RevPAR and our cash flow turn down, our interest expense
turns down too—wouldn’t that be great? Sure enough, that’s
what’s happened.
“With Libor where it is today, our effective debt expense is
something like 3.5%,” Bennett continues. “The risk is not in
the crude numbers of how much debt you have versus your
assets, it’s what you are actually paying for that debt. If Libor
stays where it is today for the coming year, it will save our platform between $50 million and $75 million. That is a huge
amount of money.”
Ashford has also undertaken a slew of other expense reduction measures. They include personnel cuts at the corporate
office and its hotels; re-bidding contracts with vendors; postponing the implementation of brand standards; reducing brand fees
plus hiring and wage freezes. Additionally, it is looking at several
refinancing opportunities. “It’s tough going, but we have a number of properties that are relatively low leveraged,” Bennett says.
“We only have one debt maturity coming due this year, and it’s
for a $29-million loan. It’s one asset and we’ve already talked to
the lender about an extension, and all indications are that it will
be extended. The following year we’ve got a $75-million loan
coming due on a pool of assets. It’s a low leverage loan, and we
feel like we could refinance it today if we wanted to, even in this
difficult environment. So we feel very good about our near-term
maturities.”
FelCor is undertaking nearly the same course of action of
painstakingly reviewing operational expenses and labor costs.
Having completed a $450-million renovation program company-wide, the firm is now scaling back its redevelopment projects,
except for the conversion of its 400-room hotel in San Francisco’s
Union Square district into a Marriott.
“At this point, capital
preservation is really
important to investors.”
SMEDES ROSE
KEEFE, BRUYETTE & WOODS
It is also working to refinance a $135-million loan that is coming due this year, $118 million of which is backed by seven
Embassy Suites. In a departure from its usual procedure, the
REIT hired a mortgage broker, Holliday Fenoglio Fowler, to work
on the deal. “They have generated some interest from a number
of players that we don’t have relationships with,” Smith says.
“We’re turning over every stone to get the most efficient execution. We feel confident about being able to get that done because
it’s in the 35% to 40% loan-to-value range. Worst case scenario,
we have enough availability under our line to pay it off if we had
to, but I don’t think it will get to that.”
Smith says the company currently has a net debt to EBITDA
ratio of 5.8x. (The target level is 5x. Debt to book assets is approximately 60%.)
“When we sold 45 properties, we paid off $440 million of debt
and we got our balance sheet back to a position where we wanted
it to be,” he relates. “Now, that leverage has come up a bit due to
dropping EBITDA numbers, not because of incremental debt.
While it is slightly outside of our typical target range, it’s not anything that can’t be handled. From a coverage standpoint, we are
in a fantastic position. We have some maturities coming due in
2010 and ’ 11 that as soon as we get this initial refinancing done,
we will start working on immediately.”
Neither Ashford nor FelCor anticipate much in the way of
dispositions or acquisitions in the coming 12 months. Bennett
says the best returns on capital for Ashford are purchasing its
preferred or common stock as well as making mezzanine loans,
more likely to occur towards the end of the year. The company’s
primary concern, he says, is to hold on to cash given the state of
the credit markets.
“We would love to sell more
assets, but it’s tough to do in
this marketplace.”
MONTY BENNETT
ASHFORD HOSPITALITY TRUST
Smith says his company has a “handful” of assets on the market
currently, but will not sell at fire-sale prices. “There are a lot of
bottom feeders out there right now,” he says. “If we can achieve
the pricing we want, we will sell. Otherwise, we will wait.” For now,
FelCor’s first priority is to refinance existing assets and preserve
capital for future opportunities, says Smith. He adds that the
company will not be doing any ground-up development in the
coming quarters, and intends to only pursue acquisition opportunities once the credit markets stabilizes.
Beyond just a company-by-company review, certain hospitality products are likely to experience a bigger blow from the
recession. “The relative losers thus far—and will continue to
be—are those properties that catered largely to financial institutions or are in major financial urban centers such a New York
City, particularly the very high-end luxury properties including
flyaway destination hotels,” Arabia says. “The reason is many
corporations, particularly on Wall Street, which were very
heavy users of luxury hotel rooms, are cutting back. There is
also a significant amount of scrutiny being placed in this environment, when many people are losing their jobs, about
spending too much for luxury hotels.” AIG, for instance, came
under fire for hosting an incentive travel trip to the St. Regis
Monarch Beach in Dana Point, CA shortly after being bailed
out. “Luxury hotel operators saw a noticeable number of cancellations, particularly from public companies, immediately
after that news broke.”
So when will the economic environment be more hospitable
to the lodging industry? Anyone hoping for a quick turnaround
in 2009 will be disappointed. Arabia envisions a profit and
RevPAR recovery in 2011, a prediction seconded by others.
FelCor’s initial forecast is for a 6% to 8% drop in RevPAR for
all of 2009. “There will likely be a double-digit decrease during
the first four months, and then it will moderate during the next
four months, then flatten in the last four months,” Smith says.
“On an absolute basis, we will see some modest market recovery
in 2010 and very strong growth in 2011.”
Smedes Rose of KBW sees a slight turnaround by midyear.
“We are generally looking for negative RevPAR trends through
the first half of the year, and then they should moderate
through the back half of the year,” he explains. “By mid-2009,
as that moderation happens in RevPAR and there is a little
