What are Owner Expectations in Today’s Market?
Are Hoteliers Ready to Rebound in 2011?

At last the hospitality industry is seeing the light at the end of the tunnel (hopefully). However, there are many serious concerns yet on the horizon. Regardless of where hoteliers are, maintaining cost control during a time of lower occupancy and ADR remains at the top of the list for owners.

Today there are basically two owner situations: There are those with recently purchased assets who are now repositioning to go forward. And then there are the owners who refinanced or purchased hotels during the upside of the cycle and are now grappling with debt-service issues.

But in either case, asset managers are starting to peer beyond the rubble and to begin planning for the future. There is life after the financial meltdown, and business continues to go on.

The Biggest Challenge: Bringing Back Rate as Occupancy Returns

Many asset managers are reporting that they had much more control over rate in 2010 than they did in 2009. The biggest challenge they face is all about bringing back rate as occupancy returns. And room demand is surely coming back, thanks to some aggressive rate programs and discounting.

The bottom line is that all the fundamentals are moving in the right direction and prognosticators are uniformly upbeat. Smith Travel Research predicts that all three key industry metrics will rise in 2011: occupancy will go up 1.6 percent to 58.3 percent; ADR will increase 3.9 percent and RevPAR will be up 5.5 percent. Lastly, the supply/demand equation is much more favorable, with projected demand up 2.5 percent and new supply of hotel rooms up by 0.9 percent.

How Have the Various Stakeholder Roles Changed?

As a result of the distressed hospitality landscape during the past few years, the relationship between owner, asset manager and third-party managers has dramatically changed. In many cases all of the stakeholders have become more involved and innovative in managing operations.

One industry executive with a large real estate investment trust summed up today’s overall situation succinctly: “During the present economic environment we are seeing better alignment between the owner, asset management and hotel companies. However, the recessionary climate is also causing our business model to permanently change. One of our biggest challenges is managing the cost growth as business levels grow. Our hotel managers have been very good in managing costs relative to the lower occupancies and ADRs.”

Troy Pentecost, Executive VP and COO for FelCor Lodging Trust, has a unique point-of-view in that they are the owner and asset manager for all of their properties:

“With the drop in revenue due to the economy, the owner and asset managers have taken a more involved approach to cost reductions,” said Pentecost. “This has really forced the owner and third party managers to work closer in guiding the hotels in the right direction through the downturn. They perform a major analysis and evaluation of staffing, with a high level of focus on the essential cost needed to drive the most revenue and market share possible for the hotels—while maintaining the required guest satisfaction.

“The brand managers for FelCor Lodging Trust have done a very good job of managing the cost,” continued Pentecost. “There was and continues to be a very open atmosphere to step out of the normal box for hotel operations, try new ways of operating in improving cost as well as—most importantly—productivity with staffing. At the end of the day, as an industry we cannot save our way to the bottom-line; we must always make RevPAR and market share improvement the priority to drive revenue to be successful.”

More than ever before, today’s hoteliers must perform a delicate balancing act between managing debt load, RevPAR, cost control, service and capital improvements (just to name a few).

“Over the last several years FelCor has focused the majority of our attention on the debt load, RevPAR and cost controls,” said Pentecost. “However, all of these areas are inter-related and important to maintain a successful business. You need a good balance sheet to take advantage of continued growth, which means you must have strong RevPAR improvement and cost controls to have more profit for capital improvements, and in turn to drive service and quality of the asset for solid returns.”

2011: Is it Time to get out the Checkbook?

Regardless of the type of economic landscape we find ourselves in today, owners are still focused on the bottom line, especially as it relates to the underlying investment. “As an owner in today’s market, what we pay the most attention to is the rate of profitability generated by our hotel compared to the investment in the hotel,” said Fadi Ramadan, VP, Asset Management, for DiamondRock Hospitality Company. “We’re also looking for better market penetration and improved RevPAR. Additionally, we expect moderate increases in cost necessitated by volume increases. In other words, we expect that the current leaner operating models will continue in the future.

“The present economic environment has brought us owners and operators closer and generated, in most cases, better cooperation,” said Ramadan. “Owners have seen more flexibility on the part of management companies and we expect that to continue. In this kind of market, no management company will be successful if they are being rigid and inflexible.”

Though most industry experts agree that there will be more pressure to pursue capital expenditures, each financial area is mutually dependent upon the other. “What we are most focused on depends upon the particular property, and each hotel is different,” added Ramadan. “It is always RevPAR and cost controls that drive profitability, which in turn allows for servicing the debt load. Likewise, capital improvements are justified when you have profitability, so everything is tied together.

“Our hotel managers have been pretty effective in managing costs relative to today’s lower occupancies and ADRs, some more so than others depending upon the circumstances,” continued Ramadan. “Overall, management has been responsive. We remain cautiously optimistic and expect that increases in staffing will come about only when business volume increases come back.”

Order of the Day: More Cooperation and Greater Efficiencies

The recurring sentiment among hospitality executives during the last few difficult years is that there is a much greater appreciation for asset managers and owners. “Asset management is part of our business today; this can add value to the investment of the hotels,” said Gerald Chase, President and COO of New Castle Hotels & Resorts. “As long as everyone is moving to improve value, relationships can build this up rather than see it decline. We have seen consultants, asset managers and experts support owners and management companies during every recession. It is part of the cycle.”

Nearly everyone agrees that capital improvements will get some much needed attention in 2011, yet this is still very dependent upon other factors such as debt load, cost control and service. “All these areas are important and all need continued focus and management,” said Chase. “We need to move rate in our hotels over the next several years to return value to the business. Likewise, service is more important than ever.

“We can expect properties to start investing more in capital improvements because they were forced to defer during the last several years,” continued Chase. “The brands will also decrease waivers for capital improvements on PIP’s (property improvement plans).

“I think we all have done a pretty good job over the last two years,” added Chase. “The hotels are more efficient than ever before. We are more effective in using technology for improved productivity and managing costs to changing demands in business. The challenge will be to continue this discipline as we start increasing occupancies and ADR.”

Conclusion

In 2011 nearly everyone agrees that rates must come back. And flexibility and cooperation among the key stakeholders will continue to be a critical part to success in the hospitality industry. The good news is that hotel managers have been consistently effective in managing costs as they relate to today’s lower occupancies and ADRs.

The biggest question mark will be whether or not hospitality organizations will stick with the new efficiencies that they have gained when demand comes back.

Many hospitality organizations began to see an uptick in demand months ago and began ramping up; consequently they are better positioned for the rebound. During the downturn many lessons were learned and greater efficiencies have been achieved with fewer resources. Historically what happens with everyone when the economy turns around is short-term memory loss.

The hospitality industry is cyclical and each decline has always been followed by a future climb. And the smartest companies out there have already been setting the stage for future success.