Northcott Hospitality’s Paul Kirwin and Dave Johnson of Aimbridge Hospitality have some concerns about the hotel industry’s future.
PHOENIX—Hotel owners always have plenty on their minds and with a volatile and unpredictable economy to deal with, what keeps them awake at night is as varied as the hotel industry. That was evident during Wednesday’s “Hotel Owners Check In” panel during The Lodging Conference.
Four owners and an owner’s representative gave five distinct descriptions of what causes them to toss and turn:
Paul Kirwin, president and CEO of Northcott Hospitality and AmericInn, said a double-dip recession is his nightmare. “If demand starts going backwards, it could happen,” he said.
Dave Johnson, president and CEO of Aimbridge Hospitality, said the political climate is a sleep depriver for him. “Washington, D.C. Our job is tough enough for our industry and we could use some support with them (in Washington, D.C.) standing down,” he said. “Them getting their act together—both parties—to get corporate America some confidence to open the coffers.”
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Lou Plasencia, chairman and CEO of The Plasencia Group, which among its services offers asset management expertise to owners, also had a political sentiment. “Barack Obama. I don’t know what’s coming out of the White House,” he said. “Usually gridlock is good. It’s not good anymore.”
C.A. Anderson, president and COO of The Dow Hotel Company, said the far-reaching effects of sovereign debt issues in Europe are scary and will ultimately be what will set the tone for the United States. “If we can’t work it out at the global level, we’re going to get absolutely decimated on the micro level,” he said.
Mark Laport, president and CEO of Concord Hospitality Enterprises: “We are at a time of unprecedented opportunity. I spend a lot of time awake thinking about how I can seize the opportunity.”
Other key issues facing the industry range from the rising costs of doing business to debt maturities to increased expectations of property-improvement plans to acquisition opportunities.
Laport said the rising costs of doing business coupled with slowly improving revenue per available room are not a good combination.
“We’re stressed every day to increase margins,” he said. “Competition is as tough as it’s ever been.”
Laport added that many markets juts haven’t recovered as he thought they would, and with fewer people looking for rooms in those markets, driving margins has been a challenge.
Anderson said employees are getting more expensive, too.
“We’re also facing benefits creep,” he said. “It has to do with good people deserving additional things and those things cost money.”
He cited the city of Seattle’s recently passed legislation that requires paid days off for medical and personal time as an example of unneeded cost escalation. “It is ridiculous,” he said.
Dow Hotel Company’s C.A. Anderson makes a point while Mark Laport (foreground) of Concord Hospitality listens during a “Hotel Owners Check In” panel held during The Lodging Conference.
Property-improvement plans provide plenty of reasons for owners to not be thrilled.
Anderson also said the pro-union stance by the Obama Administration has produced challenges to keep operating costs under control.
The state of financing—or lack thereof—was prominent on the panelists’ minds.
Plasencia said there is US$25 billion of commercial mortgage-backed securities financing for hotel assets that will need to be refinanced in the near term.
“The extend-and-pretend loans are sitting behind the dam,” he said. “The opportunity is there, a lot of it has to do unfortunately with debt.”
Plasencia said he doesn’t know when the dam will break, but a number of special servicers know they need to start moving assets.
Johnson said Aimbridge finds itself in a position of having some debt maturing soon, and it’s something that’s not easy to deal with in a volatile economy.
“Debt markets are extremely schizophrenic,” he said. “You think you have a deal … then think, ‘Should we wait or should we not?’”
Kirwin said the situation has created a steady flow of distressed opportunity buys.
“For some owners, after a certain period of time, if (their) market hasn’t gotten a lot better, the end of the line has come for that owner—and it amounts to a short seller,” Kirwin said.
Brand PIPs were among the most talked about topics during the conference, and they came up during this panel. Johnson said the forcefulness to complete PIPs varies by brand.
“They realize there’s been no capital spent on these assets for the last five years,” he said. “What’s benefitted them is there’s been a lot of change in ownership, which triggers a PIP.”
With 42 Hilton Worldwide products in its portfolio, Johnson said Aimbridge appreciated it when Hilton took a forceful stance on PIPs when times were tougher than they are now.
“The PIPs have strengthened in what the brands are asking for,” Johnson said. “They’re playing catch up.”
Anderson said PIPs are going above what normal brand standards call for and affecting items such as computer systems and the method of Internet connectivity.
“Everything they ever wanted, they’re asking for now,” he said.
Concord’s Laport said PIPs hurt many owners when it comes time to sell a hotel.
“When it is sold, the PIP is triggered and it costs more than we originally anticipated,” he said. “When it’s time to harvest the value we think we’ve accumulated over time … it does hurt in terms of capital appreciation, which we all worked so hard for.”
Plasencia said there are plenty of opportunities to acquire hotels in secondary and tertiary markets. He said markets such as San Diego; Austin, Texas; Tampa, Florida; Nashville, Tennessee; and Baltimore are prime hunting grounds for hoteliers looking to acquire assets. He also said the potential buyers should scour submarkets in major cities to find acquisition opportunities because they often buck a downward trend in the overall market.
“There are some great acquisition opportunities that people missed,” he said.
Johnson said the opportunities for buying largely depend on what type of asset is being sought. Aimbridge, like many other companies, is looking for value-add opportunities—assets that have been under-capitalized during the downturn.
“We’re not worried about equity, we’re worried about debt,” he said. “A 60% (loan-to-value) loan was not difficult earlier this year; now everyone is starting to (hesitate) a little bit.”
Plasencia said he’s seen return requirements by investors moderate by as much as 150 basis points to 200 basis points during the past six months.
“They’re realistically looking for 15% returns rather than 22%,” he said. “The vast majority of deals we’re completing now are all cash, but those buyers will eventually put some serious debt on those.”
Johnson said Aimbridge has about six hotels that fall into the category of being acquired for all cash and need to be financed by a lender at some point in the future.
Anderson said Dow Hotel Company has made two acquisitions by looking inland away from the seaboards. He said cities such as Austin, Pittsburgh and Clarksville, Tennessee, among others, provide opportunities.
“We look where the metrics against the national averages are on an improving trend,” he said.
Acquiring hotels isn’t the only way to grow. Concord, which has had an aggressive development schedule for the past five years, has four hotels under construction. Laport said he’s not afraid to build a hotel during a choppy economy.
“We are contrarians, but we do find opportunities in some markets that have older hotels,” Laport said.