We are very slowly recovering from the Covid pandemic. However, the threat of new variants is on the horizon and governments conservative policies towards international travel still exist. With more and more of the main feeder markets to Spain being vaccinated and booster vaccines being proposed for this autumn, by 2022, travel should have some sense of normality return.
High Debt Levels
As we have said before, some Hotel owners and chains, even before the pandemic, had high levels of debt, in part due to their expansion plans or not addressing their costs sufficiently or taking out loans for refurbishments etc.
A case in point is the Fairmount Juan Carlos. The owners have been trying to sell desperately due to the difficulty in making a profit. In fact, and according to Gonzalo Baratech as he revealed in Crónica Global, “in the 28 preceding annual accounts that Juan Carlos I have filed, it has only achieved profits in three periods. The accumulated balance for the entire period shows losses of 120 million”.
So this Iconic hotel is in an unsustainable position. Additionally, there are other issues with the land license with the local government and the projected fall in MICE travel. To this date, no investor, whether international or national, can make the numbers add up. Subsequently, there is no interest in buying the hotel. There are approximately four hundred jobs at risk. This is not an isolated case within the Spanish hotel industry; this is a scenario that is becoming more common.
Since the pandemic started, owners are now faced with a scenario where the market value of their hotel is lower than their total debts. In essence, they are now underwater. With high levels of debt which have only increased trying to survive during the pandemic, plus the prolonged return to normality, Spanish hoteliers are in many cases an unstainable situation. They will be forced to go into Administration.
During the pandemic, the Spanish government decided to suspend the request for the declaration of bankruptcy. This moratorium expires on December 31 2021. As of this date, the calculation of the legal period of two months to request the declaration of insolvency will begin. The processing of the necessary bankruptcy applications submitted by creditors from March 14, 2020, is also suspended until December 31, 2021.
As many experts, including Hotelient, agree, hotels going into Administration over the next few years will be many, which brings us to the next issue: how will administrators maximise the hotel’s value to minimise debt forgiveness?
In general terms, a hotel is valued at 10 x yearly profit in a typical year or the value of the land, whichever is lower. So clearly, increasing the hotel’s profitability is fundamental in expanding the deal to sell for market value.
Hotel Recovery Management
This is where Hotel Recovery Management comes in. Once a hotel goes into Administration, the priority will be on making drastic changes to current staffing levels, services, and the way the hotel is marketed.
From our experience, the hotels that have gone into Administration with existing hotel management have failed to make the tough decisions to optimise for maximising profitability. Struggling hotels that bring in fresh eyes on the business recover faster, more robust and more efficient. They achieve their optimal market value within three to five years.
Most Hotel Recovery Management contracts typically last between 2-3 years. Initially, a study is done to understand the hotel’s viability based on possible guest segments, feeder markets and projected REVPAR. If, in the case that the hotel is not viable mid to long term, then the administrator can take the necessary decisions to wind up the business. On the other hand, the hotel is feasible, a team of experienced professionals taking over the hotel’s day-to-day running, making decisions based on the numbers in front of them and local knowledge rather than historical or sentimental feelings toward the hotel and employees.
They work closely with Administrators, too, to return the hotel as quickly as possible to profitability whilst at the same time introduce Investors who are interested purchasers based on the work that already be done.
Hotelient, as experts in Recovery Golf & Hotel Management, take it even further. Through our years of expertise, we introduce technology that, in most cases, can reduce the hotel’s wage bill by up to 33%. Having the ability to make critical strategic decisions quickly and put the resort or hotel on the path to increased profitability makes companies like ours a strategic partner for Administrators.
If you are an administrator and would like to partner with Hotelient, contact John Kearney for further information.