LOS ANGELES—Good, but not great.
That’s how executives from some of the world’s leading management companies discussed the future outlook for the hotel industry during a breakout session Wednesday afternoon at the Americas Lodging Investment Summit.
“The situation is improving. Does it improve as rapidly as we would like it to? No,” said Michael George, president and CEO of Crescent Hotels & Resorts, which operates 69 properties in the United States and Canada.
Rate remains the biggest area for improvement, the panelists agreed during a session titled “The view from the boardroom—a focus on management companies.”
“We’re hitting occupancy levels, and we have quite a ways to go in our belief on rate,” George said.
Interstate Hotels & Resorts, which saw a 7% increase in revenue per available room across its portfolio of nearly 70,000 rooms, will see that growth slowed but is still driven primarily by rate, CEO Jim Abrahamson said.
“The better year in 2013 should come not with this stout RevPAR growth but it will be largely (rate-driven),” he said.
“I think it’s going to be a good year but not a great year,” Abrahamson said, while pointing to the lingering threats from what he dubbed “known unknowns,” such as the impact of health-care reform implementation.
While the robust transient segment largely has shielded the U.S. hotel industry from several of those macro factors, the group segment has left something to be desired, said Steve Rudnitsky, president and CEO of Dolce Hotels and Resorts.
“Group has not come back to the level in North America that transient has either by occupancy or by rate. There’s still kind of a halo effect of bookings that occurred during the downturn that we’re still sort of cycling through that is depressing rate to some extent,” he said, adding that booking pace has been up double digits in the first quarter and approximately 5% for full-year 2013.
Dolce, which has more than 25 properties worldwide, is a business-oriented brand that specializes in training and corporate events, Rudnitsky explained.
The boutique segment is in the early stages of recovery, according to Mike Depatie, CEO of Kimpton Hotels & Restaurants, a boutique brand with more than 50 properties in the U.S.
While demand has returned to most markets, he pointed to an uptick in supply—fueled by the availability of more financing—which will make the competitive landscape that much more volatile and challenging.
But with challenges come opportunities, as each executive pointed to a more active transaction market as a key driver to their own portfolio expansions.
Dolce’s Steve Rudnitsky said the group segment still has a lot of room for growth.
“Our signings are in direct proportion to changes in ownership,” Abrahamson said.
Interstate plans to sign approximately 50 new management contracts each year, with additional expansion coming in the form of acquisition and consolidation, he added.
While growth opportunities exist in the states, Abrahamson said Europe will prove a “sizeable play” in 2013, 2014 and 2015.
The sessions’ other panelists were a bit more reserved in their growth projections. George, for example, stressed that Crescent’s growth is tied to the aspirations of their client base.
“Our growth is targeted solely to certain clients that you want to do business with,” he said. “ … We’ll add appropriately, but most important, we want to keep happy the clients that we have.”
Because Dolce is a brand unto itself, Rudnitsky said the company is restrained to only add assets that fit within those parameters.
“If you are truly your strategic platform of building a branded management company … then you stay true to it just that way and you don’t waver on the assets that you bring into the portfolio,” he said, adding Dolce is pursuing at least some growth through ground-up development.
Kimpton is taking a similar approach, Depatie said. The brand provides much more value to developers of new projects as opposed to taking over existing boutique assets where there is little value to be added, he said.
Sophistication and savvy
Management companies have done a much better job of driving flow through to the bottom line, the panelists said.
And at the same time, owners have displayed that savvy outlook when managing their managers.
“We are seeing much more active, very astute ownership today,” Abrahamson said.
The caliber of private equity and real estate investment trusts buying their way into the hotel sector are much more demanding when management companies exert a “laser focus” on the pro forma, he added.
“There’s just a lot more drilling into the substance of the operating company. If you’re good, you can answer it and you can give comfort,” George said.
REITs, for example, don’t just ask about how a management company will operate their asset. They now ask about their other investments, leverage, turnover ratio and more, he said.
That level of scrutiny is weeding out a lot of the less experienced operators, George said.
It’s also demonstrating the level of customization that is required to satisfy the needs of owners, Abrahamson added.
“The big thing they want today is flexibility because most of the owners are transactional,” he said.