Industry Update
Opinion Article17 August 2020

The Owner’s Obligation – Cash

By Robert Mandelbaum, Director of Research Information Services at CBRE Hotels

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The COVID-19 virus has had an extreme negative impact on the U.S. lodging industry. According to CBRE's June 2020 edition of Hotel Horizons®, lodging demand in the U.S. will decline by 37.0 percent in 2020. This will cause a 38.0 percent drop in the national occupancy level, along with a 22.5 percent fall in average daily room rates (ADR). The net result is a projected 51.9 percent fall off in revenue per available room (RevPAR) for the year. Using historical data from the CBRE Trends® in the Hotel Industry database of operating statements, the most likely consequence of a 51.9 percent RevPAR decline is a Gross Operating Profits (GOP) decrease in excess of 80 percent.

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U.S. hotel owners also face projected low earnings before interest, taxes, depreciation and amortization (EBITDA). Based on the annual occupancy levels forecast for each chain scale in 2020, it is expected that luxury and upper-upscale hotels will struggle to generate cash from operations for the year. Properties with more modest ADRs have a stronger opportunity to achieve a positive EBITDA, but their profit margins will still be 3,000-4,000 basis points below their historical averages.

Minimal Owner Fixed Costs

We have analyzed the 2019 operating statements from 1,008 hotels that reported their interest payment for our Trends® in the Hotel Industry survey to estimate the impact of the 2020 industry recession on U.S. hotel owners. In 2019, this study sample averaged 179 rooms, and achieved a 73.8 percent occupancy level, along with a $159.26 ADR.

In addition to their interest obligation, under the extreme circumstance that an owner closes their hotel, we assume the following minimal expenses remain:

  • Minimal levels of administrative, security, and maintenance costs to maintain the asset
  • 50 percent of the annual utility costs
  • Insurance
  • Property taxes

We understand that several owners continue to provide benefits for furloughed employees, upheld some level of marketing efforts, and maintained other operating costs. These additional expenses add to the "cash burn" of U.S. hotel owners who have closed their properties in 2020.

Further, it is important to note that these expenses do not represent the operating fixed costs of a hotel. In addition to the expenses listed previously, hotels that continue to operate at extremely low levels of occupancy would incur greater labor and utility expenditures, as well as the cost of supplies and services.

Interest Coverage

In 2019, 91.0 percent of the properties in the study sample generated an EBITDA level greater than their interest obligation. On average, the EBITDA to interest ratio was 2.27, meaning that the hotels generated more than double the cash required to pay their interest obligations. It is important to note that this analysis does not assume any deductions from EBITDA for a capital reserve.

For our analysis to determine obligations during this challenging time, we held the 2019 interest payment constant, and then assumed different EBITDA decline scenarios (50%, 60%, 70% and 80% declines) for 2020. Next, we compared the resulting EBITDA levels to the assumed 2020 interest payments and made two calculations: the coverage ratio and percentage of owners in our sample who could pay their interest under each scenario. The results showed that with a 50% decline in EBITDA, the interest coverage ratio dropped to 1.14, and 73.4% of the sample property owners would be able to pay their interest obligation. However, if profits were to decline by 80%, the coverage ratio drops to 0.45, and only 4.8% of property owners would be able to cover their interest payments.

Walking To The Workout

Given these dire prospects, most owners have been forced to communicate with their lenders or landlords regarding their debt or rent obligations. Using the minimal costs outlined earlier, if hotel owners in our study sample opted to close their properties, they would be obligated to carry a monthly cash burden equal to $488 per room in addition to any debt service or rent. On average, that equates to a minimal "cash burn" of $87,000 per month.

As expected, the minimal monthly "cash burn" varies by property type in the study sample. Given the complexity and size of large convention hotels, the monthly "cash burn" for the owners of these properties, before interest and rent, is approximately $410,000. On the other end of the spectrum, owners of smaller limited-service operations would be obligated to pay minimal monthly expenses of $38,000.

While news of declining U.S. hotel operating performance in 2020 has been shocking, the impact on the owners of the nation's lodging assets has been even more dramatic. Despite the tremendous run of profit growth and returns the U.S. owners have enjoyed since the Great Financial Crisis in 2009, it is doubtful that most were equipped to handle the hit to their fiscal health.

Robert Mandelbaum is Director of Research Information Services for CBRE Hotels Research. To benchmark the cash flows of your property(s), please visit pip.cbrehotels.com/benchmarker, or contact [email protected]. This article was published in the July 2020 edition of Lodging.

Robert Mandelbaum

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