Q&A with InnFACT Advisors’ president and founder MaryJo Finocchiaro
INSIGHT ARTICLE |
The hospitality industry is under enormous stress, grappling with a steep pandemic-induced decline in business. For first-hand perspective on what the industry is up against right now, RSM senior real estate analyst Ryan McAndrew asked MaryJo Finocchiaro, president and founder of hospitality real estate advisory firm InnFACT Advisors, about what the hotel market looks like in the current environment.
Founded in December 2019, InnFACT’s leadership team has experience with hotel finance, management and ownership. Read Ryan and MaryJo’s conversation below.
Ryan McAndrew: What are some key steps that hotel operators are taking to help guests feel comfortable coming back to their properties?
MaryJo Finocchiaro: Large brands and independents alike are taking significant measures to ensure guest and staff safety. They have reduced person-to-person contact and are enforcing social distancing protocols. Operators have implemented expedited or virtual check-in, daily deep cleaning and disinfecting with electrostatic sprayers, touch-free hand sanitizer stations, disinfectant wipes outside elevators to wipe down buttons, temperature checks, elimination of buffets and banquets, and mandatory face masks.
RM: What are you seeing in terms of capital markets and lender activity for the hotel industry?
MJF: We are observing some dislocation of capital markets. Loans are moving to special servicers that offer 90 to 120 days of forbearance. We are also seeing whole loan sales for performing loans, mezzanine loan trades under distressed conditions and limited investment sales. For owners who have a strong balance sheet and continue to meet their debt service obligations, lenders are granting concessions such as waiving restrictions on furniture, fittings and equipment reserves to allow owners access to that cash to meet operating expenses. During the next three months, we expect to see a pipeline of loan restructurings, limited refinancing because of cautious credit markets, a significant number of distressed investment sales and continued loan sales.
RM: What do you expect to see in terms of transactions in the next year?
MJF: We expect a large increase in M&A transactions beginning in the fourth quarter of 2020 and continuing into the first half of 2021, characterized by significant distressed investment sales and seasonality challenges for travel.
RM: When do you expect to see group business to start to return? What things have to be in place for that to happen?
MJF: We expect group business to lag any improvement in the leisure market, like what happened during the financial crisis beginning in 2008. Bookings are not expected to occur in a meaningful way before 2021, subject to a COVID-19 vaccine and therapeutics being widely distributed in 2021. We expect it to take several years for group business to reach pre-pandemic levels again. Individual business travelers will also be slower to return than leisure customers because of new company policies restricting travel and the business traveler adapting to video conferencing.
RM: How much do you think hotel valuations are going to go down? Which property types do you think will be hit the hardest?
MJF: Valuations across all chain scales and hotel sizes have declined sharply. The hardest hit are the large hotels dependent on group reservations. Those that will fare best are small leisure hotels of 100 to 200 rooms in drive-to markets. Again, discovery of therapeutics and/or a vaccine for COVID-19 is critical for the hospitality business to ramp up on a wide scale.
RM: What impact do you think this will have on the hospitality industry workforce? Do you expect many hospitality professionals to leave the industry?
MJF: Federal financial assistance and state unemployment benefits have provided significant support to hotel associates. Some will undoubtedly leave the industry, even if only temporarily. When stay-at-home orders were in place, some members of the workforce leveraged low- and no-cost online programs to earn certifications and licenses that will help them in the future.
RM: Are there any significant, permanent changes to hotel operations that you expect to see?
MJF: Until an effective vaccine is developed or highly effective treatments are broadly distributed, we expect all the safety protocols we spoke about earlier to remain in place.
RM: How much impact do you think the government stimulus programs have had on the industry, and what more do you think needs to be done?
MJF: The stimulus package has certainly helped the hospitality workforce and airline workers, but business and individual incentives are still needed to drive demand. Such incentives could come in the form of tax credits, sales tax holidays and occupancy/bed tax holidays, as well as direct stimulus to consumers.
RM: Are you aware of any new technologies hotels are using to improve guest safety?
MJF: Hotels are using emerging technologies to help guests feel more comfortable traveling. Many hotels have implemented contactless check-in. In cases where in-person check-in remains, some hotels have installed plexiglass barriers between customers and hotel associates to mitigate risk. Hotels are using temperature check-in kiosks, touchless digital menu systems, and online ordering with curbside contactless pick up. Face shields are also being worn by associates in F&B and retail outlets. They are also using sophisticated cleaning devices in common areas.
RM: Once a vaccine is readily available, how quickly do you expect travel to rebound?
MJF: Drive-to markets have experienced some travel rebound this summer, even without a vaccine. Unfortunately, we do not think this will be sustained and expect transient business to drop off again in the fall. Once a vaccine is readily available, transient business will undoubtedly rebound first and demand may recover nicely within 12 months. We think group and individual business travel will take longer to rebound, probably 18–30 months after a vaccine is available. Whether the industry gets back to the record levels it experienced pre-COVID-19 in that time frame is less likely, in our opinion.
RM: From a financial operations standpoint, what are some of the things you are seeing hotel operators doing to survive?
MJF: Hotel management companies acted quickly by laying off hotel staff and furloughing management employees. Running a very lean operation is key to survival during these times. We have also seen a lot of hotels get creative with potential revenue streams like curbside food pickup and outdoor activities.
RM: Do you expect real estate private equity groups to move investments out of hotels and into other real estate sectors?
MJF: No, our country is resilient, and people inherently want to travel. The industry will fully rebound in time. Private equity firms will capitalize as they have before. We expect real estate private equity firms to double down on buying distressed real estate during the fourth quarter of 2020, after the election, through at least the first half of 2021 and realize record profits on exit.
RM: What key performance indicators are you watching right now and why? With regard to the overall outlook for hotels, what data are you watching?
MJF: Hotel re-openings and occupancy are the fundamental measures. Demand drives each metric. As temporarily shuttered supply comes back online, and occupancy levels continue to rise, that will be a clear sign that economic activity is picking up. Companies like TravelClick harness data that can help inform the future for certain markets and the country.
RM: Are there any geographic differences in current performance and expected recovery for the hotel industry?
MJF: Generally, the more isolated a market is and the more difficult it is to access by car, the slower that market will recover. Quarantine measures in each market will also be a factor.
RM: In terms of lender activity, what terms do you expect to see for new deals compared to existing deals?
MJF: It’s still too early to say what the terms will look like for workouts since loans are still in forbearance, but we would expect similar terms to those of the 2008 financial crisis.
This article was written by Ryan McAndrew and originally appeared on 2020-08-14.
2020 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.