Joel Ross makes a case for why RevPAR is completely irrelevant in projecting growth in the hotel industry.
The pundits had it totally wrong in 2008, and they were off by more than 50% this past January. Still, they think they can project 2017 when the Federal Reserve can’t even figure out what the economy will be doing 60 days from now.
The industry continues to focus on revenue per available room instead of cash flow and actual value. It ignores what the impact of capital markets and the world outside the hotel industry will have on hotel cash flow and value. For example, RevPAR is unaffected by changes in minimum-wage laws. It is unaffected by interest rates. It is unaffected by regulatory rules, under which banks underwrite hotel loans.
Data providers at conferences—and in articles—continue to focus on RevPAR as though it is a section from the Bible when, in fact, it is just a number that varies week to week, varies by full month versus weekly data in the same month and is affected by when a holiday falls. None of this matters.
When you build or buy a hotel, it is no different than investing in any other asset or operating business. You invest to earn a cash-on-cash return, and a sizable capital gain on sale. Why else make the investment? RevPAR is irrelevant to this analysis. It is simply the top line of a projection spreadsheet, but it is the bottom line of cash flow and the equity required, and equity projected to be recouped on sale that determines if you decide to invest and how much.
Value comparisons depend on the debt markets and the view of the economy by potential buyers. Risk assessment is the determinant of potential returns, not RevPAR. It is these factors which help derive the cap rate applied to cash flow. It is cash flow that lenders analyze when determining the basis to which they apply debt yield. They do not lend on RevPAR, they don’t get repaid out of RevPAR and returns to investors are not paid out of RevPAR.
It all depends on cash flow, the size of the property-improvement plan and the general capital markets and economic conditions—existent and projected. Instead of wasting time focusing on RevPAR, speakers and analysts should focus on things like wages, regulation, online-travel-agency commissions, how the Federal Reserve is likely to act, debt market underwriting, asset prices versus true value, competition from Airbnb, and geopolitical and U.S. political and social trends.
While some of these topics get covered in individual panels generally in surface terms, they are never woven together by anyone to form an analysis of future cash flow and true value projections at opening conference sessions and data sessions.
RevPAR can be increasing, and cash flow and value decreasing—as is the case right now. RevPAR is up a bit, but values are down 10% to 15%. So what is the point of talking about RevPAR when you just lost 10% to 15% of your investment value?
A further example of how hotel industry leaders have no clue: One CEO at the opening session of the Lodging Conference said, in essence, “We need to stop Airbnb. We did not stop the OTAs, but we have to stop Airbnb.” That may be one of the most ignorant statements ever made by a hotelier.
Airbnb is the most successful hotel company today because the brands simply don’t get it. They do not provide guests with a value proposition, which is why Airbnb succeeds so well—going from an air mattress six years ago to the fastest growing hotel company six years later.
That statement by that CEO, and others, demonstrates that people in the hotel industry who claim Airbnb is no threat are completely missing the point that the industry is not competing effectively against the OTAs or Airbnb. If they were, neither of those businesses would exist.
There was a gross failure of the brands to deliver value and differentiation, which created the gaping opening those two filled. Now even Wall Street firms are suggesting their executives use Airbnb to save money, but get good accommodations.
The hotelier’s statement shows he has no idea what is going on in the market, nor how to effectively compete. The brands think the answer is opening more new brands, which compete with existing franchisees so that the brand can show growth to Wall Street instead of focusing on improving its existing product to effectively compete with Airbnb and the OTAs. It is like a mouse running on a wheel—round and round to eventual exhaustion, but going nowhere.
The franchisee who has capital at risk ends up competing with the brand he pays fees to for what he thought was impact protection. The brand has no capital at risk. It makes no sense. And you wonder why values are decreasing and why Airbnb is causing average daily rates to be constrained in certain markets.
So what you have is the big brands competing with their franchisees and completely failing to deliver a competitive value product to consumers and failing to deliver an effective marketing online experience, thereby putting the franchisees’ capital at greater risk. Then the pundits pile on, talking about RevPAR, which has nothing to do with what is happening to those who risk their cash by investing in hotels.
The appraisers top it off by producing make-believe reports, which are just an aggregation of unsupported assumptions to make it appear as if values are going up and up. As someone who has no agenda nor capital at risk in hotels, and who is involved in a variety of other types of real estate and operating businesses, I have a very different but objective perspective, which I am certain will be rejected by most readers.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real estate financing firm he launched in 1981. A Wharton School graduate, Ross began his career on Wall Street as an investment banker in 1965. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage, and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. Ross also was a founder of Market Street Investors, a brownfield land development company. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross served two tours in Vietnam with the U.S. Navy.
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