It's hard to expect a V-shaped rebound for the hotel industry, but improvements to coronavirus testing could accelerate the L-shaped recovery, anticipates Jon Bortz, the CEO of a large hotel ownership group.
As the chief executive of one of the largest U.S. hotel ownership groups, Pebblebrook Hotel Trust CEO Jon Bortz has felt the dire coronavirus impact on travel demand. Pebblebrook has temporarily closed 46 of its 54 upscale hotels across the U.S., and its operators have furloughed most of the roughly 8,000 employees across Pebblebrook’s entire hotel portfolio.
Bortz went to the White House in March with a group of hotel executives that included Marriott International CEO Arne Sorenson and Hyatt Hotels CEO Mark Hoplamazian to appeal to the Trump administration for a $150 billion bailout for the industry while a stimulus bill was being drafted. While the resulting $2 trillion relief package will help hoteliers and their employees, Bortz thinks more is needed to navigate through a recovery he expects will take longer than initial forecasts predicted.
Bortz was at the center of the $5.2 billion 2018 merger between Pebblebrook and LaSalle Hotel Properties, the lodging real estate investment trust he oversaw for 11 years. In an interview with Skift Tuesday, he outlined what steps are needed to move from survival to recovery and why a fourth piece of legislation is a necessity to bring the hotel industry back to its feet.
Note: This interview has been condensed and edited for clarity.
Skift: How much of a lift do you expect the $2 trillion CARES Act relief package will have on the overall hotel industry?
Bortz: I think it’s helpful, but I also think it’s kind of a down payment. It was originally set up to cover a challenging period of about eight weeks, and this is obviously going to be a lot longer than that. We think it has some nice aspects to it. It helps small businesses and is done by property instead of by employer or major owner, so that gives operators the ability to apply for small business loans by individual property.
The challenge is these properties in any major resort market shut down already. Employees were furloughed. The idea of bringing people back only to let them go after eight weeks because business isn’t there doesn’t make a lot of sense, and it doesn’t really cover a lot of other expenses.
Skift: How will Pebblebrook’s properties benefit from the CARES Act?
Bortz: Like everyone, the way the program is set up right now, there are still a lot of unanswered questions submitted to the Treasury Department and Small Business Administration. We’re waiting on answers as an industry. We filed for a loan for all our properties as well as the corporate entity. We have 20 different operators, and about a third of our properties are affiliated with a major brand. They all qualify.
Skift: In March, you said you were looking at closing more than half of Pebblebrook’s 54 properties and that 4,000 employees had been furloughed with an additional 2,000 expected by the end of the month. Can you give us an update on those plans?
Bortz: Forty-six properties have closed — some of which for three weeks already. Out of a little more than 8,000 employees working across all our properties, operators have furloughed a little over 7,500. Obviously, that’s a vast majority.
Skift: There is much discussion on what shape the recovery will take. Given what we know so far, how do you anticipate the hotel industry will come out of this?
Bortz: We’re planning for a very slow, very mild recovery because we’re concerned about human behavior, government regulations, and what’s going to be allowed. Can you have a group meeting? Can you have a wedding? How many people can gather in a space or location? We think there are some basic aspects that will be necessary in order to cause the recovery in travel and hotels to accelerate.
We have to have the mass of testing where, when someone comes down with coronavirus, we can trace interactions and quarantine people quickly so we can avoid this becoming an epidemic again. The second piece is an antiviral treatment that reduces the outcome quickly, more akin to what happens when you have the flu, so you don’t end up in the ICU with a ventilator.
We think it’s more likely an L-shaped or angled-L with an opportunity to escalate with treatments or testing or a vaccine, which I don’t think is until next year. There is potential for a hockey stick-shaped recovery if there is a vaccine and it works.
Skift: What are you going to need to see to move from survival mode to recovery?
Bortz: We think we need to see health solutions; otherwise, we could be in that W-shaped recovery. We should all be hopeful since there are a huge amount of resources devoted to finding medical solutions around the world.
In the meantime, we think leisure travel comes back first, as those travelers are not accountable to anyone but themselves. People are cooped up and anxious to get on the road. I think we’ll see more drive-to than fly-to initially. We think leisure comes first, then some business travel comes back, and group travel comes back last.
Skift: Economy extended stay hotels are performing the best at the moment, and some analysts predict luxury hotels will take the longest to recover. Do you agree with that sentiment, and could that change your portfolio strategy going forward?
Bortz: Extended stay may be performing better at the moment because they tend to be in secondary rural locations that might not have [coronavirus] hotspots. They may have business that is residential in nature or construction crews. I don’t think that’s a real indicator of who’s going to benefit in a recovery.
Drive-to locations will probably be the biggest and earliest beneficiary in a recovery. Resorts fall into that category, particularly those with more space and are wide open where people feel comfortable outdoors. I don’t think it will be a socioeconomic recovery where luxury is somehow negatively impacted.
Skift: What other cost-cutting measures are being considered at Pebblebrook to survive the downturn in travel?
Bortz: We’ve cut pretty deep at this point. Closing hotels is about as severe as you can get. There are limited skeleton teams at those properties. It’s a total crew between five and 10 people, and we’re talking at hotels as large as 400, 500, or even more rooms. At a hotel level, we’re pretty lean at this point.
There were cuts at the corporate level in terms of compensation and [general and administrative expenses]. I voluntarily offered to forgo my salary for the rest of the year, and the senior team volunteered to cut their compensation by 30 percent. We also had retention grants the board provided for senior folks in late February before all of this happened, and we voluntarily forfeited those a couple weeks ago.
Skift: Other hotel executives are making similar moves, but some have faced scrutiny over gains still made through stock awards. How do you suggest conveying the right message when it comes to executive compensation at this time?
Bortz: We have three pieces of compensation: base salary, a target bonus, and stock grants we get each year. My base salary is 15 percent of our target, so it’s performance-based. If there are any bonuses earned this year and our board decides to pay any, the bonus would be paid in stock instead of cash. We’d retain cash for the company, which is the resource so dear.
Given the stock performance in this event, it’s not really going to be worth much of anything. The whole idea of stock is to align with shareholders and seems to be the appropriate piece of compensation that would continue on.
Skift: Have you looked at renegotiating covenants? If so, what are those discussions like?
Bortz: For most folks, it varies. Some folks have individual property debt and will call their mortgage holder. Particularly if you’re a small business, you’ll look for forbearance for a period of time and interest on future payments. It’s up to the individual borrower and lender. I’d expect there to be cooperation because everyone is in the same boat, and nobody caused this to happen.
Ours is at the corporate level, and we’re working with a bank we’ve had relations with for as many as 40 years. We’ve seen one lodging REIT renegotiate with their bank group and receive waivers on covenants through March of next year. You should expect that to happen with everyone, and not just in our industry.
Our corporate debt is at half the level of any corporate borrower. We’re running the company at a 30 to 35 percent leverage, so it’s a very low debt level. We don’t have a debt issue, we have an EBITDA issue like anyone ese. Everything is closed – and by government order.
Skift: Say recovery does take longer than expected. What happens when and if the humane side of banking stops and difficult conversations need to happen?
Bortz: That’s going to be an issue for many owners, particularly those that don’t have access to liquidity. We have over $700 million in cash, so we don’t have an issue in liquidity. Folks who own a few hotels and who don’t have the same level of liquidity are going to need different solutions.
We do expect there will be properties that go back to lenders and equity that’s wiped out. The financial assistance package can’t keep that from happening, particularly the longer this goes on. There will be plenty of properties that end up back at their lenders, even if they don’t want them. We also think there will be hotels that don’t reopen.
Skift: What goes into dissecting the relief package and determining if government assistance is worth it?
Bortz: I think many of the terms are reasonable as it relates to dividends, buybacks, and no increases on executive compensation. But there are some potentially that relate to labor neutrality, and that’s kind of a non-starter for most companies and that would be for us as well, but we don’t need that level of assistance. For those that do need it, it’s a big roadblock down the line.
Skift: Is a phase four piece of legislation needed?
Bortz: We do think it’ll be needed and highly likely to be provided. Think of what we’re talking about: Thirty percent of the economy has no revenue. That’s not a business model that can work. Those industries, in order to work in the future, are going to need help getting to the other side.
I believe, based on conversations we’ve had with folks in the administration and in Congress, they get it. I don’t sense a resistance to doing what’s necessary to keep businesses alive and keep the economy in a position where it can recover in a reasonable way.
Skift: What are specific provisions you’d like to see in new legislation?
Bortz: Particularly to SBA loans, we think the period to rehire needs to be extended at least to September 30th, if not to the end of year. We think the amount of a loan that can go for other expenses like debt services, real estate taxes – which the city and states desperately need – insurance, and rent needs to increase. Those are at least equivalent to your payroll costs. Without assistance, a lot of hotel owners are not going to get to the other side.
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Photo credit: Pebblebrook Hotel Trust operates 56 upscale hotels across the U.S., including the Liberty Hotel in Boston (pictured). Most of the company's hotels have closed due to coronavirus. Ben W. / Flickr