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The U.S. hotel industry is at a recovery impasse with rising coronavirus case counts across much of the country.
Hotel business survival, let alone recovery, largely depends on what comes out of the next coronavirus economic relief package from Washington, according to Best Western CEO David Kong.
“What I’m afraid of is there could be massive defaults on not just [commercial mortgage-backed securities] but on all loans. You would have a disaster,” Kong said Monday in an interview with Skift. “You’d have the 2008 and 2009 financial crisis all over again. I think the problem is going to get easier as we go. We just need to buy ourselves time.”
Hotels in June were the biggest source of delinquent loans for commercial mortgage-backed securities, a group of commercial mortgage loans pooled as one that hotel developers frequently use to build new projects. But Kong fears the industry’s financial problems will grow beyond CMBS delinquencies if Congress doesn’t offer some level of financial assistance.
Similar to the American Hotel & Lodging Association’s proposal, Kong wants an extension to the Paycheck Protection Program — a federal small business loan initiative launched in the $2 trillion CARES Act relief measure passed in late March. Roughly $130 billion remains in the PPP funding pool, which expired at the end of June.
The Best Western chief executive echoed industry calls for liability protection against potential guest claims of contracting the virus at a hotel.
Kong would also like to see travel incentives in the form of a tax credit to help buoy the industry into recovery mode, similar to the $4,000 credit Sen. Martha McSally (D-AZ) proposed through the 2022 filing year. Financial relief is also needed to help restore the depleted coffers of U.S. tourism bureaus and marketing groups, Kong said.
“Aside from survival, you have to help the travel industry recover,” he added.
Seeking a Better Bandage — but Is It Possible?
Kong earlier this year referred to the CARES Act as a Band-Aid on a bigger problem for hotels.
He felt the PPP funding didn’t go far enough in addressing debt obligations and long enough in its eligibility window through June. There are heavier real estate investments and accompanying mortgage payments involved in operating a hotel, meaning owners in the industry carry higher costs beyond just payroll, Kong said.
Now that the relief measure is running out and banks are beginning to roll back flexible terms floated in the early days of the pandemic, there is need for a better bandage.
“For our industry in particular, I look at [the CARES Act] as a much-needed Band-Aid, but it’s not really helpful in the long-run,” Kong said. “If you think about the situation now, you have the PPP money drying up, you have the loan forbearance coming to an end, and the business is not really picking up because of the continued spikes in the pandemic, civil unrest, and restrictions on travel in many states.”
Organizations like the U.S. Travel Association and the AHLA have both called for industry-specific aid in the next round of federal economic relief. Best Western has every reason to do the same, as occupancy rates — while recovering — are still down 30 percent for the year. Daily rates are down 20 percent, Kong said.
But while the hotel industry may desperately need targeted relief, Kong understands why it is highly unlikely it will receive it in whatever deal Congress makes.
“I don’t think Congress nor the administration wants to single out one industry. They caught a lot of flak for the airline industry, but I get why they did it. That’s an essential service. If the airlines went down, it’s going to make recovery even more difficult,” Kong said. “It doesn’t help that President Trump owns hotels. He, of course, understands our plight, but he can’t favor the hotel industry because he’d get crucified.”
The Nonprofit Headwind
Global pandemic shutdowns arrived less than a year after Best Western failed in an effort to move from nonprofit to for-profit status.
Best Western operates on a model where the company licenses brands to owners who become voting members of the organization. Hotel companies like Hilton and Choice Hotels operate on franchise models where owners may voice concerns on operational matters, but they ultimately don’t have the power to vote down policy like a costly new brand standard.
Kong’s effort to take the company public stalled, and he recognizes that puts Best Western at a disadvantage to its for-profit peers during a catastrophic downturn like coronavirus.
“If you are a for-profit company, especially a public company, you have access to public market capital,” he said. “You have just so many vehicles to raise capital to shore up your balance sheet during this period of uncertainty. We don’t have that ability to raise money like that in a public market.”
Hilton, Marriott, and Choice Hotels have sold hundreds of millions, even billions, of dollars in debt since the start of the pandemic to shore up cash in order to weather the uncertain coronavirus storm. While he maintains Best Western continues to operate with no debt and “manages finances very well,” Kong still thinks there would be more financial tools in a recovery if the company was a for-profit operation.
“Who is running TV ads right now? It’s a public company running TV ads,” he said. “What is the offer? Stay two times, get a free night. You know how much that costs? Millions. A TV campaign costs tens of millions. They can afford that. We can’t.”
But Kong is still optimistic about Best Western’s future.
Like most major hotel companies, Best Western is ramping up talks with independent hotel operators to take on one if its brand flags. Many travel industry analysts and executives expect a rush of these conversion deals in the coming years, as travelers during the recovery will crave the familiarity of a major brand, the thinking goes.
Half of Best Western’s business comes from its rewards program, and Kong expects that will be a key selling point to independent operators attempting to build back an operation after mass job layoffs earlier this year.
“The independent sector in particular has to think about recovery and what that looks like for them. It’s not like you can open your door and business will come back to you,” he said. “You have to fight for it, so who is going to fight for you?”