NY Times: Hotel owners with risky debt and Trump ties seek bailout

In a remarkable new story, the New York Times reports what Bailout Bandits has been saying for a while: hotel CMBS debt holders are looking for an expensive, controversial federal bailout.

The article explains how wealthy Trump donors like Tom Barrack (Colony Capital), Monty Bennett (Ashford Hospitality Trust), and Doug Manchester cannot make payments on their collective billions in hotel mortgage debt due to the pandemic. Behind the scenes, lobbyists representing the hotel and real estate industries have been waging an increasingly desperate campaign to rescue mostly well-heeled hotel owners that financed their hotel holdings via cheap but inflexible loans later packaged into commercial mortgage-backed securities (CMBS) and sold to institutional investors like insurance companies, pension funds and hedge funds.

There are a multitude of practical obstacles that have prevented a CMBS bailout from proceeding thus far: lack of clear Congressional authorization; restrictions that prohibit CMBS borrowers from taking on more debt; and Trump administration officials’ putative reluctance to be caught bailing out an industry closely tied to the President. Beyond the optics of a hotel debtor bailout, the NYT piece highlights many of the sound policy reasons why the federal government shouldn’t bail out hotel CMBS debt:

  • Wealthy real estate investors would reap most of the benefits: As the Times notes, CMBS makes up a relatively small slice of the overall commercial real estate market, and a bailout of hotel debtors would primarily benefit wealthy investors who knowingly made high-risk bets.
  • A bailout could expose taxpayers to losses: Some CMBS borrowers, including hotels and shopping malls, might be “zombies” that are not going to survive regardless of government help, and taxpayer money sent to prop them up would be wasted. This is bolstered by forecasts that the hotel market will not recover any time soon – perhaps not until 2023, according to a survey of hospitality executives conducted by McKinsey.
  • CMBS borrowers knowingly took on risk and should bear the consequences: Ethan Penner, a creator of the CMBS market, has been making this argument and repeated it for the Times: “The idea of bailing out owners of real estate does not even make sense to me…What could make that rise to the top of anyone’s priority list when so many individual people are suffering and need help. These businesses should be allowed to fail.”

The most important reason not to bail out hotel CMBS, however, was found in a quote cited in the article from recent Congressional testimony given by Gwen Mills, the secretary-treasurer of UNITE HERE: rescuing investors who turned to Wall Street to finance hotel buying sprees will not save jobs. “Jobs are driven by occupancy, and only ending the pandemic can fix that,” Mills testified.

If CMBS short investors made a windfall from the pandemic, should CMBS holders get a bailout?

On Monday, the New York Times reported on investors who had shorted commercial real estate loans – that is, they had bet big against holders of commercial real estate debt, primarily in the retail sector.

How big has the payoff been? One major investor made $1.3 billion on this wager since October.

The successful short was realized amidst the economic turbulence of the pandemic, which sent shopping malls and other retail real estate into a dive; data company Trepp stated that so far this year, 16 percent of all retail industry loans are delinquent.

But similar troubles plague the lodging industry – a report compiled by Trepp and promoted by the AHLA showed that 23.4% of hotel industry CMBS loans were delinquent more than 30 days as of July. Our own analysis shows that hotel CMBS debt is a creature of big investors like REITs and private equity companies.

The news that investors foresaw CMBS declines even before the pandemic should give pause to legislators contemplating a CMBS bailout. According to the article, “Brick-and-mortar retail has been in distress for years.”

“…’It’s an absolute perfect storm, unfortunately, for the commercial real estate market,’ Mr. Burg said. ‘We see very little that the Fed or government can possibly do to prop this up when there’s so much excess supply.’”

Why should taxpayer money go to support real estate loans in the retail industry if there were doubts before the pandemic? Or if billionaire investors have already profited from their distress? Or if bailout funds would largely accrue to sophisticated real estate investors in the hotel industry?

Read the New York Times article here.

Is HOPE dead? After debunking by reporters, CMBS bailout bill attracts few cosponsors and industry criticism

(Angel of sadness by iceman20152000 – CC BY 2.0)

Back in June, Congressman Van Taylor (R-TX) promoted a letter in support of a bailout for commercial real estate, in particular the hotel commercial mortgage-backed securities (CMBS) market. Along with 104 Representative co-signers, Taylor argued that significant federal support was necessary to prevent a wave of foreclosures and “permanent job loss in multiple industries and communities across the country.” Taylor told the Wall Street Journal that “This started with employees in my district calling and saying, ‘I lost my job.’”

The argument that bailing out hotel real estate owners would preserve jobs is, as we’ve previously explained, simply not credible. Now that Rep. Taylor’s ideas have been introduced in a bill he’s dubbed the Helping Open Properties Endeavor (HOPE) Act, the 105 letter signers have dwindled to only a handful of co-sponsors.

Why haven’t the letter-signers joined the legislation? It certainly didn’t help that journalists found serious issues with the idea:

  • The Wall Street Journal reported that “the biggest beneficiaries of any assistance could be large real-estate owners affiliated with properties that owe troubled hotel debt.” The hotel owner with the most money in troubled CMBS properties was Dallas billionaire Monty Bennett, whose affiliated companies (Ashford Hospitality Trust, Braemar Hotels, and Ashford Hotels Inc.) at the time had loans valued at nearly $2.3 billion with special servicers.
  • The Huffington Post narrated how American Hotel and Lodging Association (AHLA) lobbyist Chip Rogers bragged in an interview that his group had created the letter, and had gotten Congress to change the rules of the Paycheck Protection Program to help hotels. (An AHLA spokesperson said Rogers simply misspoke about orchestrating the letter.) An expert interviewed by the outlet assailed the letter: “This is sort of special pleading for one group.”

Consequently, when Rep. Taylor introduced the HOPE Act on July 29, it only attracted two co-sponsors. Even Congressman Denny Heck (D-WA), who had been a leader on the letter, was conspicuously absent. (Nine more co-sponsors have since joined as of 8/11/20.)

Who has come out in favor of the bill? Rep. Taylor issued a press release with statements in support of the bill from several industry associations including AHLA, the Asian-American Hotel Owners Association, the International Council of Shopping Centers, and NAIOP, the Commercial Real Estate Development Association. None of the unemployed workers who Taylor says prompted him to pursue this legislation were quoted.

The Commercial Real Estate Finance Council (CREFC), the industry association for the commercial and multifamily real estate finance industry, issued a press release with the cautious sub-headline, “Efforts appreciated but need further refinement.” “CREFC remains hopeful that a technical correction that does not require any additional appropriation to the CARES Act will address the commercial real estate industry’s needs,” the release concluded.

Financial Times columnist John Dizard best summed up the hard road ahead that a CMBS bailout faces:

“It seems very unlikely that $400bn or $500bn of federal money will go into propping up commercial property values. It is just a piece of theatre that lenders and borrowers can point to — magic government money. Commercial real estate will have to be entirely restructured in the US. More equity and less . . . hope. Starting next year. So burn the furniture and lobby for a government cheque.”

Pioneer of CMBS slams potential government bailout: CMBS “a forum for mostly the greedy and risk-loving, or the clueless, none of whom deserve a bailout”

In the 1990s Ethan Penner was the primary driver in the creation of the Commercial Mortgage-Backed Securities market while at Nomura Securities. In doing so he created a market which issued $96.7B worth of securities last year alone.

But now that COVID-19 has introduced uncertainty for real estate owners and a CMBS bailout is being discussed in Congress, Penner’s verdict is that CMBS should not be bailed out.

In an essay, Penner argues that the central structural problem with CMBS is that it leaves borrowers without a negotiating partner to workout distressed loans. Instead, CMBS holders must try their luck with a Special Servicer, who is structurally incentivized not to extend forbearance to borrowers. Uncertainty over the property’s fate leads to neglect and asset devaluation.

The real estate industry should have learned the lesson in 2008-10 that CMBS creates this unproductive friction; he writes, “The real estate industry learned very well in the GFC [Great Financial Crisis] that if you borrowed through the CMBS format and ran into problems you’d have no one to deal with and you’d be very frustrated and impaired.”

Consequently, prudent property owners fled the CMBS market for traditional loans; the remainders represented those who refused to learn:

Borrowing from the CMBS system became a forum for mostly the greedy and risk-loving, or the clueless, none of whom deserve a bailout. Commercial real estate is a game for professionals and governmental aid ought to be reserved for segments of our society that are in real need. CMBS borrowers are corporate entities or wealthy individuals who should have known better and who took risks they must now pay for. These businesses should be allowed to fail.

Read Penner’s entire essay here.

Keeping it clean? Hotel industry demanding tax breaks for cleaning equipment while promoting a job-killing plan to reduce cleaning staff

In the midst of the largest federal bailout in US history, the hospitality industry has stepped up to demand a slew of subsidies, one of the latest of which is a tax credit for cleaning equipment and expenses ostensibly to keep guests and employees safe from COVID-19. However, their rationale for the credit is not in synch with the actions of some of the industry’s largest players.

Many of the large hospitality real estate investment trusts (REITs) have vowed to use the pandemic as an opportunity to standardize a ‘new operating model’ whose main feature is reducing labor costs for cleaning.

The AHLA demanded a new cleaning tax credit supposedly to ‘benefit hotel employees’…

The American Hotel and Lodging Association (AHLA), the nation’s largest lobbying group for the hotel industry, sent a letter to Congress on May 20 that included the demand for a new cleaning tax credit. The idea was promoted under the AHLA’s ‘Safe Stay’ initiative, an initiative focused on modifying hotel procedures to meet the challenges presented by COVID-19. Among the provisions the letter cynically claims would benefit hotel employees was:

Tax credits for Capital Expenditures or Expenses to Meet the Industry’s Safe Stay Initiative: The hotel industry is taking extraordinary measures to ensure that our properties across the country are healthy, clean and sanitized for both our guests and our employees. This includes expenditures for deep cleaning, provision of personal protective equipment (PPE), and provision of personal kits for guests. Further, hotels are altering their operations and retraining staff to ensure compliance with updated CDC and state guidelines regarding physical distancing, promoting contactless staff interaction and implementing enhanced cleaning measures in guest rooms and common areas. Hotels, which are facing little revenue and demand, will need assistance to offset these new substantial costs.

The AHLA repeated this demand in a July 20th letter to members of Congress. The lobby has also promoted the Healthy Workplace Tax Credit introduced by Rep. Tom Rice (R-SC), which would provide a 50% tax credit to businesses for purchasing PPE and engaging in deep cleaning.

…while promoting a plan to reduce housekeeping labor based on ‘anticipated’ guest concerns

It’s not clear exactly how this provision would help employees, unless by “helping” they mean separating them from their jobs or reducing their hours.  The Safe Stay program in fact recommends that hotel operators substantially reduce housekeeper work by eliminating daily room cleaning unless guests specifically request it.

The basis for AHLA’s recommendation is apparently an “anticipation of individual concerns of guests” – an unsourced claim that is not attributed to the advice of any public health authority. The assertion that guests may not want daily housekeeping is contradicted by a McKinsey survey of hotel guests, which found that less than 10% of US respondents said that “no housekeeping during your stay” would make them more likely to stay at a hotel for leisure.

In practice, hotel companies’ daily cleaning practices have varied widely during the pandemic. Differences within hotel companies belie the public health rationale for eliminating daily room cleaning. For instance, Hyatt has made daily room cleaning optional, and requires most guests to opt-in to receive the service; however, elite guests will still receive the service, and must opt-out not to receive daily housekeeping.[1] Hilton has ended daily room cleaning (unless they opt-in) for guests in the US and Canada;[2] however, for certain brands outside the Americas, and for all hotels in China, the chain offers daily housekeeping.[3] It beggars belief that there is a public health rationale in denying or mandating daily room cleaning based on guest elite status, hotel brand, or hotel location.

Health experts support daily hotel guest room cleaning

Debunking industry statements, a group of 7 leading occupational health experts wrote to the San Francisco Board of Supervisors and contradicted the notion that daily cleaning of guest rooms presented a health hazard. They argued that, in fact, daily cleaning was a positive public health measure: “When understood in that light, we believe there is good reason to ensure that high-touch surfaces in guest rooms receive regular and thorough disinfection, as with other hotel spaces. Waiting until check out to clean a room occupied by an infectious guest or frequent visitor may increase the risk of contact transmission to employees, guests and visitors.”

The letter concluded:

We believe there are compelling reasons to encourage daily cleaning of hotel guest rooms, especially in the context of COVID-19. We understand from hotel employees that cleaning rooms after several days without housekeeping services makes it difficult to do a thorough and deep cleaning between guests – something that is all the more important during a pandemic. We also recognize that such delayed cleaning can necessitate the use of more intensive cleaning chemicals and physical effort, which can lead to adverse health consequences.

Hotel owners have discussed a new operating model based on labor reductions – not public health concerns

If health experts have come out against a cessation of daily housekeeping, and guests do not believe that it would keep them safer, why does the hotel lobby promote a program that would eliminate daily housekeeping?

Many hotel owners have discussed with investors their efforts to decrease operating costs during the pandemic. Several have extended this to describe a ‘new operating model’ that could be continued after the threat of COVID-19 has passed; this model features reduced work for housekeepers in particular, but also hotel workers of several classifications.

The discussion of this approach is remarkably similar across several companies:

  • Host Hotels: CEO Jim Risoleo argued in May that, “We view this opportunity, this crisis, truly as an opportunity to redefine the hotel operating model.”
  • Park Hotels: CEO Tom Baltimore mentioned on the company’s 1Q20 earnings call, “In general, we are expecting a different operating model overall for our hotels when travel resumes.” He added, “We are also expecting housekeeping to be altered in a way that provides guests with added assurance that the guestroom is clean and sterilized. We could see a move away from daily housekeeping service and an increase in contactless check-in, for example, such as Hilton’s Digital Key program.”
  • Braemar Hotels: “Additionally, we have specific plans to contain expenses and generate revenue as the portfolio reopens. We may eliminate housekeeping service from some properties for stay overs,” said CEO Richard Stockton.
  • Xenia Hotels: According to COO Barry Bloom, “Certainly, I think opportunities become more efficient throughout the hotel, whether that’s through providing housekeeping only on checkout, whether that’s through really getting to the point where mobile key, so keyless check-in checkout — or not keyless, passing the desk into check-in and checkout. I think, those are really large initiatives that we have been working toward for some time that I think will have some legs as we go through this. I think certainly, shortening and moving food and beverage offerings to more limited offerings and offerings that are much more expedient to be able to prepare on a style that may be available for grab and go, I think those are those are the primary areas where I think you’ll see, both cost savings initially, and things that have potential to stay in the operating model longer term.”

When the hotel lobby comes to Congress crying for a cleaning tax credit, we have to ask – are they motivated by health and safety? Or are they simply seeking another taxpayer handout and an opportunity to further cut staffing?

 

 

[1] Email from Michael D’Angelo to Connie Holt, “Subject: Housekeeping Guest Personal Preference,” 6/9/20.

[2] Hilton CleanStay U.S. & Canada Operating Guidelines V2,” Page 7, 7/2/20.

[3] Hilton CleanStay Website, accessed 6/30/20. 

Washington Post details how hospitality industry has failed to support workers with PPP funds

A blockbuster story from the Washington Post details how hospitality industry employers who received millions in Paycheck Protection Program (PPP) funds have not passed the money on to workers in the form of wages and benefits. The article shows how Omni Hotels, the Fairmont Grand Del Mar in San Diego, and Earl Enterprises, the Orlando-based umbrella for Buca di Beppo and Bertucci’s restaurants, have declined so far to retain most of their staff on their payrolls.

One of the most galling aspects of this failure is that, as COVID-19 continues to threaten lives across the country, some furloughed employees have been kicked off company health insurance because employers are not funding their premiums. For instance, Omni Hotels company has declined union requests to continue to pay health insurance for furloughed workers. For furloughed Fairmont Grand Del Mar workers to maintain their health insurance, they have to send money back to the company to cover part of the insurance cost.

“It’s pretty cruel kicking people off of their health insurance in the middle of the pandemic,” said Christopher Cook, 47, who has worked 22 years at the Omni Providence, mostly in the purchasing department. His family lost the company insurance on June 1. “If they received that [government] money — that’s mind blowing to me.”

Read the full story here.

Trump and hotel lobby singing in harmony: a hotel bailout is for the little guys, we promise!

Chip Rogers, President and CEO of the American Hotel & Lodging Association, the country’s biggest hotel lobby, recently spent what he called “one of the most interesting sixty minute time periods of my life” meeting with President Trump and several other hotel industry executives. But in recounting that meeting, Rogers attributed to Trump what sounds exactly like the AHLA’s own strategy.

In a conversation with Hunter Hotel Advisors, Rogers said that getting extra help from the federal government for the hotel industry has been difficult because the Trump administration is concerned that assistance to the hotel industry could be seen as benefitting billionaire President Trump himself via Trump Hotels.

Roger’s comments start at around 8:30 into the following clip:

Two things – and this is so important for people to remember when they get a little frustrated about what they see coming out of the White House. First and foremost, the President clearly understands our industry – he’s a hotelier, it’s not like we had to explain to him how things worked, he gets it. The problem is that he and his entire administration are very sensitive to this idea that anything they are doing is specifically helping hotels because the media is going to accuse him of helping his own business. I know that for a fact because at the beginning of this virus crisis probably the first 50 or so interviews I did, in at least half those interviews people were asking, how is this going to help Trump Hotels? And I kept telling them, look, guys, there are 56,000 hotels in the US, Trump has about 9 of those 56,000, so what we’re working on is to help everybody, including the employees of Trump Hotels, but every single employee that’s in the industry. They are very, very sensitive to anything that could be characterized as helping hotels specifically, so we have to work through that and make sure that what we’re talking about is helping small businesses or at least those small businesses that have been hurt by the pandemic.

The “tell” in the above quote is the phrase “talking about.” POTUS is “sensitive” about the optics of bailing out global hotel corporations, so we (the AHLA) have to make sure we’re “talking about” helping small businesses.

The same subterfuge is in play when AHLA claims its efforts to get the Federal Reserve to bail out hotel owners locked into troublesome CMBS loans – which would primarily benefit large real estate investment trusts and private equity firms – is motivated by concern for “small business owners” who must be given “a lifeline” so that “workers will have jobs to come back to.” (See our earlier post.)  Never mind that bailing out hotel real estate investors is unlikely to bring back any idled workers.

Despite the professed concern for small business owners and “valued employees,” the AHLA’s executive board is comprised primarily of the major hotel operating companies and hospitality REITs, and its agenda and priorities reflect the interests of those large players.   Case in point: Among the changes AHLA sought in the PPP program in their April letter to Congressional leaders (archived here on our website) was to add franchise fees paid to the big franchisors like Marriott, Hilton and Hyatt to the list of allowable uses for PPP funds.  If the giant hotel brands – which were sitting on billions in cash at the beginning of the pandemic (see cash on hand for Marriott, Hilton, and Hyatt) – really wanted to help the downtrodden small business hotel owners, why wouldn’t they just suspend franchise fees altogether?  After all, it’s not like their reservation systems and loyalty programs are filling up hotel rooms at the moment.

The hotel lobby goes to bat for big hotel owners saddled with CMBS debt

If you listened to the American Hotel and Lodging Association (AHLA), the nation’s hotel lobbying giant, you might get the impression that U.S. hotels were primarily threatened by unsustainable debt loads. The AHLA has been pushing Congress for months to bail out hotel owners with commercial mortgage-backed security (CMBS) debt, and they are getting closer to their goal. Over a hundred Representatives signed onto a letter expressing support for the Treasury and Federal Reserve to bail out the $540 billion in CMBS debt that couldn’t be assisted through existent programs.

While the letter mentioned “businesses of all types and sizes” being threatened by the economic fallout of the pandemic, in the hotel industry CMBS debt is a creature of big business. Most troubled hotel CMBS debt is owed by large publicly-traded REITs and private equity firms, not by Mom & Pop small businesses.

Even more concerning, a large quantity of this debt is already in trouble. About $19 billion of hotel CMBS loans were in a category called “special servicing”, a step before default where borrowers are seeking some form of relief from bondholders. A quarter of CMBS debt in “special servicing” is owed by just 3 large real estate investors.

Some of the more notable CMBS debt holders included:

  • Monty Bennett’s Ashford companies owe $2.3 billion in specially serviced CMBS loans on 53 hotels as of 7/22/20.[i] According to the Federal Election Commission, Bennett has donated more than $350,000 to Trump’s candidacy and committees, and a similar amount to Republican candidates and committees since 2015. Bennett-related companies drew scrutiny for receiving $68 million of PPP funds before returning the money.
  • Tom Barrack’s Colony Capital, a $50 billion private equity firm, has $2 billion worth of hotel CMBS loans in default as of 6/27/20. Barrack served as Chairman of President Trump’s 2017 Inaugural Committee.
  • The storied Fontainebleau Miami Beach Resort owes $975 million in the largest CMBS hotel loan in the country as of 7/20/20, and the resort is seeking forbearance[ii] from bondholders, even though the owner cashed out $191 million in 2 refinancings in 2018 and 2019.
  • Gordon Sondland owns 7 hotels with $205 million in CMBS loans that are delinquent as of 7/20/20.[iii]
  • The Marriott family owns 2 hotels with $37 million in CMBS loans that are delinquent as of 7/20/20.[iv]

Big investors and lenders may benefit from a CMBS bailout, but workers certainly won’t. Although you wouldn’t know it from the AHLA’s rhetoric, the debt woes of hotel owners have very little, if any, bearing on whether the millions of laid-off hospitality workers will be able to return to their jobs.

During the Great Recession, many hotel owners with unserviceable loans fell behind on their payments.  Some even defaulted and handed over their keys to lenders.  Some workers (about 7%) lost their jobs over the course of 19 months of continuous revenue declines – attributed by the Bureau of Labor Statistics to decreased demand, not foreclosures.[v] But the hotels never stopped operating, and new owners emerged to buy the hotels at bargain basement prices.[vi]

In the current crisis, millions of hotel workers have already lost their jobs. Prospects for the hotel industry won’t materially improve until the public health crisis abates and people feel safe traveling again.  That’s why it’s a little hard to take when a lobbyist says with a straight face that handing over billions of dollars to private equity firms and other real estate investors with CMBS debt will somehow “save jobs.”  We’re getting a little tired of saying it, but show us the receipts.

 

[i] Trepp, 7/22/20

[ii] “forbearance” per Trepp 7/20/20

[iii] UH compilation from publicly filed CMBS prospectuses and distribution reports.

[iv] Thomas Point Ventures is ownership vehicle.

[v] See also “U.S. Lodging-Backed CMBS Bracing For The Impact Of COVID-19,” S&P Global, 3/23/20. https://www.spglobal.com/ratings/en/research/articles/200323-u-s-lodging-backed-cmbs-bracing-for-the-impact-of-covid-19-11399346

[vi] See for example, the Stanford Court in San Francisco (https://money.cnn.com/galleries/2009/real_estate/0907/gallery.Luxury_hotels_in_default/2.html); the Pleasanton Sheraton (https://www.eastbaytimes.com/2010/02/08/troubled-pleasanton-sheraton-sold/ and https://www.pleasantonweekly.com/news/2009/02/06/pleasanton-sheraton-owners-default-on-loan); and the W San Diego (https://www.wsj.com/articles/SB124441227998992281).

AHLA’s Chip Rogers: Saying the quiet part out loud

Close readers of this blog (yes, we have a few!) might have noticed a theme: what hospitality industry leaders say doesn’t always match what they do.

A case in point is the Paycheck Protection Program, the controversial SBA program enacted as part of the CARES Act, whose ostensible purpose is to encourage small businesses reeling from pandemic shutdowns to continue providing pay and benefits to their idled workers. While the legislation was being drafted, the hospitality industry trumpeted the program as a critical job retention measure. But since then, few hospitality workers have been rehired, and an industry lobbyist has made it clear that they are focused on managing hotels’ mortgage payments – not helping workers.

Hospitality industry leaders had initially pushed for an industry-specific program, calling it the “Hospitality Workforce Relief Fund”, which they envisioned as $100 billion in government “grants to businesses for the purpose of employee retention and rehiring.”

Although the hotel industry had already begun laying off most of its workforce by the time Congress began drafting the CARES Act, the industry’s lobbying group, the American Hotel and Lodging Association, claimed:

“the unemployment rate will dramatically increase in the next month unless Congress prevents millions of hotel workers from being furloughed or laid off. The fund would help employers meet their payroll obligations, slow the growth of rising unemployment numbers, and help keep employees on employer provided health insurance, lessening the impact on the Unemployment Insurance program.”

The CARES Act provision that created the PPP did not hew exactly to the AHLA’s vision, and  the PPP was open to all affected small business employers, not just those in the hospitality industry.  But hospitality lobbyists did persuade the Act’s drafters to create an unusual carve-out for their industry.  Whereas in every other industry, PPP eligibility was restricted to small businesses, hospitality companies were allowed to apply for a loan at every location with fewer than 500 employees, regardless of the size of the company’s parent organization.  Thus, large businesses, including multi-billion dollar real estate investment trusts and private equity companies could apply for the forgivable loans at every one of their hotel properties that employed fewer than 500 employees.

Before the ink had even dried on the CARES Act, the AHLA began to criticize the program it had proposed, calling the PPP’s loan limit of 250% of  payroll “unworkable” because it “will not allow a business owner to meet both payroll and debt service obligations beyond an estimated four to eight weeks.”

By then, the hotel industry had already laid off 70% of its workers nationwide, and most employers were in no hurry to get them back. Imagine their chagrin then when the Small Business Association, accustomed to serving mainly, well, small businesses, imposed a rule requiring 75% of the amount of loan forgiveness ultimately received by a PPP recipient to have gone to workers’ wages and benefits.

The AHLA got to work.  In an April 8 letter to Congressional leaders, AHLA called the 75% rule “too restrictive” and suggested the agency adopt a 50% rule. And instead of a maximum loan amount equal to 250% of payroll, AHLA suggested the maximum should be 8 months of total operating costs.

AHLA CEO Chip Rogers conducted a flurry of TV and print interviews, raising the alarm that “if small business hotel owners can’t pay the mortgage or utilities, they will have to close their doors with no jobs for employees to come back to work.”

To Travel Weekly he acknowledged, “lawmakers were hoping that they could create a plan that would keep people on the payroll. For many hotels, however, people were already off the payroll by the time the plan was implemented.”

By late May, the industry’s lobbying efforts had apparently had an effect: House Speaker Nancy Pelosi told the Wall Street Journal she regarded the SBA’s 75% rule to be “debilitating”, and later announced that the only measure she was stripping out of the comprehensive HEROES bill for a stand-alone vote on the first day after the House recess was one that expanded the PPP from 8 weeks to 24 and eliminated the SBA’s 75% rule altogether.

That probably would have been the end of it had not a group of union leaders suggested on the eve of the expected vote that maybe it wasn’t such a good look for Congress to be stripping the paycheck protection part out of the Paycheck Protection Program. Rather than eliminating the SBA rule as originally planned, the amended PPP Flexibility Act simply changed the formula for loan forgiveness so that 60%, rather than 75%, of a recipient’s loan forgiveness amount would need to go towards worker paychecks and benefits.

The bill passed the House on a vote of 417 to 1 on May 28th and sailed through the Senate the following week before being signed into law by the President.  In addition to changing the payroll formula, the new law contains provisions allowing recipients to receive loan forgiveness in some circumstances even if they did not ultimately use 60% of the forgiven amount for payroll expenses, as long as they can prove they have been “unable” to hire employees or return to the “same level of business activity” as before the pandemic due to new standards for sanitation, social distancing, or other safety requirements.

Although pitched by the AHLA in March as an “employment retention” measure, by May the industry had largely succeeded in turning the PPP into something that better suited its needs: a means of subsidizing hotel real estate investors’ debt service.

Now, as many cities and states begin the process of reopening for business, the large hotel employers perceive a new problem: with the pandemic far from over and $600 supplemental unemployment benefits not set to expire until the end of July, workers might not be eager to return to their workplaces just yet.  Here is how AHLA CEO Chip Rogers put it in a May 7 podcast:

Minute 7:02

… So, what we were seeing was people were taking out the PPP and then were going back to their employees and saying, “Look, because of the PPP, I need to bring you back on the payroll.” And people were saying, “No. I’d rather stay off the payroll. A, I don’t have to work, and B, I’m getting more money.” And so, it was a weird situation – we’re trying to get people back on the payroll because we had the PPP money, but they wouldn’t come back.  We kept reminding the administration:  this is really problematic.  They just came out with some rules that say, “Look, if your employer asks you to come back, and you say, ‘no I’m not coming back,’ then you no longer qualify for the additional $600 of bonus money.”  We think that’s fair because the unemployment is not meant for people who have a job.  It’s meant for people who don’t have a job or can’t work. And if your employer is saying, “Hey, come back, work, your job is now available again,” then unless you don’t want that job anymore, you should go back.

At which point the interviewer, an Atlanta-based hotel industry consultant, says:

Yeah great, we’ve been hearing that a lot, so I appreciate that you brought it up.  It’s definitely a concern, and I’m glad that you’re there fighting.  Do you think it will have impact? Do you think it will work?

CHIP ROGERS: It will work, yeah. There’s no doubt about it. We’re already hearing from people saying, “Thanks, this is going to make it a lot easier for me to get my employees back.” And it’s the right thing to do. Again, we don’t want a country where we’re incentivizing people not to work.  That does not work at all.  We know that, both economically and just historically.  So, if we want to get back to the way America was – which was going pretty well – then we need to use those rules of free enterprise that have worked so well for centuries.

The employees of a swanky Hollywood restaurant might be finding out the hard way how hospitality employers can exploit the new PPP rules for their own purposes. Food service workers at the luxe Yamashiro told the LA Times that their employer had told them it received PPP funds and offered to rehire them – but only in jobs they were unqualified and unsuited to do, such as maintenance, HVAC, and plumbing. Meanwhile, workers saw their old positions listed on job websites. (Yamashiro declined to comment.) Under the rules championed by the AHLA, could Yamashiro claim that workers had refused rehire offers, and then apply to have PPP loan funds forgiven even though less than 60% were used for purposes other than workers’ wages and benefits?

The possible future that Rogers is painting is a grim one for workers: forced to choose between staying home without pay, or going to work during an ongoing pandemic. Or, for Yamashiro’s workers, losing unemployment benefits after being ‘offered’ jobs that they can’t actually fill.

The next time corporate lobbyists ask taxpayers for a half trillion dollars so they can “save jobs” and “retain workers,” let’s hope Congress gets receipts.

The Missing Hospitality Stimulus: Hospitality corps could give billions in stimulus to their own employees for cents on the dollar – what’s stopping them?

A provision of the CARES Act allows companies to get a 50% refundable tax credit on the first $10,000 of wages and benefits paid to each of their employees idled by COVID-19– meaning that they could assist employees at low cost to themselves. A survey of the major hospitality employers[1] shows that the credit could help them to distribute more than $3.6B to more than 783,000 employees. But few of the employers have announced that they have taken advantage of the tax break, potentially leaving over $1.8 billion on the table. What’s stopping them?

By any measure, the hospitality industry has faced heavy losses during the pandemic: the Bureau of Labor Statics estimated that more than 33% of hospitality workers were unemployed in May. A McKinsey analysis based on a survey of global business executives’ predictions for economic recovery estimated that hospitality revenue may not return to 2019 levels until beyond 2023.

The Employee Retention Tax Credit (ERTC) included in the CARES Act granted a refundable tax credit of 50% to coronavirus-affected businesses that paid workers wages and health benefits for the remainder of 2020, up to $10,000 per employee. However, only two of eight gaming companies surveyed, and none of the Big 3 hotel employers, reported using any of the credits in the first quarter of 2020. As shown in the table below, the potential credits available to employers run into the billions:

 

Company Number of US Employees Est. Employees Furloughed Total amount of ERTC possible Amount of ERTC taken Maximum Amount of ERTC Remaining Liquidity
Marriott 130,000[2] 20,000[3] $100,000,000 $100,000,000 $4,300,000,000[4]
Hilton 60,000[5] 35,000[6] $175,000,000 $175,000,000 $3,800,000,000[7]
Aramark 150,000[8] 90,000[9] $450,000,000 $450,000,000 $1,207,700,000[10]
MGM 70,000[11] 60,000[12] $300,000,000 $300,000,000 $6,000,000,000 [13]
Caesars 64,000[14] 57,600[15] $288,000,000

 

$34,000,000[16] $254,000,000

 

$2,677,000,000[17]
Hyatt 43,000[18] 28,000[19] $140,000,000 $140,000,000 $1,232,000,000[20]
Penn National 28,300[21] 26,000[22] $130,000,000

 

$130,000,000

 

$730,700,000[23]
Boyd 24,300[24] 25,000[25] $125,000,000

 

$125,000,000

 

$1,111,200,000[26]
Wynn 16,400[27] 15,000[28] $75,000,000

 

$75,000,000

 

$2,880,971,000[29]
Eldorado 15,500[30] 13,950[31] $69,750,000

 

$69,750,000

 

$688,500,000[32]
Red Rock 14,000[33] 7,000[34] $35,000,000

 

$20,000,000[35] $15,000,000 $1,120,949,000[36]
Twin River 4,831[37] 3,000[38] $15,000,000

 

$15,000,000

 

$361,591,000[39]
  Total $1,848,750,000 $26,110,611,000
  Wages & Benefits Supported $3,697,500,000  

The industry has lobbied for an even more generous credit: in a letter to Congressional leadership dated June 17, the AHLA, alongside several other hospitality industry groups including the National Restaurant Association and the American Gaming Association, advocated expanding the ERTC in line with the JOBS Credit Act. According to bill sponsor Rep. Stephanie Murphy, the JOBS Credit Act would substantially increase the portion of wages & benefits refundable as a tax credit (from 50% to 80%) and the amount of wages & benefits that could be eligible for the credit (from $10,000 per employee for all quarters to $45,000 per employee in aggregate). A substantially similar provision was included in the HEROES Act, which passed the House in May. Expanding the credit on those terms would enable an even more massive stimulus for hospitality employees – more than $17B in wages and benefits, at a cost of just $3.4B to employers.

The industry’s failure to utilize the credit stands in stark contrast to the billions of dollars of liquidity that they are sitting on. These companies have been the recipients of a great deal of government aid – both direct and indirect. Under the current law, securing the full benefit of the credit would require less than 5% of the employers’ current assets, and the costs could be spread over the remainder of calendar year 2020. The economic multiplier effects of this distribution – not to mention the individual impact for workers who face un- and underemployment for the foreseeable future – are hard to overstate. (Not to mention that paying furloughed employees during a pandemic would foster great employee loyalty.)


Footnotes

[1] Based on public filings with the SEC. Although it is possible not all companies have done so, the SEC Commissioner has advised public companies to report CARES Act assistance they’re receiving, to the extent such assistance is “likely to have a material future effect” on the company’s financial condition or operations. (“The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19,” SEC, 4/8/20. https://www.sec.gov/news/public-statement/statement-clayton-hinman

[2] Craig Karmin, “Marriott Begins Furloughing Tens of Thousands of Employees,” Wall Street Journal, 3/17/20.  https://www.wsj.com/articles/marriott-starting-to-furlough-tens-of-thousands-of-employees-11584459417

[3] “Tens of thousands” expected to be furloughed. Craig Karmin, “Marriott Begins Furloughing Tens of Thousands of Employees,” Wall Street Journal, 3/17/20.  https://www.wsj.com/articles/marriott-starting-to-furlough-tens-of-thousands-of-employees-11584459417

[4] Net liquidity as of 5/8/20: https://www.sec.gov/Archives/edgar/data/1048286/000162828020007293/mar-2020q1er99.htm

[5] “From ‘you’re fired’ to ‘you’re furloughed’,” The Economist, 4/3/20.  https://www.economist.com/business/2020/04/03/from-youre-fired-to-youre-furloughed

[6] CEO Nassetta statement 5/21/20: “We have furloughed, along with most in the industry, probably a bit more than 60 percent of our workforce at this point…” “Transcript: The Path Forward: Travel & Tourism,” The Washington Post, 5/21/20. https://www.washingtonpost.com/washington-post-live/2020/05/21/transcript-path-forward-travel-tourism/

[7] Cash, restricted cash and cash equivalents as of 3/31/20: https://www.sec.gov/Archives/edgar/data/1585689/000158568920000107/a2020-q1earningsrelease.htm

[8] Aramark 10-K Sept. 2019 lists 147,050 US food & facilities employees plus 650 in corporate HQ and 17,000 in the uniform division, of which at least 5,000 are est. in US (Global total 283,500) https://aramark.gcs-web.com/node/16561/html

[9] Conservative estimate based on UNITE HERE data and Food Service Management “Top 50 of 2019” breakdown of company revenue by segment: Assumes impact on 90% of est. 54,000 food service workers in education accounts, 95% of est. 29,000 in event venues, and 70% of est. 19,000 in B&I cafeterias, Estimated totals include both frontline and managerial staff. No impact assumed for facilities, healthcare, uniforms or corrections.

https://www.food-management.com/top-50-contract-companies/2019-fm-top-50-2-aramark

[10] Cash and cash equivalents and availability under senior secured revolving credit facility as of 3/27/20: https://www.sec.gov/Archives/edgar/data/1584509/000158450920000105/cik0-20200327.htm

[11] https://www.sec.gov/ix?doc=/Archives/edgar/data/789570/000156459020007393/mgm-10k_20191231.htm, p. 8.

[12] https://news3lv.com/news/local/mgm-resorts-ceo-says-60000-employees-have-been-furloughed-in-cnbc-interview

[13] Cash and cash equivalents as of 3/31/20: https://www.sec.gov/Archives/edgar/data/789570/000156459020020518/mgm-10q_20200331.htm

[14] https://www.sec.gov/ix?doc=/Archives/edgar/data/858339/000085833920000023/a2019q4cecform10-k.htm, p. 8.

[15] Caesars said it had laid off 90% of its workforce in April (https://www.caesars.com/corporate/newsroom/press-releases/caesars-provides-business-update-related-to-covid-19-impact). Substantially all of Caesars’ employees are based in the US.

[16] https://www.sec.gov/ix?doc=/Archives/edgar/data/858339/000085833920000060/a2020q1cecform10-q.htm, p. 20.

[17] Cash and revolver capacity as of 3/31/20: https://www.sec.gov/Archives/edgar/data/858339/000085833920000060/a2020q1cecform10-q.htm

[18] Estimate based on UNITE HERE membership estimate (10,000) & Hyatt annual report statement that 23% of US employees are represented by a union- Hyatt 2019 Annual Report, p. 19. https://www.sec.gov/ix?doc=/Archives/edgar/data/1468174/000146817420000015/h10-k123119.htm

[19] Based on reported plan for 2/3rds of employees to be furloughed or have ”hours significantly reduced” https://www.bloomberg.com/news/articles/2020-03-24/hyatt-to-furlough-u-s-corporate-employees-with-hotels-shuttered

[20] Cash, cash equivalents, and restricted cash as of 3/31/20: https://www.sec.gov/Archives/edgar/data/1468174/000146817420000067/hq133120.htm

[21] https://www.sec.gov/ix?doc=/Archives/edgar/data/921738/000092173820000009/penn1231201910k.htm, p. 9.

[22] https://www.pennlive.com/business/2020/06/penn-national-gaming-has-furloughed-26000-people-but-more-than-200-could-be-laid-off-permanently.html

[23] Cash and cash equivalents as of 3/31/20: https://www.sec.gov/Archives/edgar/data/921738/000092173820000018/penn0331202010q.htm

[24] https://www.sec.gov/ix?doc=/Archives/edgar/data/906553/000143774920003765/bgc20190819_10k.htm, p. 8.

[25] https://www.reviewjournal.com/business/casinos-gaming/boyd-gaming-updates-pay-policy-during-coronavirus-shutdown-1992526/

[26] Cash, cash equivalents, and revolving credit facility availability: https://www.sec.gov/Archives/edgar/data/906553/000143774920010170/bgc20200331_10q.htm

[27] https://www.sec.gov/ix?doc=/Archives/edgar/data/1174922/000117492220000024/wynn-20191231.htm, p. 15.

[28] https://wynnresortslimited.gcs-web.com/news-releases/news-release-details/wynn-resorts-extends-benefits-all-north-american-employees?field_nir_news_date_value[min]=

[29] Cash and cash equivalents as of 3/31/20: https://www.sec.gov/Archives/edgar/data/1174922/000117492220000085/wynn-20200331.htm

[30] https://www.sec.gov/ix?doc=/Archives/edgar/data/1590895/000156459020007599/eri-10k_20191231.htm, p. 11.

[31] Based on ”vast majority” of employees furloughed, this figure is 90% of Eldorado’s employees. https://seekingalpha.com/article/4346414-eldorado-resorts-eri-ceo-tom-reeg-on-q1-2020-results-earnings-call-transcript?part=single

[32] Cash, cash equivalents, and revolving credit facility availability as of 3/31/20: https://www.sec.gov/Archives/edgar/data/1590895/000156459020024352/eri-10q_20200331.htm

[33] https://www.sec.gov/ix?doc=/Archives/edgar/data/1653653/000165365320000005/rrr12-31x2019x10xk.htm, p. 18.

[34] Estimate of 50% of employees furloughed in absence of company statement.

[35] https://www.sec.gov/Archives/edgar/data/1653653/000156459020026160/d924114dex991.htm.

[36] Cash, cash equivalents, and revolving credit facility availability as of 3/31/20: https://www.sec.gov/Archives/edgar/data/1653653/000165365320000009/rrr10-qx03312020.htm

[37] https://www.sec.gov/ix?doc=/Archives/edgar/data/1747079/000174707920000038/trwh-20191231x10k.htm, p. 14.

[38] Estimate based on statement that Twin River had furloughed most of its employees (Twin River Worldwide Holdings 10Q for 1Q20, p. 40. https://www.sec.gov/ix?doc=/Archives/edgar/data/1747079/000174707920000062/trwh-20200331.htm)

[39] Cash and cash equivalents as of 3/31/20: https://www.sec.gov/Archives/edgar/data/1747079/000174707920000062/trwh-20200331.htm

 

[1] Based on public filings with the SEC. Although it is possible not all companies have done so, the SEC Commissioner has advised public companies to report CARES Act assistance they’re receiving, to the extent such assistance is “likely to have a material future effect” on the company’s financial condition or operations. (“The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19,” SEC, 4/8/20. https://www.sec.gov/news/public-statement/statement-clayton-hinman