Archive for category: Updates

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

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020 to provide broad-based economic assistance for workers, families, small and large businesses, and state, local and tribal governments. The $2 trillion CARES Act is the largest emergency spending measure bill in US history. With such a large amount of money at stake, the potential for fraud or misappropriation is high.

The CARES Act established 3 bodies to oversee the management of any programs created out of the legislation as well as the disbursement of those funds. These bodies are the Congressional Oversight Committee (COC), the Pandemic Response Accountability Committee (PRAC) and the Office of the Special Inspector General for Pandemic Recovery (SIGPR). (Separately, the House empaneled the Select Subcommittee on the Coronavirus Crisis, and Senate Majority Leader McConnell has implied there will be a similar body in the Senate.) These entities are collectively charged with weeding out fraud and ensuring that taxpayer bailout money is reaching those actually impacted by the pandemic.

Bailout Bandits will continue to track these accountability bodies, highlighting their findings and pointing out where the hospitality industry is implicated.

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Only a few months into a seemingly never-ending pandemic crisis, Darden Restaurants – the parent company of Olive Garden, Longhorn Steakhouse, and other suburban favorites – has quietly restored the base salary of CEO Gene Lee and executives. Meanwhile, thousands of its employees face the end of ‘emergency pay’ and serious questions about the safety of reopening.

Darden restored Lee’s base salary to $1 million effective June 1^st. Other named executive officers had salaries of between $640,000 and $775,000 restored. The company’s non-executive directors also saw restoration of their pre-COVID compensation. For Lee, base salary made up less than 10% of his fiscal year 2019 compensation.

Back in March, Darden had announced that Lee would forego his salary and other executives were having their base salaries cut 50%, “until we are successfully on the other side of this.” Darden had already experienced steep declines in sales and announced soon after that 150,000 employees had been furloughed.

Darden announced in March that it would give workers three (initially two) weeks of ‘Emergency Pay’ of 50% of pay for hourly employees who could not work. However, that program rolled out in late March, so many Darden workers would have stopped receiving that pay long ago. Darden has not announced that it will continue this Emergency Pay program. (And it’s worth noting that companies can receive a 50% tax credit for wages and benefits paid to current employees due to the CARES Act.)

In a call with investors, Lee indicated that the company’s commitment to assist workers would be subject to change based on government relief:

David Tarantino, Analyst with RW Baird: Hi. Good morning. My question, Gene, is on the pay of the hourly workers. I know you did the right thing. It seems to implement this emergency pay. But I just wanted to confirm the length of time that covers. And then, once that expires, what your thought processes on and how you keep these employees engaged for when times do get better down the road?

Gene Lee, CEO of Darden Restaurants: Yes, David, I think the time commitment right now is once the disruption happened it’s two weeks. But that is subject to change depending on what happens with these relief packages from the government. We know that the government is going to start sending people checks directly and not come through us. That has to be part of our calculation. And when we think about our people, we are going to try to keep people employed maybe through our furlough program where we can still have — they can still have access to their benefits, and they don’t lose their tenure. We are really, really trying to work through keeping our people engaged, so when it’s time to ramp back up that we can ramp back up quickly. But we’ve to continue to work in concert with the government. And if they’re going to compensate the American public directly, then that has to be a part of our calculation as we think about our people.

Will Darden also make part of their “calculation” that enhanced unemployment benefits, for those lucky enough to actually get them, will run out in July? The company indicated that as May 19 the company was cushioned by access to over a billion dollars of available liquidity:

Based on week ending May 17 results, the Company’s ongoing weekly cash burn rate has improved to less than $10 million including capital expenditures. Given the increased confidence in our cash flow projections and stabilization in the credit markets, the Company fully repaid its $750 million credit facility on May 5, 2020. With approximately $700 million of cash on hand as of May 17, the Company is well positioned for the near term while retaining financial flexibility to fully access its $750 million credit facility should capital requirements present. Including cash available through the credit facility and cash on hand, we have access to over $1.4 billion of liquidity.

Meanwhile, Darden workers face another risk: restaurants reopening before the pandemic has been contained.

Darden announced in mid-May that it planned to reopen 65% of its dining rooms by the end of the month. At the beginning of May, Darden opened most of its restaurants in Georgia for dine-in service – despite data showing that the state received tens of thousands of visitors from other states that had not lifted all restrictions. The New York Times quoted Dr. Robert W. Amler, dean of the School of Health Sciences and Practice at New York Medical College, saying that “There really is no scientific study” on the best ways for restaurants to reopen following a Covid-19 outbreak.

Darden’s actions raise serious questions. Will its employees continue to receive emergency pay as the pandemic rages? Will workers be forced to choose between unemployment benefits (which for millions has yet to or may never arrive) and going back to work during a pandemic?

Are you a worker at a Darden Restaurants brand (e.g. Olive Garden, Longhorn Steakhouse, Cheddar’s Scratch Kitchen)? Tell us how you’ve been treated by the company during the pandemic – if you’ve gotten ‘emergency pay’, send us a copy of your paycheck! You can contact us at jsussman AT unitehere DOT org.

The White House’s favored recovery strategy could permanently scar the economy – Washington Post

Some Americans fear their jobs will be lost forever – Financial Times

For Economy, Worst of Coronavirus Shutdowns May Be Over – Wall Street Journal

Hotels Fund More Cleaning by Cutting Room Amenities and Breakfast Buffets – Wall Street Journal

U.S. Senators Urge Delta, JetBlue to Restore Employee Hours – New York Times

At the May 19^th Senate Banking Committee hearing on CARES Act implementation, Treasury Secretary Steve Mnuchin and Federal Reserve Chair Jerome Powell were asked about their plans to shore up the hotel commercial-backed securities (CMBS) market. Although they did not commit to any specifics, it is a worrying sign that they entertained the possibility of taking steps that will not do anything to protect hotel worker jobs or healthcare.

It is no surprise that hotel debt broadly, and CMBS debt in particular, has suffered in the wake of the COVID-19 pandemic – only 76.3 per cent of hotel properties in CMBS deals were up to date on their mortgage payments in April, according to JPMorgan data reported by the Financial Times.[i] The hotel industry lobbies – including the biggest, the American Hotel and Lodging Association (AHLA) – have urged Mnuchin and Powell to shore up the $86B in hotel CMBS debt to avert “a potentially catastrophic prolonged impact on jobs and tax revenues.”[ii]

On Tuesday, Senator Thom Tillis (R-NC) cited numbers from the AHLA to say that only 15% of CMBS borrowers have received forbearance from services, which he described as ‘low,’ a characterization with which Secretary Mnuchin agreed. Senator Tillis further asked whether the Fed and Treasury would consider extending the use of their facilities to new-issue CMBS loans, including debt rated less than AAA. Both Powell and Mnuchin pledged to continue to look at expanding loan facilities for CMBS.[iii]

Sen. Tillis’s questions recall the dire warnings issued by the AHLA. In a call to help hotels stay open and save millions of jobs, the AHLA warned, “Without action to shore up debt servicing, including in the CMBS market, this crisis will lead to widespread foreclosures, snowballing into mass disruption and a critical lack of liquidity in the commercial real estate market.”[iv]

The reality is that rescuing hotel CMBS debt will do nothing to help hotel workers, who have suffered the most in the pandemic’s economic fallout. By the time the CARES Act became law in late March, hotels across the US had already laid-off 70% of their workforce.[v] The three largest US hotel employers -Marriott, Hilton and Hyatt – are sitting on $4.5B in cash, and have done little to assist laid-off workers.[vi]

CMBS debt relief would not even necessarily help hotels make it through the economic downturn. Without radical restructuring, many hotel loans are unsustainable given the near total collapse of the travel and tourism sectors.  Many analysts believe it could take more than 2 years before hotel revenues approach pre-crisis levels. Why should US taxpayers support hotel-backed debt payments for such an extended period?[vii]

Most critically, hotel CMBS debt relief would only reward speculative real estate investing, not keep hotel workers employed. If current hotel owners default on their debt service, ownership of their properties will simply pass on to lenders or other buyers, primarily a handful of large private equity firms sitting on a pile of cash.  Distressed debt sales, foreclosures, or transfer of ownership in general in the hotel industry have rarely if ever led to permanent shuttering of hotels. As the Wall Street Journal recently reminded us, cash-rich distressed debt investors are already salivating at the thought of pandemic-induced asset sales.[viii] And they won’t be buying hotel assets in order to turn them into parking lots.  If anything, they’re likely to invest the capital needed to spruce them up and keep them operating so they can sell them once the hotel industry recovers and occupancy levels approximate their pre-COVID levels.

The Fed using a loan facility to assist hotel owners with CMBS debt will only assist hotel owners, many of them large tax-advantaged real estate investment trusts, their bank lenders, sophisticated real estate investors, and financial engineers – not workers.

At another point in Tuesday’s hearing, Senator Ben Sasse (R-NE) correctly countered the push to expand CMBS relief, quoting a Wall Street Journal editorial: “This means the Fed will in effect buy the worst shopping malls in the country and some of the most indebted companies.”[ix] Hopefully the Federal Reserve will recognize that this logic applies equally well if not more so to over-leveraged hotels, and not prop up the CMBS financing model, which has proven particularly untenable to even short business interruptions, not to mention the long-term crises unfolding in the hotel and retail industries.

 

[i] Joe Rennison, “Empty US hotels increase pressure on debt investors,” Financial Times, 5/5/20. https://www.ft.com/content/f7f19028-70f1-4243-b546-7ac8d7067d38

[ii] Letter to Steve Mnuchin and Jerome Powell, AAHOA and AHLA, 4/16/20. https://www.aahoa.com/docs/default-source/default-document-library/ahla-aahoa-cmbs-treasury-fed-submitted-short1.pdf

[iii] The Quarterly CARES Act Report to Congress, Senate Banking Committee, 5/19/20, beginning at 1.55.30 of video.   https://www.banking.senate.gov/hearings/the-quarterly-cares-act-report-to-congress

[iv] “AHLA Supports Plan To Add Funds For Small Business Loans, Seeks Additional Action To Protect Hotel Jobs,” AHLA, 4/8/20. https://www.ahla.com/press-release/ahla-supports-plan-add-funds-small-business-loans-seeks-additional-action-protect

[v] Chip Rogers, CNN Interview with Julia Chatterley, 3/30/2020. (Transcribed from recorded video.)

[vi] BofA Global Research, Liquidity: How much room to navigate a travel shutdown? 3/25/20, p. 1

[vii] http://hotelnewsnow.com/Articles/301004/US-hotel-RevPAR-forecasted-to-drop-506-for-2020 2021 forecast does not reach 2019 RevPAR of $86.76.

[viii] Konrad Putzier and Peter Grant, “Real-Estate Investors Eye Potential Bonanza in Distressed Sales,” Wall Street Journal, 4/7/20. https://www.wsj.com/articles/real-estate-investors-eye-potential-bonanza-in-distressed-sales-11586260801

[ix] The Quarterly CARES Act Report to Congress, Senate Banking Committee, 5/19/20, beginning at 1.11.00 of video.   https://www.banking.senate.gov/hearings/the-quarterly-cares-act-report-to-congress; see also “The Fed’s ‘Main Street’ Mistake,” Wall Street Journal, 4/9/20. https://www.wsj.com/articles/the-feds-main-street-mistake-11586474912