April 1 2010
ATLANTA—The hotel industry might not be up for an Oscar nomination anytime soon, but that didn’t stop company presidents from making comparisons to this year’s
crop of best picture candidates during a general session at the 22nd annual Hunter Hotel Investment Conference.
Jay Shah, CEO of Philadelphia-based Hersha Hospitably Trust, said the state of the industry is most closely aligned to the story arc of “An Education,” which depicts a young English schoolgirl getting seduced by a suave older gentleman.
“Finally she finds out that the guy was a fraud,” he told a crowd of hotel-industry executives. “Then she returns back to more purposely deliberate path … To some degree, that’s what we’re going through now. We’re paying for the sins of the past a little bit, and we all need to refocus.”
Steve Joyce, president and CEO of Silver Spring, Maryland-based Choice Hotels International, found a comparison with “The Blind Side,” especially given the possibility of future challenges.
“You’ve got to be very cautious of a second dip, of health care costs coming in driving profitability even lower, of lots of different things that could happen,” he said.
Lance Shaner, chairman and CEO of State College, Pennsylvania-based Shaner Hotel Group, said the instability in the U.S. government reminds him of the movie “Inglorious Basterds.”
“The growth of our federal government is alarming,” he said. “Our deficits are alarming. I consider that the No. 1 threat to our industry.”
Lastly and most optimistically, Stephen Schwartz, chairman and CEO of First Hospitality Group, said the industry’s current trajectory is most reminiscent of “Up.”
“I see what’s going on with international travel and our new (Travel Promotion Act). My sense is that this recession will come to the end sooner rather than later.”
The flood that never came
Talk to a banker today, and they’ll likely roll their eyes when you discuss commercial real estate, Schwartz said. “They know the real bubble is coming.”
But unlike past cycles where a deluge of distressed assets flooded the market, Schwartz and the other executives on the panel agreed this bubble’s burst won’t be quite as bothersome.
“You’re not going to see the floodgates of properties that you saw in ’91,” he said.
This time around, lenders are much more willing to refinance to recoup as much value as possible. The industry players have gotten savvier as well.
“The industry is managing through what I call a depression, and they’re doing it very, very well,” Shaner said. “Sure, there’s going to be some assets (that get forced onto the market). (But) we might not see the product that we thought would come this time around.”
Joyce, however, did advise investors to keep an eye on the lower end of the market. The FDIC is going to close a lot of regional banks in the coming year, he said, and when that happens, those real estate portfolios are going to be dumped pretty quickly.
Regardless of what assets do become available, pulling the trigger is going to require more effort than one itchy finger can muster, Shah said.
“We’ve recognized now that most of the opportunities that will be really worth while, they take a lot of hard work to source. These are ones that you have to roll up your sleeves and really make things work out.
“The next several years are going to be the year of the dealmakers,” he added. “… It’s a matter of turning over stones until you find something that works.”
A good place to start? Work with the people you know in the markets you know, Schwartz advised.
Even the best relationships are fruitless if there’s not capital to finance a sale. Fortunately, there is some money trickling back into the market for existing hotel sales, Joyce said. The U.S. government is doing its part as well, pushing for an increase in SBA financing from US$2 million to US$5 million.
But while a trickle might whet the course for transactions, it’s not quite the current needed to push through ground-up construction, panelists agreed.
“For new builds … I think that’s going to be a tough market for the next year to 18 months,” Joyce said.
New brands especially will be vulnerable to this construction freeze.
“When you start looking at a brand that has 20 hotels, you’ve got real problems in terms of you don’t have the distribution footprint, the customer recognition,” Joyces said.
Choice is throwing a lot of energy and effort behind its new Cambria Suites brand to overcome those challenges. For existing properties, the company created a sales force to sell those hotels directly to support owners. On the development side, it’s working diligently to facilitate new deals. But even then times are tough. The company originally planned to open 50 new Cambria Suites in 2010; now Joyce said he’d be happy with 10.
The lack of new development doesn’t lack a silver lining, however. As supply dwindles, the balance is starting to tip back toward a more favorable state of demand. That
will bode well for conversions.
“With somewhat of a cap on supply, the conversions business probably should be pretty robust,” Shah said. “In this type of environment, flags are apt to chance, whether you’re positioning up or positioning to a more value-oriented chain scale.”
Positioning for the future
When asked how First Hospitality Group was positioning itself for recovery, Schwartz said it all comes down to flexibility.
“Stay nimble. Stay flexible. Keep your powder dry. There’s going to be a lot of opportunities coming,” he said.
“The franchisee/franchisor relationship is critical,” Shaner said. “… Choose your franchise relationships very carefully. The companies that respect your investment and will enter into reasonable negotiations … as an investor, as an owner—it’s very important we assess those relationships.”
Shah cautioned attendees against aggressive underwriting.
“The recovery story is going to come along with very attractive growth rates on its own,” he said.
Joyce said Choice is looking to capitalize on something its’ always done very well: conversions.
“Our view is that coming out of this scenario, our position is as good as it’s ever going to get … because all of the action is going to be in conversions because that’s where we excel,” Joyce said. “As they come, as people look to drive more business through their hotels, we’re going to get more than our fair share.”
