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A Host(mark) of Predictions

Hostmark Hospitality Group's President and VP Of Operations share their thoughts on the Fiscal Cliff and the state of the industry.

Tuesday, December 18, 2012
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Hostmark Hospitality Group is one of the country’s leading management companies and has more than 350 hotels, restaurants and resorts in 365 states, the British West Indies, Canada and the Middle East. We got a chance to talk to both their President jerry Cataldo as well as Peter Connolly, their Executive Vice President of Operations and Development.

These guys are true champions of hospitality so we were dying to see what they’re thinking on the biggest issues of the day such as this supposed “Fiscal Cliff” we’re about to fall off of. That is if we survive the Mayan apocalypse later this week.

We also discuss how they see the hospitality environment in 20134 and beyond. To give both sides of the story we have the pessimist Connolly and the optimist Cataldo.

Here is an excerpt of our chat, so if you want to hear the whole conversation you listen to it click listen below. The entire conversation is also featured as part of Hotel Interactive® Radio's This Week In Hospitality.

You can also subscribe on iTunes!

Glenn Haussman: We have got a very special group today. We have Mr. Jerry Cataldo and Peter Connolly, both of Hostmark Hospitality Group!

Thank you so much for joining us here at the BITAC® Owners Event. So, Jerry, we just came off a panel. We were talking about management companies and what you guys are doing these days. And, Peter, I want you to chime in as you can.

How do you guys see the general state of the industry? Is that pessimism finally go well; well, maybe going away – but maybe not with you, Peter, because I hear you are the pessimist?

Peter Connolly: I am the resident pessimist. Yeah.

Glenn Haussman: Okay. First let’s start with the cheerier side. Jerry, why don’t you tell us how you are kind of seeing all the components fitting together.

Jerry Cataldo: Well, as we’ve heard a little bit here at the conference throughout the last couple of days, I think people are encouraged by some of the uncertainty that surrounded various events that affect the economy and the performance of our industry, starting with the election.

And eliminating some of those uncertainties is making people feel a little bit more comfortable about what they’re operating environment is.

Glenn Haussman: So I kind of look at the universe as always filled with uncertainties and I always see a lot of people in the hospitality industry mired down in uncertainties. Why can’t they just say, “Ah, forget about it” and move along? Because after all, if the world is going to come to a screeching halt, it’s going to come to a screeching halt, you might have well as done stuff just in case it doesn’t.

Peter Connolly: Well, I think the issues are – particular issues like the Fiscal Cliff, are pushing companies to do things that they otherwise wouldn’t do. And in a large sense, if you think about it, the election happened right in the middle of everybody’s budget season. And the day after the election all we could talk about in the press is the Fiscal Cliff.

So now that’s looming at the end of the year and it’s still budget season. People are finalizing their budgets for next year, and they’re looking at what, if I don’t know what’s going to happen, if I don’t know whether the tax rates are going up, if I don’t know whether my medical expenses (I know they’re going up but I don’t know how much because of Obama Care) –

. What am I going to spend next year on travel? And the answer is “less.”

And that’s what makes me the resident pessimist. That coupled with Europe, which I think is coming to a screeching bankruptcy shortly.

Glenn Haussman: Great. So yeah, he’s right. He is a pessimist. [Chuckle] So, Jerry, what do you think? Do you think he’s on target with a lot of these thoughts?

Jerry Cataldo: Well, I think he’s on target in that our customers are unsure of what they’re going to do. And that makes it very difficult for us to understand how we should approach our markets and our customers. It makes it difficult to price. It makes it difficult to determine how aggressive we should be on rate. And, quite frankly, that’s where all the opportunity is; in our industry in most of the markets we’re operating in, demand has been relatively good in most of the markets we’re in.

It’s just that we have not been able to increase the rates to where they should be or were, and with those type of uncertain issues facing our clients, you don’t know how much you could push it or not push it.

Glenn Haussman: Right, right. So what percentage of these clients is actually affected by it? I guess the corporate business, obviously, because you guys – you work out deals to stay at particular hotels.

Peter Connolly: Well, that’s what we’re seeing now is if you go and look at the performance of large group hotels, particularly on the corporate side and on the association side to an extent, hiccup is not there. Group-to-group wash is bigger than it’s been. It actually feels an awful lot like last year in the fourth quarter. Remember last year, the first half of the year was terrific?

Then things get a little skittish when we started talking about the debt ceiling. And then the fourth quarter was like, “Whoo! What happened?”

People didn’t come. And that’s happening again.

Glenn Haussman: Yeah, but I also recall that they pretended to work out the debt ceiling and they just went ahead and raised it. And do you guys feel that the government is just going to pretend to get things done and ameliorate the American public? Jerry?

Jerry Cataldo: Well, I think one of two things are going to happen. There’ll be some sort of compromise to – with a plan. And some event.

Or they’ll kick the can down the road; one of the two. I don’t think – not – I’m not of the feeling that nothing will happen and we’ll fall off the cliff. We’ll see. I mean, unfortunately, our political leaders in recent times have been more focused on their partisan issues than really being statesmen. And so I would have to – if I had to bet today I would tell you it’s going to get kicked down the road a little bit –

Rather than solved in some way. But that, in and of itself, means we’re not going to fall off the cliff in January.

: I do believe that the first quarter, as Peter is saying, kind of will mirror that last quarter of last year where people are sort of uncertain. They’re not really engaged and committed to doing certain things. And hopefully, the economist that you had on your panel here at this conference, who predicted that the third and fourth quarter of next year as well as the beginning portion of the following –

Will be bigger growth and better situation.

Glenn Haussman: So we’ve got all of this uncertainty there. And we could probably go back and forth on this issue all the time. But you guys are a management company, and you’ve got to come in and manage that uncertainty at the property level.

So what are some of the things that you’re thinking that you can help these properties do to excel under these particular circumstances?

Peter Connolly: It’s all about revenue management right now. And it’s about recognizing, when we’re not going to actualize the corporate business that we’re anticipating, either because the bookings aren’t coming that normally do come, or because stuff is washing out we need to manage the blocks very closely so that we can start replacing it with transient business. And you need to do that far enough in advance so that if you’re going to on sale you go on sale by yourself and not through the OTAs.

Glenn Haussman: Right. Yeah because that’ll – you’ll lower your prices and you won’t really – the customer won’t really get that kind of a discount. Just the OTAs will get that kind of a discount. What else are you thinking about, Jerry, when it comes to empowering these properties?

Jerry Cataldo: Well, I think we are clearly focused on trying to make sure that property level management assets that we have are as focused on their markets and their competition and reaching their goals as possible, and in augmenting their activities and their performances with the resources from our corporate level, our home office teams, that we’ve invested in greatly over the last few years to advance a lot of these areas where the property level management just can’t focus on or be considered to have the expertise in all the areas that are needed today.

Glenn Haussman: And that’s true. And we talked about this earlier but, of course, we’re speaking to an audience now that hasn’t heard us before. I find – what I find very interesting is that these mom and pop hoteliers – it’s a family business. So they’re not approaching things necessarily with the rational. They approach a lot of things with the emotional.

And I suppose that’s something that you guys have to come in and get a hold of and say, “Hey, calm down. This is the right approach do to something.” Right, Peter?

Peter Connolly: But it is a very emotional – when you have your own money in the game it’s an emotional investment.

And so, yes, you have to come in and bring a little bit objectivity but also understand that this is somebody’s life blood and you have to make it work for them.

Mark Viola: Do you think the decisions would be different if it wasn’t their personal money? And more – you know, somebody else’s money and them just making decisions about that money? Because we talk about emotional money. That came up a couple times. That’s interesting to me.

Jerry Cataldo: Well, I definitely think that any time it’s personal money in an ownership situation that they’re looking at it from a completely different standpoint. It’s like, “Am I going to be able to send my children to college?”

“Am I going to be able to afford a retirement?”

And things of that nature. So yeah, clearly, the acuity of their vision – their aspect and how they look at their asset is really very acute in terms of the importance of it.

On the other side of the coin we do have a lot of institutional ownership and investors. And those – they’re short-term rewards. Their livelihood of their jobs are also dependent on the performance of a portfolio of assets and so forth. So they’re keenly focused on it maybe in a little bit a different way, but at the end of the day their livelihood is also kind of affected by it. So we see that in that regard too.

And some of those asset managers are very good and they’re understandable and knowledgeable of our industry. And others are more generalists and those are the ones, I think, that struggle when they’re looking at hotel assets and they’re trying to compare it to an office asset or a multi-family asset and they’re trying to deal three or four different ones. And those are the ones that I think have a harder time handling the hospitality assets.

Mark Viola: That makes sense. Thank you.

Peter Connolly: The key in trying to – you have to make your clients understand that you can take an objective view of their business but still view the money that you’re spending as being as much yours as theirs.

Glenn Haussman: That makes perfect sense. All right. So shifting away from all of that, let’s take a look at what you’re seeing 2013 for a top trend or two. It doesn’t have to be financially related, but what are you seeing out there that you think is just coming over the horizon that you need to start thinking about and addressing proactively? Any?

Peter Connolly: There are a lot of big issues. I think that the big challenge of next year that we see right now is we are, as an industry, kind of collectively forecasting an increase of two to three percent of rev par; some place in that neighborhood, all of which is rate-based. We’re really saying demand’s going to be flat. Rates – the only place you’re going to get it.

At the same time, at least in most of the forecasts that I’ve seen, we’re forecasting increases on the expense side, particularly in tighter labor markets that are going to be five or six percent. So we already know that we’re going to be squeezing margins harder next year than we have been in other times.

Glenn Haussman: Whoo! That’s really tough. So while you’re able to push rates, you’re not really delivering as much to the bottom line as you would expect to hope.

Peter Connolly: It’s going to tough to maintain where we are. Where we are is not a bad place right now.

But it’s going to be tough to maintain where we are.

Glenn Haussman: Is there ever a time when we’re going to psychologically feel we’re in a good place again? Because it feels like no matter how well people are doing, nobody wants to have a positive attitude.

Peter Connolly: Well, people like me didn’t feel that good when we were in 2008.

Now we look at those as being the good old days. [Chuckle]

Glenn Haussman: Right. Shame on you! You should have had – you should have had at least a nice weekend out of it or something!

Peter Connolly: Yeah right, Jerry.

Jerry Cataldo: Well, I’m not quite the Eeyore of the group. I honestly think that things will – they cycle. Like the question to the lenders, will they get back to lending or has it fundamentally changed forever? And every time we have a downturn I always hear, “Yes, everything is fundamentally different forever.”

But then when the industry picks back up and things get frothy again, our memories are very short. The lenders’ memories are very short. And competitive drive changes the landscape.

So, no, I mean things change and they’re never exactly the same. But I believe that as things move forward there’ll be a cycle up again that is – and rates will come up appropriately. But until – it’s hard to see that and that’s the problem right now. Everybody may feel that that’s going to happen, but “When?” is the problem.

So I think we’re kind of, right now, sort of in the doldrums a little bit where we know we should be increasing rates but we’re having a hard time doing so. And there’s a little glitch in the road and people panic. And that’s the hard part because all it takes in the market is one property to panic and then you have – it’s hard to hold the disciplines.

Glenn Haussman: Yeah, it really is. And I think one of the things that we have learned, in going back to the fundamentals of change, is that the only certain thing is that everything will always change. So I don’t understand while everybody gets all freaked out by the natural order of the universe and how things change, and how we all have to just adapt to whatever the new rules of the day are. That’s my – that is my summation of the entire experience!

Mark Viola: And you’re standing by it!

Glenn Haussman: I am. I am! Anything else that you guys want to add?

Jerry Cataldo: Well, I think you have to be focused. I think you have to be diligent. I think you have to be willing to roll up your sleeves and work very hard today. I don’t think you can coast in this environment. I think you have to creative and look for solutions. I don’t think you can just sit back and worry.

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