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]. |
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