One thing we can say with certainty is that it won’t be easy, nor even, and it will take some time. As with any prior major disturbances to the hospitality industry, there will be some winners and losers.
With assets under management from Argentina to Canada, we at HotelAVE have been designing solutions for our owners to bear the brunt of the pandemic. We are beginning to see the resurgence of economic life in North America, but daily life remains very different and irregular south of the border. It may take more time, which many asset owners do not have.
Let’s look at it by theater.
In the United States, hoteliers have learned to save, be efficient, and squeeze every dollar. The U.S.’s legal framework has been beneficial to most owners by allowing them to adjust their operating expenses as needed to stay alive. Lenders have also been very responsive, willing to assist with forbearances, and flexible regarding loan covenants and DSC ratios, therefore easing the burden of long-term debt. However, over leveraging by some owners during the good times—a lesser incidence in this cycle—could come back to bite them when lenders request payments to start again.
On the operation side, hotel managers and their team members have managed to reduce their breakeven occupancy to levels we didn’t imagine possible in the pre-pandemic environment. For instance, HotelAVE’ s analysis shows that a unionized New York City urban asset can now breakeven with around 35% to 45% occupancy with an ADR of $150 to $175. Kudos to all our asset managers who assisted these owners, as a shameless plug!
Paralleling previous post-crisis years (9/11 in 2001 and the global financial crisis in 2008), HotelAVE predicted that properties with established traffic from government contractors and drive-to/weekend leisure segments would be the quickest to recover. That turned out to be true, with resorts leading the way and some other markets well ahead. In its June 2021 P&L data release, STR identified Miami, Tampa, Norfolk/Virginia Beach, and Phoenix as leaders achieving 41% to 79% GOPPAR index versus 2019. For urban hotels focused on business transient and group occupancy, 2022 is the anticipated year of recovery, with RevPAR likely to regain its 2019 level by 2023-2024. As of mid-year 2021, STR shows that most top urban markets are reporting less than 50% of 2019 revenues.
Known for its clear waters and rich culture, Mexico has some of the world’s loosest border restrictions. Travel by air for business or leisure is freely permitted without the need to present a negative COVID-19 test, which is still a basic requirement to visit many international destinations. While an antigen test is required prior to returning to the United States, most hotels and resorts are now offering the tests on-site at a minimal cost.
Most tourists flock to the beach resorts around Cancun and the Riviera Maya, but other well-established destinations including Los Cabos and Puerto Vallarta/Punta Mita are bustling with visitors as they offer “incredible food, sensational beaches and quaint historic towns,” as CNN Travel noted in a recent article.
The results are uneven, but undeniable.
With occupancy levels consistently over 60 since January 2021—barring a 2-week hiatus in February when the U.S. instituted a negative COVID-19 test result requirement for re-entry into the country—these leisure destinations are humming. After HotelAVE conducted weekly status updates of the pandemic’s impact on many hotels and resorts in these sub-markets as well as in Mexico City, we can clearly say that pent-up demand in leisure is alive, and Mexico is tapping into it.
Further east, in a region celebrated for its lush vegetation, the Caribbean has experienced more unevenness thus far. Destinations including Puerto Rico, the USVI, Aruba, T&C, The Dominican Republic (where all hotel workers have been vaccinated), and Jamaica have maintained a substantial visitor base, allowing their ADR or occupancy to exceed the 2019 high season during 2021’s summer months. Some small luxury assets have also thrived by focusing on isolation and price as a barrier to entry for the general public.
Stringent COVID-19 measures, a lack of flights, and complete closures are among the reasons many islands remain difficult, or impossible, to get to. Restrictions are slowly easing up, but the climate is still starkly different from the hustle and bustle in Mexico.
A more foreseeable outlook seems to indicate that the region will reopen by the end of this year in anticipation of the 2022 high season, a necessity for a region where approximately 15% of employment and GDP is based on tourism. Securing an ample number of vaccines to inoculate the Caribbean’s smaller population should be prioritized to protect inhabitants, and implementing a mandate for visitors to be fully vaccinated could further reduce health concerns. One can only hope these types of decisions will be economically driven, very dissimilar to the political turmoil that seems to taint health concerns in the United States from time to time.
In Central and South America, the water seems a bit murky as the situation is not yet easy to assess. It is clear that vaccines have become a key tool in accelerating the reopening of the region. However, as Arturo Garcia Rosa recently mentioned, “the need to ensure mass access to vaccines, the systematization of protocols for border crossings, the normalization of flight frequencies, and the incipient arrival of the Delta variant to our region are all issues that are yet to be resolved.” Amid these struggles, he prudently elected to postpone the SAHIC conference in Panama from late-September to March 2022.
This two-year disruption since the official start of the pandemic in March 2020 could be problematic for many owners in the region. Who can sustain such an impact? Who will survive?
As it turns out, many will not. Just like in North America, albeit on a smaller scale, leisure destinations in Latin America have seen an uptick in business. It’s very localized, driven by national demand for the most part, but will it be enough? In urban settings, business hotels are dramatically down in all relevant statistics: occupancy, ADR, and RevPAR. International business travel will be affected for the foreseeable future, with companies focusing on virtual meetings and limited trips.
Some of the biggest impediments to a normal recovery are the drastic differences in virus contamination, vaccine availability, and COVID-19 protocols among the various countries that constitute Latin America. Through an economic lens, since these countries are very interdependent, a return to normalcy will be difficult.
Already, a significant amount of capital from Latin America is chasing “distressed assets” in the United States, unsuccessfully for the most part, due to a significant delta in the bid-ask spread. As an interesting question to ponder, is it time for private equity and institutional investors to once again focus on Latin America for opportunities?
So, what about these distressed assets?
- In the United States, we haven’t seen many yet, and with too much money chasing too few deals, owners on the market are now getting their previous 2019 targeted prices.
- Generally, owners are much better capitalized in this cycle versus the global financial crisis, with lower LTV.
- With lender and brand permission, some owners are using FF&E reserve funds to cover operating shortfalls and debt service.
- One approach is to reach out to public and private REITs and brands for sale of non-core hotels. Pricing still might not be in line with distressed assets expectations.
- Being geographically part of North America bodes well for Mexico’s recovery. It will lag the U.S., but leisure will be the shining star. With a large internal market and proximity to the United States, the relaunch will be a matter of timing, probably a few months behind the U.S. The interdependence between the two economies, three counting Canada, is a strong factor that will positively impact Mexico’s post-COVID-19 growth. The deployment of vaccinations currently taking place in Mexico is average by international standards. However, with the intent to accelerate the reopening of the border, Mexico has focused its health initiatives on states bordering the United States.
- Mexican officials recently displayed a map showing the vaccination rates of adults: Baja is at 91%, Sonora stands at 75%, Chihuahua at 81%, Nuevo Leon at 93%, and Coahuila at 88%.
- “We have good relations with the United States, there is cooperation, and we need each other,” said Lopez Obrador while giving support to the reopening of regional business, the antidote to limiting the amount of distressed inventory in that country.
- The Caribbean has also seen some significant adjustments over the last few years following stronger than normal hurricane seasons. Lower LTV, larger residential components to offset development costs in many projects, and the ability to bounce back with a product perfectly situated in the pent-up segment of the demand will negatively impact the potential amount of distressed assets for sale.
- In Central and South America, it might be time to take advantage of an unusual and unforeseen opportunity. Distressed assets are coming, but taking advantage of the situation is not a matter of access to capital—there is plenty of that going around. It is an infrastructure and expertise matter. Do you have the setup, knowledge, information, and ability to rapidly underwrite and reposition these opportunities, to pull the trigger and build a performing portfolio?
And once you find these opportunities, here is some food for thought from HotelAVE as an investment strategy in a post-COVID-19 world to create some real value with your new investment:
- Install revenue management and sales best practices to build RevPAR index share.
- Manage and monitor expenses to be in line with budget (including service contracts and utility-saving measures).
- Utilize internal labor efficiency tools to guide re-opening/stabilization of hotel staff.
- Tight management of reserve and capital expenditure dollars is a must. Historically, exceeding brand standards has not generated ROI.
- Centralize operating costs to optimize GOP margins and expense efficiency.
- Invest necessary CAPEX at acquisition to capitalize on premium product positioning during the whole period.
- Leverage existing lender relationships to secure favorable financing terms.
- And remember, you need a long-term view of hotel investment, with a need to quickly react to short-term challenges while maintaining focus on an enduring strategy. That may seem complicated—because it is—but it also makes for a lot of excitement!