Owners profess the value of cash flow as growth shrinks
 
Owners profess the value of cash flow as growth shrinks
30 MARCH 2018 7:38 AM

A panel of large-scale investors in the hotel industry shared their insights at the Hunter Hotel Conference, saying it’s important not to overlook the impact of cash flow for the business.

ATLANTA—To say “cash flow is king” is so rote, it’s a cliché. But some large-scale hotel investors believe the cliché has never been more true or vital for the industry than it is right now.

Speaking during the “State of the industry” panel at the recent Hunter Hotel Conference, the importance of cash flow was a recurring theme among panelists.

Mit Shah, senior managing principal and CEO of Noble Investment Group, said the desire for strong and predictable cash flow is what led his company to focus on select-service hotels.

“Since 2008, we’ve been exclusively select service because it’s more predictable,” he said. “The business is just about cash flow.”

While there are always different metrics to consider and concerns about slowing revenue per available room growth or an impending downturn, Shah said his company’s success through the last recession shows the logic behind prioritizing cash flow. And there is no secret behind what makes it work.

“That math is readily available; it’s not proprietary,” he said. “When you think about it, the investment strategy is simple.”

Suril Shah, managing director and head of U.S. hotels for Starwood Capital Group, agreed that a focus on cash flow is the right tact for hotel businesses, which he said is reflected in his company’s investment in things like the InTown Suites extended-stay brand and Yotel. He said there’s huge potential in the extended-stay segment when looked at from a cash flow perspective.

James Merkel, CEO of Rockbridge, said he’s come to see the importance of cash flow more and more over time.

“I spent so much time thinking about replacement costs when I started,” he said. “But I think about it far less now. Now it’s really a function of cash flow and the cash flow potential of an asset. I missed so many opportunities thinking about replacement cost.”

He said the key to this line of thinking is recognizing hotels are a long-term growth business, and companies must remain well capitalized to ride out potential storms.

An institutional bias?
Panelists pointed to the pending creation of a midscale hotel real estate investment trust as part of La Quinta Holdings’ upcoming spinoff between its franchising/management business and it’s owned real estate assets as the test case for if public investors are as interested in cash flow. The resulting REIT, called CorePoint Lodging, will be something the market hasn’t seen in a matter of decades, Mit Shah said.

“That story is a cash flow story,” noted Mit Shah, who is chairman of La Quinta’s board.

Suril Shah said he is on board with the strategy.

“I think it’s a brilliant story,” he said.

Tyler Morse, CEO of MCR and managing partner for Morse Development, questioned whether Wall Street is really thinking along those lines and whether those investors want the type of assets CorePoint is offering.

“Wall Street has an institutional bias against (select-service assets),” he said.

He said worries about the down cycle and the reservation system backing CorePoint’s hotels, which initially will all be part of the Wyndham Hotel Group family of brands if that deal is completed, could cause concerns among some on Wall Street.

“It’s a tough equation to get through with that institutional mindset when it’s not (Marriott or Hilton’s) reservation system powering assets,” Morse said.

Cycle concerns
While much of the discussion was flavored with the potential for a downturn at some point in the future, panelists had a hard time pointing to exactly when that might be. Suril Shah said it’s hard to divine exactly what’s coming in the future.

“I think in this business and with our funding model ... you can only look out 24 months,” he said, noting that he thinks “2018 and 2019 will be good, but after that we’re just making it up.”

Still, that doesn’t mean he doesn’t have worries.

“I’m certainly nervous because we’re 96 months (of consecutive RevPAR growth) in now,” he said. “So you have to find differentiated ways to put (capital) out.”

Morse said one of his top concerns at the moment is the difficulty in doing deals as many fear a downturn is coming in the relatively near future, even as no one is sure what the catalyst might be.

“There is a lot of fear that we’re at the peak,” he said. “And smart people don’t want to do a bunch of business at the top (of the cycle).”

He said the solution to that problem is to narrow the focus on individual opportunities as opposed to keying in on the macro picture.

“We’re not worried too much about where the market is overall,” Morse said. “We want to find good deals that work fundamentally, one by one.”

Mit Shah said at this point in the cycle, when growth is slowing and owners and operators are being pinched by growing costs in their efforts to maintain profit margins, it behooves the largest and more powerful companies in the industry, particularly Marriott, to make changes to protect profits across the industry.

“I’m excited about the opportunity … for brands to actually use their weight, specifically Marriott, to do things transformational for our industry, specifically around revenues,” he said.

As one idea, he suggested the hotel industry could operate more like the airline industry in requiring full prepayment for stays and offering credits to be used for future stays instead of refunds in the case of cancellations. He said this strategy could also be used to funnel more booking to direct channels, by offering less flexibility on third-party booking platforms.

“That’s transformational,” Mit Shah said. “We can talk about amenities, but to really change the landscape, the opportunity is there, and I think the intent is there. The risk on the flip side is we don’t move fast enough.”

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