How ’bout this: IREFAC panel displays optimism
 
How ’bout this: IREFAC panel displays optimism
28 JANUARY 2010 7:42 AM

Stopping short of saying a recovery has started, hotel-industry executives serving on a panel at the Americas Lodging Investment Summit believe there are signs the worst has passed.

SAN DIEGO—As the usual zingers and barbs flew through the air during Wednesday’s traditional Industry Real Estate Finance Advisory Council panel at the Americas Lodging Investment Summit, one thing became perfectly clear: There’s some optimism brewing among a group of industry executives who are often miscast as having cantankerous, cynical personas.

“I am shocked at the last eight to nine weeks that I have had no bad news, and I’m seeing an increasing amount of good news,” said Laurence Geller, president and CEO of Strategic Hotels & Resorts. “(At the) Four Seasons (Washington) D.C., I am astonished at the level of business and the level of spending that’s coming back. I’m pleased with what I’m seeing in group pace for the entire portfolio.

“I’m feeling much better than I was two or three months ago,” he added. “If things stay the same, I think we’ll have a better year than expected.”

The booking window

What is becoming clear to Geller and other IREFAC panelists is that the booking window is tight. Geller said the in-the-month-for-the-month business is stronger than he has seen in any cycle—and that it means consumer confidence is beginning to show.

Charles Henry (left) listens to Jackson Hsieh make a point during Wednesday’s IREFAC panel.
“In-the-month-for-the-month … it’s scary doing business that way without seeing anything on the books (for long-term business),” said Charles Henry, president of Hotel Capital Advisors. “It’s going to come back faster than we think, because it always does.”

Starwood Hotels & Resorts Worldwide CFO Vasant Prabhu said 2010 will depend on late-breaking business.

“That is hard to predict,” Prabhu said. “It’s been better than people expected in the last few months … (but) it can evaporate as fast as it shows up.”

Mitesh Shah, senior managing principal and CEO of Noble Investment Group, said business transient activity is gaining traction. He said that at this point, the group business approach for his company’s hotels is to simply get the business to establish a base of occupancy—even though it’s clear that group rates will drag in 2010

Richard Solomons, CFO and head of commercial development for InterContinental Hotels Groups, said he sees occupancy stabilizing this year.

“Look at the linkage of hotel rates and (gross domestic product), and that link has been broken,” Solomons said. “The only concern is it’s dangerous to think governments are going to be rational and banks are going to be rational over the next year or two.

“It’s right to be cautious. It’s right to be ready for the upturn. (But) be ready for it to be a little slower,” he added.

Lamenting rates

The panelists lamented the deep average daily rate discounts that have dominated the industry during the past 12 months to 18 months. Geller said there’s a need for even more sophisticated revenue-management systems than currently exist.

“Pricing reductions have been way more than they should have,” he said.

Henry said the best hotels in any particular market need to show no fear in raising rates as 2010 unfolds.

“We should be pushing rate right now,” Solomons said.

RevPAR growth projections

Just about every panelist said they believe there will be positive year-over-year revenue-per-available-room performances at some point this year. Following are the projections for which month that will happen:

  • Mark Elliott, senior managing director for Hodges Ward Elliott: October.
  • Geller: May.
  • Henry: September.
  • Jackson Hsieh, managing director, global head of real estate lodging & leisure for UBS: It will not occur this year.
  • Prabhu: It will happen this year, but did not predict a specific month.
  • Shah: August.
  • Solomons: said he hopes so, but declined to be more specific.
  • Arne Sorenson, president and COO, Marriott International: mid-year.


Following are highlights of how the panel addressed other key issues that the hotel industry is facing:

Big deals and mergers & acquisitions
Hsieh said there will be more debt resolution in some of these high-levered deals.

“I don’t necessarily see wholesale acquisitions yet,” he said. “The capital structure needs to be resolved.”

Single-asset transactions
Elliott said transaction activity has increased since Labor Day.

Richard Solomons of IHG tells the audience that it’s hard to imagine governments and banks being rational as an economic recovery tries to take hold as Mitesh Shah looks on during Wednesday’s IREFAC panel.
“Since Thanksgiving, pricing has moved 5 (percent) to 10 percent upward,” he said. “Transaction volume will triple this year from ’09, but it will be down two-thirds from ’07.”

“The word for this conference is optimistic, but it’s also frustration,” Shah said. “Where transactions will come from is not apparent.”

The big question of 2010 involves whether transactions will simply be recapitalization, Shah added.  “Will an asset really trade?” he said.

Property values
“A year ago people thought the definition of distress was ‘I want to pay a high (capitalization) rate on depressed (net operating income),’” Prabhu said. “What prices will a financing market support?”

Elliott said there is some clarity on values beginning to show.

“The two saving graces are the operating efficiencies are such that your compounding cash flow will grow dramatically, and there’s enough capital out there that it will price in,” Elliott said.

Product-improvement plans
Hsieh said one of the big issues coming to light is how much of a property improvement plan prospective owners will be willing to absorb. Owners likely will defer property improvement as cash flows remain stifled, he said.

“When a new buyer comes in, the PIP cost to actually get the new buyer to come in and take it is interesting,” he said. “Brands, or somebody, will have to put money in.”

Henry defended the desire of brands to push PIPs during a down cycle.

“Brand standards never put a hotel into bankruptcy,” he said. “To point at any of these and say ‘this is causing a default’ is absurd.”

Geller said brands have been particularly pragmatic during the past 18 months—he hasn’t seen this in the five cycles he has been through in his career.

“No owner is going to pony up incremental equity if he thinks he’s going to be out of it in a year’s time,” he said.

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