As border closures and travel restrictions drag on, the hotel industry has had more than its fair share of financial challenges. While many predicted a dearth of revenues during the 2020 holiday seasons, the long-awaited comeback is still a distant prospect.
Delays have put an unprecedented strain on financing options for operators. While government subsidies have helped, they’re facing a climate of risk-averse lenders, declining values, rising construction costs and occupancy rates that range from single digits to 35 per cent at best.
The severity of the financing challenges varies depending on locations and type of operation. “I usually start financing conversations by saying it’s bad across the board,” says Salim Gulamani, senior vice-president, Specialized Real Estate for Clifton Blake in Toronto. “But if you’re in Alberta or Saskatchewan, the challenges are very different. The hotel industry and economy there were having big issues prior to the pandemic. COVID-19 was just the icing on the cake for them.”
Lenders can only do so much for businesses already dealing with a struggling economy, he adds. “If you were already struggling pre-COVID-19, lenders aren’t going to be the most accommodating.”
Urban centres have been the hardest hit as they tend to benefit the most from business travel, conventions and leisure travel, he says. “The Vancouver market for example, has lost a huge portion of cruise, convention and group-business visitors, including large influxes of travellers from Asia.”
Mark Kay, president of CFO Capital in Toronto, notes lower-end chains and more economy brands have outperformed larger chains in secondary markets. “They are faring better than downtown urban-core and airport markets that are more dependant on corporate travel.”
But there are still compelling reasons for lenders to work with hotels, Gulamani says. “Frankly, they have no choice because no lender I know wants to take a property back because the appetite to sell is very minimal. At the same time, many are not looking to add hotels or new clients to their portfolios right now.”
There are occasional exceptions, he notes. “They may lend to first timers if they’re backed by a professional management team or established business partner. But for the most part, they’re not willing to take on the risk of a new hotel and are more amenable to existing hotels.”
With many of the banks pulling back, even existing operations are facing an uphill battle, Gulamani says. “If you have an existing hotel and go to another lender, their first question would be ‘why is your current bank not doing this?”
For those who do succeed in pleading their case, lending parameters have changed. More lenders are asking borrowers to pay down their existing loan, demanding more guarantees, and/or adjusting interest rates upwards.
Not surprisingly, criteria for eligibility are more stringent as lenders prefer borrowers who have other sources of income or multiple properties that can serve as collateral, Gulamani notes. “They feel more comfortable if you have enough sources generating cash-support payments going forward. They ask for more equity. Before you could get 70 per cent of costs. Now it’s more like 55 per cent,” he says, adding new construction has declined, with the exception of projects already underway. “The costs of new construction are actually going up. If you’re just starting a project, it doesn’t make sense to move ahead.”
“The cost of construction has not come down, but business and asset valuations have,” confirms Ed Khediguian, senior vice-president, CWB Franchise Finance in Toronto. ìThe cost of construction versus values is a bit off right now. There’s been little to no trade activity because buyers and sellers are not seeing eye to eye on property values, although we expect to see some transactions over the next couple of quarters.î
Heís also seen a reduction in appetite for the space by non-specialized hotel lenders. ìMany banks and credit unions have re-trenched and stepped away from covering the sector, although most, for the time being, are working with their existing clients through liquidity requirements and covenant breaches.î
During the initial impact, owners are focused on reducing operational burdens and seeking longer-term rental agreements with municipalities and provincial health and housing departments. ìFederal subsidy programs available to them have greatly helped,î Khediguian says.
Generally speaking, most experienced owners have been able to manage through the past year since they were coming off several years of strong industry performance, he adds. “While it has required a re-investment into their assets, it has allowed them to survive over the medium term. If the recovery happens in the next 12 to 24 months, they’ll be fine. But if borders remain closed for extended periods of time and corporate travel is slower to recover, it will be more problematic.”
Kay feels lenders have been fairly supportive in providing interest-only loans and principal postponements. The key is managing cash flow with the inclusion of institutional and government assistance “Although COVID-19 is a moving target, the general consensus is recovery is expected to commence in the fall, as we’re hopeful the majority of Canadians will be vaccinated, provincial and international travel bans will be lifted and corporate travel will return. But I will say that institutions are feeling a bit more comfortable today about the outlook than they were six months ago.”
Financing is currently available, however more due diligence – particularly in sensitizing revenue projections based on the expected COVID-19 recovery outlook per region and assessing borrower’s liquidity – is required, he adds. “Borrowers will need to have sufficient liquidity to carry the interest component of their loans, while principal is deferred. If the borrower can meet the new lending parameters – comfort with revenue projections, industry experience, and proof of liquidity – there is institutional funding available to them, in addition to private-equity-fund options. We have been active providing re-finance, acquisition and construction loans when the opportunity arises”
Moving forward, Gulamani advises hotel operators to keep communications open with lenders and existing clientele. “Borrowers need to keep lenders up to date on their plans. Even if they are shying away from hotel loans, make sure you keep them informed. Have a working plan for moving forward. If cruises are cancelled in the future, what will you do to make up those revenues? Also, maintain contact with existing clientele, even if you haven’t seen them in months. Kay prefers to be optimistic about the future of the industry. “With each previous economic crisis, the market has come out stronger than before. We believe there is a pent-up demand for travel once parties get vaccines and borders re-open, and as long as the government and financial institutions provide their support. It’s just difficult to pinpoint when that will be.”
BY DENISE DEVEAU