Hotel Leaders Look For The Silver Linings

What will happen this year in terms of distressed properties. Will we see more foreclosures, bankruptcies and closures, or will be it more pray and delay?

Sacco: I don’t know how long delays can continue. Last year at this time we thought the transactions activity would pick up by the middle to the third quarter of 2010. Some people still think by the third or fourth quarter we’ll see some transaction activity, changes of hands in properties, either through workouts or foreclosures or otherwise. Others say it won’t be until 2011. I think it will happen in spurts. It won’t be a windfall of activity that occurs all at once. There will be pockets of activity that will land all of us some conversion and rebranding opportunities.

Pepper: It’s inevitable there will be more distressed assets out there by the end of 2010. We’ve had some meetings with bankers on Capitol Hill and they tell us the FDIC will take more banks in 2010 than they did in 2009. They’re be smaller banks, but kicking the can down the road is about to end. Already we’re starting to see a pickup. I’m spending more time with special servicers than I am with bankers. The distressed assets are coming, and we’re getting a lot of inquiries by special servicers to look at assets. I visited one special servicer who had a room that was empty this time last year but is now filled with 100 people tracking hotels. Hopefully, this will also start the transactional activity up a bit with some assets trading hands.

Stamoutsos: We’re seeing the same thing. You’ll see spurts and some properties going back to the banks. There are some lenders out there saying they want to stave off foreclosure, keep it in receivership as long as I can. A lot depends on the next six to nine months, and if things stabilize some of those lenders will give it some time. It’s going to be periodic and opportunistic. It’s also what lenders can take off their balance sheets, what hits they can take so it will be specific to financing.

In this kind of environment, what is the importance of branding? Can someone make it as an independent in such a tough economic and hotel environment?

Sacco: It’s all market-specific. It all depends on each individual asset. There’s no question people are going to be looking at the power of large brands and distribution systems to help them in the markets where that makes sense. There are other markets where independent hotels can do just fine, but what I’m hearing from the lender and owner community is that branding with a powerful distribution system and powerful brand names is going to be one of the key things in this market.

Wilner: Brands are going to continue to be strong, but people are going to take a closer look at what those brands are delivering for the cost.

Pohl: A customer often chooses a brand because they want to be able to trust it, so the trusted brands will perform well. And certainly independent hotels, which are a brand in themselves, can perform very well in some markets. In these times, though, consumers want to know they’re going to get what they expect when they get there, and brands provide a security blanket that there will be a certain level of consistency and service they
can count on.

Wilner: The reality is that in order to get transactions done, a lender 99 percent of the time is going to require a brand.

Magnsuon: I disagree. I’ve done hundreds of deals where properties have left brands and gone to Magnsuon. We tell them they’re on the same reservations system as everybody else. If you look at customer behavior over the last few years, when they can select cars, consumer electronics or hotel rooms based on transparent criteria, they’re looking for what in essence takes the place of what a brand communicated in the past. Our standpoint is brands are important, but we’re seeing a decline in brand power. 

Anhut: We all have properties that are distressed, and the first call comes from the lender to make sure a comfort letter is in place. Today we’re going through a massive relaunch of our beloved Holiday Inn brand. Some of those have not and will not make the journey, but when that flag goes down, what happens to the revenue? In a distressed scenario, the likely ultimate owner of that hotel is looking not just for the brand and the familiarity but also to the systems that stand behind that and the premiums that brand is capable of driving. So, yes, you can get revenues by being independent and going totally naked on the Internet. It’s a good business model for those properties that want to be more independent and can afford to be and have a much lower fee structure, but the distressed owner is looking for as much air cover and support as possible. Those of us with frequency programs know those customers generate substantial premiums in terms of rate and propensity to purchase plus the sheer volume of room nights those individuals deliver on an annual basis.

Sacco: Look at SPG or other loyalty programs that can help in all segments and all hotel types, be it leisure-oriented, business-oriented or group hotels. Meeting planners who have meetings rotations also look to brands so they can book multiple meetings annually at different locations of that same brand.

Stamoutsos: What we’re talking about here is an asset. Some people are acquiring an asset to make a short-term acquisition to flip it, and others are acquiring for a long-time play. In the economy and mid-scale segment, an acquirer may go independent for a while but when that asset is flipped, that individual is looking for a brand because they’re looking at a long-term position. There are opportunities to stay independent or look at certain independently affiliated brands, but in the long term those individuals are looking for brands.

Pepper: Brands bring many things. Number one is the distribution platform, which can generate 30 percent of your business. It’s also the frequent stay program because people absolutely want their points. Another thing brands bring is service. Let’s not forget we’re helping our franchisees a lot today. Especially as we go international one of the biggest thing they value is training at the property level. At the end of the day, there is also the brand on the building and it does mean something. It brings you business and it brings you rate. Look at McDonald’s. Almost everyone has eaten there but nobody makes a reservation. How did they get there? Because they know the brand. Also, when you walk into that McDonald’s you know how much the value is because there is a price to that brand. Same in the hotel industry. Everyone knows what a Starwood costs, or a Howard Johnson or a Holiday Inn costs. There’s value to what a brand means to the consumer. Even though we all bring a reservations platform and a frequency program and service at the end of the day, a brand still means something to the consumer.

How do the so-called soft brands—Starwood’s Luxury Collection, Marriott’s Autograph Collection, Choice’s Ascend Collection—fit into the brand spectrum?

Sacco: The Luxury Collection is a great opportunity right now for people. It’s a true upscale/luxury play. It allows a property to maintain its independent identity because it’s probably well-known in a certain market but it can also tap into all the powerful distribution systems we offer. So it’s not necessarily competitive with a pure affiliation group. It is a franchise or management agreement, but it allows for affiliation with all the power of SPG. It can be a very powerful tool.

Pepper: The Ascend Collection is an opportunity for all those boutique hotels developed in the past couple of years in these urban markets that were getting killed. It allows them to keep their own identifies but also to build brand awareness. What we’re providing is an OTA-plus. Choice doesn’t have a lot of product in urban locations, but we have a ton of eyeballs looking for hotels in downtown D.C. or downtown Chicago. In downtown Chicago, we had 1.4 million non-price turndowns because we had one Comfort Inn in the market. Here is an opportunity for an independent hotel to tap into a huge distribution platform and drive a lot of business to the property. On top of that, they get access to the frequent stay program. It’s almost like us competing with Expedia. It provides the owner with an opportunity to improve their bottom line by tapping into these huge systems.

Is the AIG Effect still an issue? Are people still shying away from luxury and upper upscale products?

Anhut: We’re making it very attractive rate-wise for consumers to come to the higher-end products, and there is such transparency on the Internet in regards to pricing and peoples’ ability to shop that some people are seeking and acquiring accommodations at higher-end hotels. The question is will that segment ever get back to where it was. It’s not that consumers won’t go there, but will we be able to push price back to where it was? That will probably take a little while. No doubt pricing will rebound. It’s still aspirational; there are still high costs associated with delivering that kind of service at that level. An operator can only go so long without raising prices.

Sacco: Resort travel and specifically luxury travel will always be there. It will come back, but the question is to what degree and how long it will take. Luxury will always be in demand, and you hear the AIG effect a little less than you once did.. The segment is here to stay, and it will rebound in time.

Anhut: That moment in time really affected the group business and the consumer business. And there was a lot of negativity around going to certain destinations and locations. Las Vegas right now is a bargain, so it’s pretty smart to book business in Las Vegas. It’s boomeranged around the other way. You can get to Hawaii for relatively low airfares, and that state is on sale. What makes it more challenging for those of us who have global sales teams is that the buying is now in the hands of the procurement departments, and they negotiate hard.

Anhut: We as an industry let that get totally out of hand. We let the politicians jump on that without pushing back. There were a couple guys out there talking about the impact that had on their employees. You took our incentive trips away. It was mainstream America that really got hurt by this. We as an industry need to get together quicker and respond to those kinds of things more quickly versus allowing the politicians and the press to take control of the thing.

Magnsuon: There was an article in the Wall Street Journal, which reported that several major resorts were dropping resort from their names so they won’t be victims of fall-out from the AIG effect.

Anhut: It will be interesting to see what the unintended consequences of that will be and what confusion it creates among consumers.

Pohl: AIG has had an impact but now it’s economics. Companies just can’t afford to spend, even though rates have come down dramatically, to send people on these trips.

When will the hotel industry and the segments you represent will be fully back to prosperity?

Anhut: I haven’t heard anybody say anything about the industry losing money this year. That’s different from 1992-94 when we lost money as an industry. From the development perspective, clearly this is the shakeout. We’re a cyclical business and we’re at the trough of that cycle, and I don’t know if we’re going to get back to the peaks we were at in ’06 and '07. The game has been recast and we grow from here. As a company, we’re really optimistic because this is a share-grab opportunity for us.

Wilner: You might as well guess whether Bret Favre is going to come back and play again next season. It’s that kind of question. You have to look at how existing hotels will operate versus development. It’s going to take a long time for development to come back because of financing, but it’s going to be the light-bulb effect. Sooner or later, that light bulb is going to go out and you’ve got to replace it. In some of these markets, the product is getting older with less supply being added. How long can that last? Maybe only four or five years.

Pohl: What’s having a positive impact right now is the lack of development and that’s bringing back occupancy for us. The question is when will rate start to move in relation to that. The more we can take advantage in high-demand times to move the rate we’ll see more development. We’re optimistic about 2010, flat to slightly up is everything we’re seeing. The real business returns when we get the rate where it needs to be and development will follow.

Pepper: We’ve seen demand leveling off, and we’re no longer losing demand. When corporate earnings come back and employment comes back, you’ll see more RevPAR increases instead of talking about this slightly down to slightly up or flat. Once we see the RevPAR increases, that’s when we’ll see development. The big question going forward for all of us with development is what is financing going to look like. Today, no one wants to build because there is no financing available, and where it is available, unlike the old days when we were getting 80-percent financing, now it’s 50- to 60-percent financing. It used to be non-recourse; now they’re looking for recourse. How will the developers change to get our supply growth going again? Right now, it’s not very attractive for developers to build, and once this recovery happens it will be interesting to see how these banks look and how we get our debt done.

Stamoutsos: No one has a crystal ball. From the standpoint of the industry itself, it’s a new game out there. You’ve now got to look at these brands globally. It’s forced us to look at China, India, Europe and the Middle East as opportunities. As all our companies become more diverse, you’ve got to focus attention on opportunities in those marketplaces. In North America, how financing will play in the next couple of years will dictate how we continue to come out of this downturn from a development perspective. Things aren’t clear, but we’re at bottom and looking ahead.

Magnsuon: When we look at recovery for an industry, we’re only as strong as the individuals who make up that industry. What I learned from my father, who was a Depression baby, was to always pack lightly for survival and batten down the hatches so you can be profitable in all environments. That’s a culture we’ve imbued to our independents. Looking ahead, we’re looking with our owners to be profitable or at least breakeven in the worst of times so as unemployment abates, supply moderates and the natural laws of supply of demand take effect, profitability goes up. Those things will always happen if you take care of business one day at a time.

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