Yesterday it was pushing the top line. Today, it’s managing investor, employee and lender relations.
Hotelier dubbed 2007 the “Year of the Deal,” as hotel transaction volume skyrocketed to unseen heights. Two years never felt so long ago. Today’s hotel landscape is fraught with fear and apprehension. Many experts agree real economic growth won’t occur until 2010, and there’s a general understanding that much of 2009 will be focused on damage control.
“Things are going to get worse before they get better,” says Sam Damiani, vice-president and real estate analyst at TD Newcrest in Toronto. “The state of the banking sector in the U.S. is tenuous. There’s a lack of clarity on what the capital base is, as well as what their ability to lend is.”
That uncertainty is causing lenders and investors in the Canadian hotel sector to take a wait-and-see approach, leaving some hotels in a precarious position. “Hotels need to keep as much transparency on performance as possible,” says Ed Khediguian, vice-president of GE Capital Solutions in Montreal, about the key to maintaining strong lender relations. “You must address any defaults, especially technical defaults, as soon as you can, and get in front of it. Lenders know there’s scarcity of capital but lots of demand. The first layer of capital flow is to bolster existing assets and existing relationships.”
In a climate where everyone is scrambling to slash expenditures and adjust budgets, hoteliers can take solace in the fact that lenders are willing to make capital available for the right kind of project. “Anything that can improve an asset, whether it’s a renovation or expansion, is attractive,” says Khediguian. “As long as it improves the security and bolsters its positioning.”
Unfortunately for investors in hotel REITs, many wish they hadn’t waited to sell their units at all. “This is a market, and if you look on the trading lines, for every buyer there is a seller,” says Damiani, when asked whether a large percentage of unitholders are rushing to sell shares. “[But] while the excessive selling pressure has slowed down, selling REITs when they were twice the price last summer was a better decision than selling now, when they’ve fallen 50 per cent.”
The current economic crisis has devalued units and caused panic among investors, but it’s important to note the hotel sector bounced back quickly after the last two major challenges it faced, which is what attracted many REITs to acquire hotels in the first place. “After 9/11 and SARS, the quick recovery back to normalized earnings levels gave people a bit of a surprise in how resilient the sector was, and that reduced the cost of capital on hotels,” says Damiani. “But given this recession is a bad one, how the hotel sector performs now will be critical in determining the level of institutional investors that are interested in the sector over the medium term.”
Damiani admits his take on the situation is “a little more bearish” and that hotels are going to get hit hard by the current recession. “For that reason, you’ll see a meaningful shying away of institutional investment in hotels during this cycle.”
So what advice does he have for maintaining strong investor relations? “Investors always want some sense of knowing what’s happening. If a hotel REIT’s senior management team doesn’t know what the outlook is, then they should just say that. They should try to put a pin in the downside and the upside, which provides a level of comfort.” Conversely, the worst thing a CEO can do is be dishonest, he says.
The other big cloud hanging over REITs right now is the government’s proposed legislation on their taxation. “The rules have been laid out, but unfortunately, they do not include the hotel REITs,” says Damiani. “Assuming the rules become law (and without any further amendment), then the hotel REITs will be taxable starting in 2011.” There’s a good chance the salad days hotel REITs enjoyed a few years back are gone for good, which is why so many REITs have shed hotel assets over the past few years.
Looking at previous recessions, the hotel industry did a number of things to help stay above water, says Charles Suddaby, who heads up the hospitality practice at Cushman & Wakefield Lepage in Toronto. “We put a better focus on yield management, staffing, purchasing and capital improvement programs. Where there was low-hanging fruit, that became the obvious target, and the same applies this time around. Although, speculation suggests this is going to be more prolonged, so we have to be careful trimming staff by whatever the number may be over a prolonged period doesn’t jeopardize the positioning and service level of the hotel.”
Companies must also ensure they’re being open and transparent with staff during this rocky period, especially if they’re making layoffs. “We’re in the execution stage of an internal branding strategy right now, and it’s probably going to be the bright light that will get us through these troubled waters,” says Hank Stackhouse, president and CEO of Torontobased Delta Hotels. “It has low capital cost and pulls at the emotions, the minds and the hearts of our employees. I can’t think of a better time to have this new initiative in play.”
Having a brand vision that every employee in the company understands, as well as what their individual role is, is crucial, says Stackhouse. “I went across the country and delivered the new mission, vision and values to more than 6,000 employees, and how they can play a part in it,” he says. “People want to know that what they’re doing matters. During these difficult times, you need solid values that you can put up in front of everybody, and live by them, because as business operators we have to make tough decisions. Therefore, if you are making tough decisions, you can still make them, but be guided by your values.”
Of course, the type of strategy you put in place to deal with employees depends on where your hotel is, because the playing field is not level in every region across Canada. “The takeaway of hoteliers and owners of hotels is to really be monitoring the unique dynamics in their market, and whether those dynamics impact revenue generation or whether they impact expenses,” says Sara Glenn, who has years of hotel experience in operations and asset management and now runs her own asset management company. “Each hotel in each jurisdiction has different tools in its toolbox. The key is to be aware of the macro-issues affecting your market, and be cognizant of how to creatively develop those tools. For instance, on the labour front, if you have someone leaving a position, you might not fill it right away.” The cross-training of employees is also a good idea, notes Suddaby — although if a union is in place, you might have to negotiate for that flexibility.
The other caution Glenn has for hoteliers? Resist dropping rates. “It takes a nanosecond to drop rates, but five years to get them back.” Delta’s Stackhouse agrees, and goes as far to say if there’s any bright spot in the industry right now, ADR seems to be holding. “There was a lot of rhetoric and discussion going in, and it seems like we’re trying to hold on to average rate. To me, that’s a lesson learned from the past.”