A handful of chief executives from top owner/operators convened during the recent BITAC® Symposium 2017 to discuss current industry conditions and provide a glimpse into what they see in the near-term future.
A panel entitled “What Lies Ahead For The Lodging Industry” (featured right to left in photo) Rob Winchester, President and COO, Waterford Hotel Group., Inc.; Rick Takach, Chairman and CEO, Vesta Hospitality Group; Mike Marshall, President and CEO, Marshall Hotels & Resorts, Inc.; and Mike Hines, Chairman and CEO, HP Hotels, Inc.
The executives were in full agreement that RevPAR growth has slowed considerably with each of their individual company projections for the remainder of 2017 and 2018 falling in the 2 to 4 percent range.
From a macroeconomic perspective, Hines referenced the just released PKF report that projects industry RevPAR growth for 2018 to be less than 2 percent. Nevertheless, the group also acknowledged it’s very much a market-by-market proposition.
According to Marshall, “if you look at our hotels in Manhattan we’re getting crushed on average rate because there’s so much new supply.”
Hines, meanwhile, urged both operators and suppliers to understand their clientele as well as their markets. For example, he referenced the recent effects of Hurricane Harvey. “The hotels that are still open in Houston will have a record year coming up because there’s no housing,” he noted.
The group refuted the notion that the potential for reduced RevPAR growth would encourage more cost cutting. “I think that from an operations standpoint that all of us have already probably pulled as much low hanging fruit as possible,” said Hines.
Takach added, “I don’t plan on cutting any costs, if anything I’ll probably focus on growing.”
Winchester pointed out that for the most part, the industry has never gotten back to the previous staffing levels from prior to 2008 and that “doing more with less” is a way of business now. He further noted, “With the 2 percent revenue growth that’s projected and costs that are going to go up greater than 2 percent there’s going to be profit erosion.”
In assessing the current transaction market, the consensus was that it’s tough to get anything done, despite the fact that “interest rates are still real low,” according to Takach.
He added of current conditions, “Unless someone’s in trouble they really don’t have to sell. The fact that they don’t have to sell means seller’s expectations are higher than probably what I would want to pay, especially where we are in the cycle. It’s been hard, I’ve had a few properties under contract—some significant assets—and ultimately the owner or broker would say the PIP is going to be 4 million bucks and by the time I’m done it’s 11 million. So we’re just not coming to terms,” he said.
Hines underscored the point, sharing a recent experience with a Florida hotel the company had made an offer on. “During the due diligence process we found out that there was a 4 million dollar repair that had to be done to the fire safety equipment. We went back and said ‘we’re not going to pay without some significant discount.’ They pulled it off the table and said ‘we’re not going to sell it,’ that they might as well keep it. Our groups look for value adds, and there’s very little of that out there right now,” he insisted.
Takach dismissed the idea that the prospect of 2 percent RevPAR growth could discourage him from being a buyer. “No it doesn’t, I look at cycles. We’re going to go up and down. I’ve studied all the cycles since the ‘30s, if you believe you’re going to go down and come back up it’s really believing in the industry and the underlying fundamentals. We think we’ve done enough sensitivity analysis to say we’re going to be ok. We’re pretty careful to where we think we can ride out a downturn and ride a property to significant profitability,” he said, adding there could be some buying opportunities ahead from funds that have to recycle cash and owners not willing to reinvest in their properties.
Marshall cited another factor. “In ‘07 and ‘08 we had the highest volume of hotels that were sold and a lot of those deals were done with 10-year CMBS money. They’re coming up on the end of that cycle. A lot of people because of the downturn, didn’t reserve as much cash, and they’re facing major PIPs. Unfortunately, because that was the high end of the cycle people paid a lot of money for those properties. Today they may be worth that same amount of money that you paid for it except you’re looking at a $25,000 per key PIP. So that decreases the value of that asset, basically all the equity you put in,” he said.
In light of the consolidation on the brand side, including the Marriott/Starwood merger, the group was asked about consolidation within the management and ownership ranks. Hines cited deals involving competitive companies, such as Aimbridge and Davidson, as prime examples.
“There’s been a huge consolidation of management companies. I’m fielding more calls than I’ve ever fielded before with larger management companies, or in some cases two smaller management companies, wanting to merge and buy us out. We’re looking for different management companies to buy that have a portfolio as well,” he said.
Winchester added, “We’ve looked at some complementary companies that we could potentially merge with or buy. There is consolidation happening.”
Meanwhile, the group agreed that labor is a top priority going forward. “I think our biggest challenge going forward is in terms of the talent in our hotels. Both from a high level side all the way to the management side of it. The hotel business, like the airline business, at some point used to be a sexy, attractive thing to do. But our model and the way we work our people doesn’t necessarily fall into that quality of life the millennials want to live. To me it’s always been a challenge, but it’s a lot different now,” he noted.
Marshall underscored the point. “If you think about all these new hotels that are getting developed that just shrinks the pool of talent. Every time a new hotel opens up you’re stealing from someone else’s hotel to staff them and that causes rising wages, and all kinds of other things. They’re not teaching hospitality in school, it’s not a sexy job,” he asserted.