic conditions persist, the industry has been damaged by recent events and quick action is required to mitigate the effects of that damage on individual properties. 



 

Lou Pasencia
President & CEO
The Plasencia Group is already bringing its expertise to bear on behalf of our clients in need. If we may be of service to you, to obtain more information or to schedule a Strategic Asset Value Enhancement® review, please call Lou Plasencia at 813 / 932-1234 or email at [email protected].
###
Contact:
The Plasencia Group, Inc.
Tampa International Airport
Tampa, Florida 33607
Telephone: 813 / 932-1234
Facsimile: 813 / 932-4321
http://www.tpghotels.com

 
Also See The "Perfect Storm"  - A Disaster Plan Audit  /  JMBM - go to

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