As virus empties big-name hotels smaller franchise owners are hurt
|Toronto Star 26 Mar 2020 at 16:24|
The occupancy rates at the nine hotels he owns in the Northern Virginia area plummeted from about 50 per cent to only a handful of rooms each night because of the coronavirus pandemic . He scrambled to cut costs. Floors were shut down. Bar and hot food service was stopped. A laundry dryer was turned off. And he started to lay off staff.
“It’s just gut-wrenching,” Patel said, adding that he was trying to retain employees who didn’t have a working spouse or a second income.
Among Patel’s chief worries is debt — the mortgages he holds on the Hampton Inn and Aloft by Marriott and other hotels he owns.
“I’ve reached out to my lenders saying, ‘We have to work through this together,’” Patel said.
Early Wednesday, lawmakers in Washington reached an agreement for a $2 trillion (U.S.) stimulus package that would be the largest in U.S. history. The hotel industry, which has been hit particularly hard, had asked for a $150 billion bailout. As many as four million hotel employees — housekeepers, maintenance workers, desk clerks and others — have been laid off or will be let go in coming weeks, according to the American Hotel and Lodging Association.
Much of the concern in the industry is on the roughly $350 billion in mortgages, construction loans and commercial and industrial loans taken out on hotels and held by banks, insurance companies and investors.
The bulk of that debt wasn’t borrowed by the big chains, like Marriott International and Hilton Hotels & Resorts. Rather, it belongs to individuals like Patel — who has taken out mortgages on each of the hotels he owns — investors and even publicly traded real estate funds. In 2018, about 93 p of the nearly 33,000 hotels in the United States were franchised, according to the market research firm Frandata.
And these owners say they need help, too.
“I don’t think there is a proper definition or understanding of what will go to us and what goes to the big brands,” said Buggsi Patel, who has been in the hotel business for 32 years and owns two dozen hotels in Oregon, Washington state and Idaho. He said he had mortgages on all of his hotels and last week let go of 65 per cent of his employees. “It’s one thing to help out Hilton and IHG, but what are they going to do for us?”
Chip Rogers, president and chief executive officer of the American Hotel & Lodging Association, said it was lobbying to make sure all hotels have access to lending, pointing to a change from the Small Business Administration that would provide relief for hotels that employ fewer than 500 people per location.
“The points we’ve been trying to make all along, what we’ve been advocating for, is getting money into the hands of small business owners to make sure that their employees are paid and to make sure they can service their debt so that when this passes, there are jobs for those employees to come back to,” Rogers said.
The franchise model in hotels dates to the 1950s, when the Howard Johnson chain franchised a motor lodge in Georgia. It grew in popularity during the economic downturn of the 1990s when large hotel brands, which had put mountains of debt on their balance sheets to construct hotels, were hit hard.
Over the past two decades, many large hotel brands like Marriott and Hilton have moved to a so-called “asset light” model, in which they don’t take out mortgages to build hotels. Instead, the risk is held by individuals or investment funds that borrow the money.
Marriott, for example, owned or leased just 28 properties in the United States that operated under brand names including Marriott, Sheraton, Westin, Residence Inn and Fairfield, at the end of last year. Nearly 4,500 hotels operating under those various brand names were owned by franchisees.
The hotel owners pay the parent brands a percentage of their total revenues, as well as reservation system fees and group loyalty fees. Franchisees say the various fees can total as much as 20 per cent of their total revenues.
Conversations have started between the parent brands and the hotel owners about reducing or deferring some of the fees. Best Western, for instance, cut many of the various fees by half last week.
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“I’ve been in the business for 20 years and my family, for 40 years, and we are stunned at how fast and how hard this has hit,” said Heetesh Patel, who said he has cancellations for June. “I’m speaking to a number of operators around the country and many are saying they cannot pay their mortgage this month, not the principal and the interest.”
Buggsi Patel said that in early conversations with the banks that have lent him money, there have been discussions about deferring payments or paying interest only on the loans for a period of time. Banks should have a fair amount of flexibility as commercial mortgages for lodging currently make up about seven per cent of their total loans, well behind multi-family residential or office buildings totals, said Russell Hughes, a vice-president of banking at data firm Trepp.
But Buggsi Patel said he was more concerned about the portion of his mortgages, about 20 per cent, that are tied up in commercial mortgage-backed securities.
A popular instrument before the financial crisis of 2008, these securities have made a comeback in recent years as banks use them to remove loans from their own balance sheet by bundling them into a pool of other loans, which are then issued as a bond to investors.
These securities tend to have less flexibility when it comes to deferring or restructuring payments.
Vinay Patel is not just worried about his nine hotels that are still open, he’s also worried about the four hotels he has under construction. He had planned to open an 80-room Comfort Inn late this summer and a Tru by Hilton in December.
Thanks to low interest rates and high demand among travellers, construction of hotels has been running strong. This year, more than 1,100 hotels are expected to open, according to analysts at Lodging Econometrics.
Vinay Patel estimates it costs about $150,000 per room to construct a hotel, though it can differ somewhat depending on location. So a typical 100-room hotel would cost a developer about $15 million. The owner usually puts down 30 per cent cash and borrows the remaining 70 per cent, he said.
“It’s the most I’ve ever had under construction at a time. And the problem with a construction site is that you just can’t stop. You have to finish building the hotel,” he said. “We were riding high for the last seven or eight years. And yes, people thought something could happen, but nothing of this magnitude.”