The current hotel industry cycle is nine years deep, but hotel owners and managers in the Lodging Industry Investment Council remain vigilant when it comes to boosting margins and profitability, despite when the cycle may turn.
LOS ANGELES—With nine years of generally positive growth and counting in the current hotel industry cycle, hotel owners and operators still are finding ways to capture value and margins for their properties while hedging against the eventual downturn.
Members of the Lodging Industry Investment Council met prior to the start of the Americas Lodging Investment Summit to place the current nine-year cycle in context and talk about what’s next.
What keeps the cycle going
While strong demand trends keep the cycle chugging along, most LIIC roundtable participants said average daily rate squeezes, market variability and non-fixed costs are challenges.
“Our industry does have very strong macro demand trends—people are traveling, aging Boomers have more disposable income and are moving around more,” said Robert Leven, CIO of Procaccianti Companies and TPG Hotels & Resorts. “Those dynamics on the demand side will continue to be really good. What concerns me is … the squeeze on ADR growth because we are facing a lot of cost issues.
“When you see the anemic ADR growth we had in the peak of the cycle, and now we’re further along and supply is starting to catch up, what is ADR growth going to look like under that scenario over the next couple of years?” he asked.
Bill Blackham, CEO of Condor Hospitality Trust, said that from his perspective, “the largest concern isn’t pricing,” but rather real estate taxes.
With those variables in mind, maintaining profit growth and even margins under current conditions is top of mind, LIIC members said.
“If you have labor costs going up 4% at minimum and you have ADR going up 2%, that’s stagnation,” said Prism Hotels & Resorts President and CEO Steve Van. “A lot of our hotels would be happy to just stay where we are, given the pressures from labor and real estate taxes.”
Brad Rahinsky, president and CEO of Hotel Equities, said that for his company, working with first-time hotel developers in the current hotel cycle has created “an opportunity from an operations standpoint” to come in and boost margins by installing strong infrastructure and good operating efficiencies.
Gary Gray, chief investment officer of Twenty Four Seven Hotels, agreed that differentiation can go a long way toward continuing to increase a company’s value proposition this far into a deep cycle.
“The opportunity for us with (a lot of our owners from outside the hotel industry) is to be a full-service platform on the ops side and the development side,” he said. “We’re more than an operator; we’re a consultant to them as they come into the business and they can rely on us.”
Scott Socha, president of Delaware North’s parks and resorts business, said that for his company’s U.S. hotel portfolio, which is concentrated largely in resort and national park locations, creating new revenue-building experiences has been a great way to keep value going.
“There’s only one owned hotel in our portfolio where we haven’t added a tour business to that hotel,” he said. “Everywhere we’ve done it, we’ve been pretty successful. Guests are looking for that experience.”
To hear more about the 2019 business priorities for LIIC members, watch the video:
Preparing for an (eventual) downturn
Participants in the LIIC roundtable discussion were pragmatic about preparing for the next cycle shift.
They discussed how the current transactions environment may be an indicator of things to come.
“If you’re patient and not over-leveraged, and if you hold on to hotels, they’ll come back—quickly, before new supply comes online,” said Mike Cahill, CEO and founder of HREC Investment Advisors. “It’s just that type of business.”
He pointed out that many hotel properties have changed hands two or even three times for investment profit in the current cycle, thanks to its length and strong fundamentals.
“This could be a triple-flipper economy, which hasn’t ever happened,” he said.
Still, it’s not a great time to buy now, several participants said.
“It’s a really tough time to buy,” Schwartz said. “We’re trying to be very disciplined in what we do. There’s a lot of capital on the sidelines.”
Blackham pointed out that not everyone is that disciplined, which leads to bid-ask spread in some situations.
Rahinsky said Hotel Equities prepares for the next downturn with its budgeting processes.
“Both at property and corporate level, we put together a couple different (budget) scenarios—a what we believe will happen, and a worst-case,” he said. “What’s becoming clear and concerning is that as we’re all running lean and in some cases to the bone, there’s not a bunch of variable costs anymore.”
Gray said Twenty Four Seven Hotels has been “very focused on costs and on trying to be creative.”
Though the company is laser-focused on costs and has “scaled back some expectations with our owners in terms of what topline performance will look like from 2019 forward,” he said, there’s still room to cut costs while even improving guest satisfaction.
He cited the company’s partnership with Uber. Many of the company’s hotels have an Uber account instead of a costly airport shuttle van, leading to savings on equipment, insurance and payroll.
“The net result is lower cost for us, but better than that, guest perception is much higher,” he said. “We have something that’s been a liability in the past that’s now a positive.”