U.S. hotel CEOs shared their thoughts on the growing number of brands, the future of consolidation activity and supply growth concerns during this year’s Hunter Hotel Investment Conference.
ATLANTA—CEOs speaking at the opening event for the 2017 Hunter Hotel Investment Conference demonstrated cautious optimism in the United States hotel industry, as hoteliers continue to see opportunities for profit and development while they keep a watchful eye out for the next downturn.
Speakers on the “President’s panel” on Day One of the conference shared their observations on a variety of topics, including where they believe brands are headed, recent and potential consolidation as well as supply woes.
Future of brands
It will take years to sort out Marriott International’s integration of Starwood Hotels & Resorts Worldwide, Shaner Hotel Group CEO Lance Shaner said. As the owner of 30-plus Marriott properties, he said, even though the company has great management and is good to its franchisees, there’s still the big question about the full impact of integration. The challenge for Marriott’s management will be maintaining its consistency during the integration, he said.
Though he has faith in the management of the company, he believes the integration and the result will be challenging. Imagine an exit off Highway 95 with six hotels in the Marriott system, he said.
“How are they going to deal with that?” he asked.
There are too many brands overall out there, Shaner said, and there’s not an executive in the U.S. who can differentiate them all.
“I just hope they’re careful about it,” he said. “It’s confusing the public. It devalues some of the brand value when they keep adding more brands.”
There are a lot of brands out there, said Keith Cline, president and CEO of La Quinta Holdings, so it’s about relevancy for consumers. Many retail brands have lost their way, he said, and in losing their relevancy, consumers are walking.
“In our industry, if we lean in on the guest experience, personalization, we can remain relevant with consumers,” he said. “It’s about a consistent product, a consistent experience and driving engagement.”
A strong brand is something that connects with a consumer, said James Merkel, CEO of Rockbridge Capital. Hotel companies try to attract consumers to stay in their hotel, he said, but brands can become noncompetitive as consumer preferences change and owners don’t put money back into their properties.
“There’s nothing you can do at that point to revive the property except a major capital infusion,” he said.
It’s about aligning a property with what guests want, he said, whether it be a branded product or independent.
“If it’s an independent, what’s the tradeoff between going independent or putting a hard brand on it?” he asked. “We’re really trying to align the product with the consumer, looking at brands as a way to do that and manage risks.
Direction of consolidation
Looking at the number of publicly traded companies, to get the growth trajectory shareholders want immediately and in the long-term, the way forward isn’t necessarily organic, said Greg Mount, president and CEO of Red Lion Hotels Corporation. Citing his company’s acquisition of Vantage Hospitality, he said acquisitions can provide the opportunity to leverage Red Lion’s platform by looking for smaller regional brands that are constrained and don’t have the wherewithal for ecommerce.
Aimbridge Hospitality President and CEO Dave Johnson said he agreed with Mount that consolidation will rapidly continue. For ownership companies, M&A activity still is predominantly through private equity, he said.
Brands will continue as well, he said, as they pay a lot of money to draw the customer in, but Marriott has a lot of scale now.
Smaller companies have a harder time holding on to talent, he added, because there’s not enough opportunity for them.
Cline fielded a question about La Quinta taking a different approach: the separation of its real estate and franchising business.
Should his company go this direction, he said, it will create individual companies with individual strategies. It unencumbers the brand and management companies for asset-light strategies, he said.
“It gives shareholders and equity analysts the chance to analyze them independently,” he said. “As a shareholder and investor, you can choose where to invest your money, in real estate or franchising. It lets them grow quicker separately.”
Developers develop, Merkel said, and when they can, they do it. Developers had problems from 2009 to 2012, he said, but there’s a new wave of supply coming in from work during the recovery.
“Supply is always a concern, but what we like to say is that it’s not necessarily supply but itself, it’s the pace at which supply comes into the market at the same time. It’s the absorption,” he said.
When the supply dam breaks and it comes in all at once, that’s the problem, he said. It takes time for markets to absorb new supply, he said, and any project poorly capitalized in that period of time is going to struggle.
There are markets today he believes are great markets, he said, but they’re getting a lot of supply and are vulnerable to absorption issues in the near term.
Developers will build and brands will hand out money to grow their fee revenue, Johnson said, and they’ll build until the money dries up. Most companies in 2015 and 2016 were not as overleveraged as they were 2008 and 2009, he said, but now the industry has partners looking to mezzanine loans while debt is getting more expensive.
Companies might see mezzanine loans as an opportunity, he said, but if there’s another downturn and the company has high leverage, that spells trouble.
“I get a little nervous for the industry when people are taking mezz up to 80% to 90% of capital stack and money from brands and there’s little to no equity in these deals,” he said. “In 18 months, the lender is going to own that property.”