Fires, hurricanes and pandemics all have contributed to the destruction of lives, communities, infrastructure and properties over the past five years, both physically and financially, and scientists warn this will worsen along with climate change.
The growing frequency of natural disasters, however, has generated a list of best risk-management practices for hotel owners and operators.
Best Practices for Surviving Disasters
Deanne Brand, senior vice president for strategy, analytics, risk and treasurer at Maryland-based Host Hotels & Resorts, a large U.S. lodging REIT, stressed that a best-in-class risk management program is not just about insurance, but encompasses design and construction and a competent legal team. “It really needs to be part of your ethos,” she said, noting that when looking for ways to mitigate fallout from disasters, hotel operators need to be proactive, hardening assets to ensure roofs, facades, windows and other exposed asset areas can withstand hurricane-force winds, for example.
Value in Analyzing Historic Data
Brand also encouraged them to study science-based data around recent losses, determine the cause of damage, and then work with third-party experts to rethink their risk-management strategies.
For example, the worst damage to Hosts’ most exposed hotels during the last hurricane came from a storm surge. As a result, consultants recommended erecting temporary flood barriers. With Hurricane Season starting June 1, flood barriers had been installed at all at-risk properties, particularly those located in 100- and 500-year flood plains.
Brand suggested that historic storm data can inform future investment and identify the most important relationships with vendors and local service providers. Strong relationships with local service providers, especially the electric utility, help to ensure hotels get back online quickly to provide safety for guests, a refuge for storm victims, and housing for first responders.
Significant losses in Hurricane Ian and the Maui wildfires prompted Host to invest in rebuilding with resilience. Damage from Ian was exacerbated by loss of electricity, the central power plant at the Ritz Carlton in Naples, Fla., for example, was at-grade, so it was raised. This move was successfully tested by storm surges during Hurricanes Helena and Milton.
To make its hotels more resilient to power loss, Host also is increasing its off-grid capabilities with onsite cogeneration and back-up generators to enable hotels to generate electricity off-line when necessary.
Stephen Zsigray, president and chief executive officer for Ashford Hospitality Trust, a Dallas-based hospitality REIT, discussed the financial side of crisis management. He pointed out that a plan is key to managing both operational and financial crisis and prepare owners for worst case scenarios.
Building Financial Resiliency
“Our [financial] plan has really been rooted in our capital structure,” Zsigray continued. “We've always had, almost exclusively, property level, nonrecourse debt across our portfolio, with the idea that if one property struggles, three properties struggle, nothing really gets back, that it’s contained within that silo. “
He noted that Ashford raises preferred equity to accrue dividends for times of financial stress. “Nothing's going to take down the mothership, so to speak,” Zsigray said, citing the COVID-19 pandemic as the most recent example.
Why Owners Fail to Cover Loan Repayment
He said financial crises in the hospitality industry manifest in two ways: owners are unable cover debt due to market conditions or the lending environment. A lot of hotels struggled to repay debt due when the lodging market fell apart during the pandemic, which was worked out by “kicking the can” until the market improved.
“What we're seeing now is a second type, the ‘big bill’ comes due, and you're approaching [loan] maturity with the inability to refinance assets in today's environment,” Zsigray continued, contending that the industry’s bottom line is still recovering from pandemic-induced financial stress.
He said that the biggest issue is interest rates are several hundred basis points higher (375 bps or 3.75 percent) than they were before the pandemic. “We're back, but margins have been squeezed,” Zsigray added, noting that hotels aren’t generating sufficient cashflow to offset the higher base interest rate.
Overcoming Cashflow Challenges
Ashford anticipated challenges on the refinancing front early on and began searching for innovative ways to improve performance within its portfolio and create new revenue streams.
Noting the relatively fixed amount of RevPAR to be had in any market, Zsigray said that Ashford focused on capturing a bigger piece of the pie by improving services and pricing that drive visitor satisfaction. For example, hotels implemented a “dynamic pricing” scheme for hotel parking, he said, explaining that visitors are less likely to accept paying $60 to park when the parking lot is empty than when it’s full.
Ashford hotels also focused on expanding ancillary services and amenities (food, entertainment, retail) to grow the top line and searched for ways to improve operational efficiencies, cutting unnecessary expenses and adding technology that improved building performance.
A Positive Approach to Refinances
The approach to refinancing debt started with a plan that incorporated a decision tree—if X happens, do Y. If refinancing was not an option, Zsigray noted that Ashford engaged with the lender early on. “It's one of the few transactional exchanges that happens in our industry where it can be a complete win-win for both sides, ending with the lender getting paid off and the borrower continuing to operate the hotel.”
Zsigray suggested that approaching lenders as a partner is key to a positive outcome. “What we've found to be wildly successful is being transparent, treating it (the lender relationship) like a JV partner. You're trying to solve a problem, and so the more transparent and willing you are to work with a lender or a servicer, the more willing they'll be to work with you.”
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