Benchmarking can help restructure debt, avoid closures

During a recent webinar on the impacts of COVID-19 on European hotels, STR Managing Director Robin Rossmann drew on his experience at Deloitte and shared with viewers an important practical application of benchmarking.

No hotel has escaped the COVID-19 pandemic unscathed, which may make performance benchmarking appear less important. Rossmann warned against such complacency, reminding listeners, “that day will come” when lenders and lessors undertake restructuring analyses. When that happens, benchmarking will be more important than ever.

Downturns cause financial distress

Downturns of any nature can cause hotels or hotel portfolios financial distress. Rossmann explained that during the Great Financial Crisis, hotel lenders and landlords would prepare restructuring analyses or evaluations in order to determine optimal outcomes for hotels that were unable to meet their financial obligations.

Rossmann described it as “pretty easy” for landlords or lenders to make restructuring decisions when the choice came down to a well-benchmarked hotel that was able to use data to explain why it underperformed and a hotel that couldn’t do that or wasn’t benchmarking at all. A look into historical data confirms his assertion.

Benchmarking can help hotels restructure debt

STR analysts studied hotel closures in the United States and the United Kingdom between 2008 and 2013. Closures were divided into two categories: hotels that participated in STR’s hotel benchmarking program, and hotels that did not. In both countries, the data revealed a close relationship between closed hotels and performance benchmarking.

In the U.S., 72% of the nearly 2,300 hotels that closed during the Great Recession did not participate in STR’s hotel benchmarking program. The 28% participation rate of closed hotels is significantly lower than STR’s overall participation rate—around 65%—during the same period.

The results are even more striking across the pond. Of the 1,728 hotels that closed in the United Kingdom between 2008 and 2013, 97% did not benchmark performance with STR. Of course, we must stress that timing may have played a role in the U.K.’s results. STR’s international business expansion did not take place until 2008, and several years passed before U.K. participation built up to a more robust level. Regardless, overall hotel participation was still roughly seven times higher than closed hotel participation.

Chains are ahead of the curve

For branded properties, this news is likely not a surprise; STR has high participation rates among chain hotels in both countries. However, that does not mean that hotels that benchmark are automatically safe. Participating hotels still closed during the last downturn. More importantly, actively using and understanding the data to answer questions around performance is key to successfully restructuring debt.

For Independent hotels, however, lower benchmarking participation rates led to more closures. During the Great Recession, more than 80% of hotel closures in the U.S. and the U.K. were unflagged properties, and less than 20% of those closed hotels benchmarked their performance to the market or a competitive set. Only 340 of the 3,600 Independent properties that closed across both countries benchmarked performance.

Looking Ahead

In a COVID-19 world, demand all but disappeared for an extended period, average daily rates are reaching 15-year lows, and recovery is likely to take five or more years. Understanding your property’s performance and position in relation to your market or competitive set is paramount. Rossmann reminded hoteliers that lenders and lessors will need to “assess the quality of their hotel and the quality of the business” in order to restructure debt or leases, and performance benchmarking allows for such analysis.

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