Hospitality Group

Optimism Versus Reality

Optimism Versus Reality - By H. Keith Thompson

I am, by my very nature, an optimist. I don’t think you can be a hotel broker and not be an optimist. Optimism is welcomed, wonderful, and useful, but there must be some reality woven in.

Today there are 40+ million people unemployed in the US, and it is expected that the May 2020 unemployment rate will be 20+/-%. For the hospitality industry, COVID has caused performance to plummet to levels never seen before. While I am happy to see public companies rebounding in stock value, a close friend of mine asked me what I believe could be the best question. Why?

With hotels especially, as well as office, multifamily, retail, entertainment, restaurants, sports, conventions, etc., many are expecting the second quarter and possibly the third quarter to be flatlined in terms of EBITDA. We are not talking about servicing debt; instead, we are talking about just covering operational expenses. A recently used term is “cash burn,” which describes the rate by which a company covers losses. With many public and private companies budgeting flatline EBITDA, there is also cash burn. Depending on the size of the company, the cash burn rate is projected to be very significant over the next six months.

I heard some interviews recently where some people were saying they can cash flow operations at a $25.00 RevPAR. While this is conceivable for hard budget and economy extended stay, it is simply not possible for the broader segment of the industry. For the basic branded select-service hotel, it is estimated that the RevPAR (operational) breakeven point is $40.00 – $45.00 RevPAR. For full-service and meeting hotels, that breakeven number is much higher. By way of example, if a 100-room hotel runs 25% at $100, the top line income for that day is only $2,500. By the time the franchised hotel pays the basic operational expenses, the income is not enough to cover operational expenses. This is where the owner “feeds” the property to keep it open. For an average hotel property (100 rooms) to cover operational expenses and service its debt, the threshold for cash flow is closer to $55.00 +/- RevPAR. All of this is predicated on the hotel being in a tax/insurance friendly state and being fee simple and non-union. If the property is located in any of the higher taxation regions, the RevPAR will need to be even higher.

The term Green Shoots was first used in the UK in 1991 to describe the signals of growth during the economic downturn, and the term has been brought back during the COVID situation. There are segments (deep economy and drive to leisure) that are showing signs of potential profitability. However, there still exists a vast number of hotels that may not return to profitability for a year or longer.

Therefore, the earlier question of why troubles me on a lookback basis once we get through the summer and early fall of 2020. My sincere hope is that optimism abounds throughout the US economy, but the reality of where we could be headed gives me great pause.

ABOUT H. KEITH THOMPSON

H. Keith Thompson has been a national hotel broker for 29 years, most recently as the founding principal of Hotel AG when it sold to Avison Young in January 2017. During his career, he has been involved in approximately 1,000+/- hotel transactions totaling multiple billions in market value. Thompson began his career in 1980 in the food and beverage side of the industry, progressing into real estate ownership by 1988 and into the brokerage side of hotel real estate by 1990. He has earned many sales awards through the years and is often asked to speak at hospitality conferences and has had many published articles for the hospitality industry. He is an active member of his church and has personally served in several leadership capacities within his community.

Contact: H. Keith Thompson

[email protected]/770.692.1605

published: 06-02-2020

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