6th May 2020 | Managing Finances During COVID-19
HOSPA Webinar - 6th May, 2020
Managing Finances During COVID-19
While the lockdown continues, the HOSPA board members will be sharing their insights on the effect of COVID-19 on finance in the hospitality sector. Our board members are specialists in the industry with extensive experience and will be offering tips and advice which they would like to share with you during the session.
(BS) Bob Silk - Relationship Director, Barclays Bank
(DB) David Bridge - Asset Manager
(DN) David Nicolson - VP Finance Europe, Jumeirah Group
(JP) Jane Pendlebury - CEO, HOSPA
(ME) Mark Edwards - BDO Partner, Leisure & Hospitality
(CU) Chris Upton - Chairman, HOSPA
(DM) Diana Mountain - Treasurer, HOSPA
BS - If you had said to me at the start of March that all my customers would have ceased trading, I would have laughed. And with some justification!
ME - COVID declared a pandemic after the December cutoff for Year End. Regulators in the EU and UK have agreed - For a December year end, unless you have specific links to China / Coronavirus epicentres (etc), the coronavirus would count as a non-adjusting post-balance sheet event. Evaluations in December would not take into consideration events after December. Significant disclosures are required. Other year ends will need to take into consideration adjustments.
INSURANCE (24:23) JP - COVID-19 was not a registered pandemic, so someone couldn’t claim even when protected against pandemics.
24:50 - DN: Crime prevention for empty properties is key as opportunists see hotels and restaurants as targets for theft, along with squatters taking up residence.
26:25 - : TRONCs - a claim cannot be made for a payment which is non-contractual. For many years it has been beneficial that TRONCs are not an issue, and tax benefits from operating a TRONC belong to the company/employee.
Worst case scenario - tax + NI.
28:16 - JP: They’ll be a significant increase in cleaning costs moving forwards for reopening.
29:40 - DB: There’ll need to be increased budget for products and STAFF! Rooms will need to be cleaned, but also communal areas like stairs and banisters will need to be cleaned/wiped down regularly.
We’ve spent the last 20 years opening up our communal areas and now we’re going to be reinstalling screens and barriers.
It’s too early to know what the actual costs will be until we know how we’re going to ease out of lockdown.
I predict a struggle for independents in sourcing cleaning supplies. S&D will prove challenging.
32:15 - Q from Adam Parker (JP): Can financial grants received in April be deferred to the next financial year?
32:30 - ME & DM: (answering Q above) It will be a case-by-case basis. Specific circumstances of the grant will come into play.
34:00 - BS: “Cash is King”. There needs to be more focus on this. Customers are far more focused on liquidity and cash, than by, for example, the accounting treatment of items such as we are now discussing. And in relation to covenance, what I’m typically finding in my experience thus far, is that lenders are pretty accommodating in reacting to requests for Government waivers or even Government suspension. Lenders have a tendency to waive or to spend without any kind of controls on their position as a lender. With all of my customers, I’ve asked them to put together some sort of forecast for the remainder of this year and perhaps into the first quarter of next year so we can gauge the amount of liquidity, the amount a business is likely to have, and set some sort of minimum liquidity test. It’s difficult to do. What we know is how much cash we are burning each month. What we have zero visibility over is precisely when lockdown for hospitality will end. It seems like it will be later rather than sooner. We have no idea how long it will take for cash to break-even and how long it will take to start to generate surplus cash. I understand it’s a hard thing to do. But coming back to the first part of the question, I’m more interested in liquidity, than what’s in the audited accounts.
36:58 JP: Brilliant. That’s reassuring Bob, thank you. Are there likely to be any subsidies in tax credit to the hotels as we have to improve technologies and introduce sanitation regimes? It’s tough to answer. We’ll have to wait for the Government on that. Has anyone got any input?
37:26 ME: If you are looking at doing things in a different way, definitely talk to your tax advisor about R&D credits and see if there’s an opportunity for a claim there. The Government is trying to help where possible, and may be an avenue worth exploring.
37:55 JP: Another one of our board members has picked up on Bob’s point, about the end of lockdown for hotels and he wonders if the eventual phasing of hotel openings will depend on their size and location? My personal feeling is that the country house hotels will be better placed than the city centre hotels. But I've also heard from one of our sponsors that they are doing the exact opposite, and focusing on the city centres. David, with your different hotel types in London alone, let alone across your region, are you anticipating opening them differently or awaiting Government advice?
38:52 DN: Awaiting Government advice, but we do recognise we have to open them differently. We may have phased check in and check outs, and look at a range of things from cleaning, signage, queuing guides, but we’re waiting on the advice. Food and beverage will be the big hit for the hotels as to how we handle that in the future, whether it’s room service or if the buffets are gone for breakfast.
39:35 DB: You’ve mentioned country house hotels. I’ve heard a comment the other day that some of the communities around the hotels aren’t terribly keen they reopen. I think this may have a little bit of an impact as well.
40:09 JP: Yes, I’ve heard a similar thing. Local communities are less keen and the more remote locations are, the less keen they are. Bob, did you want to add anything onto that?
40:25 BS: A personal view is that I suspect that limited service budget hotels will find it, in relevant terms, easy to reopen. Because they’re predominantly a rooms business, which lends itself to social distancing. Albeit, someone told me this week if you sell a bedroom you won’t be allowed to service it for 24 hours. That will inevitably depress occupancy. To counteract this, striving to get their cash to break-even could have an impact on average room rate. I have a document called ‘the new normal’ which is focused on food and beverage. It has some very useful thoughts and insights from the F&B side of our industry. How long it may take to get to what we consider to be normal trading and insights into what the future may look like when applying the rules of social distancing.
43:13: DN: Another one that may be slightly easier to read is JLL Food service, which published something useful the other day.
43:31 DB: Hotels can actually sell more lunch going forward, as I’m unsure that snack bars in city centres will be opening any time soon, as they don’t have the space to socially distance and serve food. So they’ll be looking for lunches in other places, so it may be that we need to have lunches open between 11-3 and kill the rush hour, phasing when people work. Maybe there will be more opportunities.
44:17 DN: It will be interesting to see how the office market picks up, and whether more people will work part-time from home as that might really affect city centres anyway.
44:27 JP: Hotels are famed for entrepreneurship, so whether they pick up on serving extra lunches or food and beverages throughout the day. On the cleaning issue, reducing cleaning to only on departure will keep room attendants and guests much happier, as there’ll be less people going in and out of the room during the day. But I did hear Sally Beck, at the Royal Lancaster, say a couple of weeks ago when listening to her speak that they were doing exactly that in the run up to the shut down, because their occupancy was so low, and that they will probably do that when they reopen. But as time goes on, you don’t want to leave rooms empty if you can possibly help it, which is where cleaning comes in. We’ve got another comment about Bob’s ‘Cash is King’, saying they’re being even more hurt in their cash flow; not just because of their regular expenses but also because of the refunds they’re having to give. I’m not sure we can give advice on this, but I know a lot of people are giving vouchers or credit, but that depends on the T&Cs of your reservations.
46:01 DB: After getting refunds from two hotels from my holidays, I would certainly go back to them again and visit them and spend the money.
47:21 JP: I’ve also heard from hotels who have furloughed staff and who are keeping up their communications through Facebook groups etc. They will see a lot more loyalty from their staff, which will hopefully filter through to the guests fairly quickly. We have another question on loans and grants, and whether they're enough to save individual hospitality businesses from folding? A tough question to answer because every example is different. What are your thoughts overall on Government support? Furlough seems to be accepted very gratefully, but the other loans - Mark?
48:15 ME: The challenge is not now; it’s what’s to come. Very few operators in hospitality across the board operate with margins that can cope with occupancy levels at 50 percent. If the furlough scheme is able to be extended to allow continued support, if rent deferments can continue, then possibly it will be enough. But the reality will be that a lot of businesses won’t come out of this positively without that continued support, unfortunately.
49:06 CE: Rent is a very important thing. There is growing support for the national time out momentum, whereby food and beverage outlets have a rental holiday and the landlords have a holiday on their loan repayments. I’m unsure of Barclays position, but it’s certainly gathering momentum.
49:39: BS: The question is, will the current round of loans and grants be sufficient enough for businesses to survive covid? Unfortunately, the simple answer is that I don’t know. As Mark said, there are 2 stages - when the lockdown comes off and one can recommence trading. And one after that when cash breaks even. How long is it going to take and how much cash will be consumed on that journey. I honestly don’t know. It will be different for every business. It will become a profound challenge. My read across would be the 1990’s recession. As we came out of that recession, I started a 5 year tour of duty. The 90s recession was very deep and very painful, but the recovery was v shaped. What we saw was that in that particular recovery, businesses which had a positive working capital cycle, ran out of cash. In this situation, I suspect it may not be a v shaped recovery, but will probably be a long recovery back. Unfortunately, to Mark’s point not everyone will make it, which is very sad.
52:41 JP: Very sad indeed. Bob, I have another question for you from Jared Nolan - who asks if the banks are likely to lend on hotel acquisitions?
53:04 BS: There are a number of things in the mix here. If you’re an acquirer of hotels, when is the right time to buy? We had a virtual meeting with Deloitte a couple of weeks ago who are seeking to acquire hotels. If you have a hotel and decide to sell it right now, you’d probably get a buyer. But I would hesitate to speculate at what price. It may well be that investors with liquidity will bide their time a little. As to where values are at this point in time? I’m unsure. It’s difficult to gauge. An asset is worth what a person is willing to pay for it at a particular point in time. In this financial crisis, the movement from peak to trough in regional hotel values in the UK was about 40%. In London though it didn’t move, as it’s far more resilient. Regionally it was wide. Would banks be willing to finance the purchase of a hotel? My answer, let’s talk about a particular proposal and we’ll do our best. But, that comes with a rider, that borrowing money or lending money is not about loans of value. What this current situation forces us to relearn is that it’s all about cash flow and it only ever is. The value of an operational hotel asset is a multiple of its cash flow. If you came to talk to me or my colleagues about funding a hotel even pre and certainly post covid, and you tried to talk about loans of value I’d stop you very quickly and talk about cash flow. Therein lies the fundamental problem, as this is something we have zero visibility of at this point in time. Acquiring hotel assets to be fair, at this point in time, is probably rather more of an equity play than anything else.
57:06 JP: A comprehensive question and answer. Just a quick one for you, from Simon Husburth, what does covid-19 do to hotel values where ground leases have been put in place?
57:25 BS: I honestly don’t know. I don’t know that the valuers know either. Much depends on the stance of the freeholder. The finance communities approach to ground leases has been varied. A lot of lenders would not go anywhere near a ground lease hotel asset, as there are fundamental issues. It is debt by another name. Also, you have a rental burden that increases year on year on year. If you plot it graphically there will come a point in time in the cycle, covid aside, when the rent has risen to a level where it is no longer sustainable and can’t be paid. Then you run the risk either as an equity investor or as a lender, that the freeholder says thanks, but I’ll have the keys back and then your equity interest evaporates and the lender loses all of their money. Even pre-covid it is likely the buyer pulled and therefore the multiples to be paid on ground lease hotels. The value of those assets right now? I can’t tell you.
59:31 JP: Thank you. To listeners, the advice we’ve given today has been on our best knowledge. But should you want formal advice, please do contact your own bank manager, accountant or whoever that may be.