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Text on screen: When will the lodging sector recover to pre-pandemic levels?
Images on screen: Hotel exteriors
Ray Huang:I would characterize the pre pandemic lodging environment as steady, but very late cycle.
Text on screen: Ray Huang, Credit Analyst, Real Estate
Then as everyone knows, we hit a brick wall in March 2020; massive shutdowns, stay at home orders. A lot of conferences, events, meetings were being canceled.
Images on screen: Hotel exteriors
So most of these companies, they saw revenues go to zero overnight. You had a RevPAR drop 80% peak to trough, and there were significant concerns regarding cash burn rates, liquidity, near term debt maturities, and potential covenant breaches on a lot of these revolving credit facilities.
Text on screen: We expect lodging to recover by late 2023
Images on screen: Hotel exteriors
Overall, we expect the full lodging recovery probably by late 2023 or 2024, but it's definitely going to be uneven. And the mix of lodging demand could look a bit different than pre COVID.
Text on screen: Can you tell us more about the various segments within the lodging space?
I mentioned leisure travel clearly outperforming, and in some cases exceeding pre COVID levels in a lot of different markets.
Text on screen: TITLE – Segments of the lodging sector BULLETS – Leisure travel, SMERF: Social, Military, Education, Religious, and Fraternal, Corporate transient
If you look at the overall July, early August RevPAR data actually returns pre COVID levels primarily driven by the strong summer leisure travel season.
Within group you have what's called Smerf, which is social, military, education and religious, fraternal sports groups. That's basically also returned or expected to return to pre COVID levels.
Then just lastly, you have the segments where there's just a lot more uncertainty. So things like corporate, group conferences, meetings, which you could argue, could be done pretty easily over Zoom and WebEx..
Importantly, corporate transient demand has historically been the most profitable segment of the hotel industry.
These customers are typically booking last minute, so they're paying higher rates. They typically have higher ancillary spend when they're on property. So there's going to be a lot of focus on how the segment shakes out heading into 2022 and beyond.
Text on screen: Are there distressed opportunities in the sector? What is an example?
Text on screen: Devin Chen, Portfolio Manager, Commercial Real Estate
Devin Chen:Recognizing that the downturn was not caused by excessive leverage and having the hindsight of that post GFC recovery, lenders didn't purge their books and take losses in high volumes. Instead, they often worked with borrowers to forebear and modify loans, particularly, again, earlier on in the pandemic. That said, there has been distressed activity and we've been able to capitalize on it.
Text on screen: Opportunity: European lodging
Images on screen: European hotel exterior
I think Europe presents a pretty unique opportunity, but the situation there needs to play out a bit longer. The opportunity set is still relatively limited due to the extensive government support for the sector since the COVID outbreak in Europe and that's really prevented meaningful distress in the sector, despite the situation there really being far worse than what it is in the US. RevPAR, they're still down over 60% relative to 2019.
Text on screen: We expect more distress in European lodging
Images on screen: European Hotel exteriors
We do expect more distress to come out of Europe as that government support starts to tail off. The major brands start to really enforce their standards. And just the labor pressure on the market. We think all of these things will, on a combined basis, add some distress into the system.
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Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
Pre-Covid refers to the period prior to March 2020 and post-covid refers to the period beginning March 2020.
RevPAR (revenue per available room) is a metric utilized by the lodging industry to measure hotel performance.
The continued long term impact of COVID-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.
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