The industry still refuses to pay attention to the numbers that matter: net operating income. RevPAR is meaningless unless it flows to the bottom line, and that is not so likely now.
The black swans have landed and the party is over.
U.S. hotels’ revenue per available room in January grew 2.4%, according to STR data. Results for the week ending 13 February saw RevPAR up 0.2%* and occupancy down 3%.
For months, the investors in the stock market have said hotels will get softer results, but the industry pundits at the Americas Lodging Investment Summit refused to pay attention. Although the macro situation is very different, and we are not having a financial crash and likely not a recession, the hotel industry pundits and others are acting just as they did in 2008 at ALIS—ignoring the world outside their narrow focus and ignoring the capital markets.
In 2008, I was able to predict a crash in the hotel industry because, to me, the capital markets predict where other things are headed, and the capital markets had already begun to crash in August 2007. It was simply axiomatic that the economy and the hotel industry would follow.
This year the capital markets are in chaos; the credit markets are under serious stress; and none of that is going to get better for most of this year. Even the Fed is now saying publicly that the economy is unclear and it might not raise rates anytime soon—and very likely not for the next six months, at least in my view.
Loan spreads are substantially wider. The commercial mortgage-backed securities markets have major problems now. Not only are they more expensive and more stringent underwriting, but there are still a substantial number of old loans that need to be refinanced in a very shrunken market capacity.
While job totals are much better, many of the new jobs are low-wage or part-time. The U6 rate is still above 9%, which is the much more accurate measure of unemployment. The participation rate is still at a 40-year low. The stock market is down nearly 8%, and fear reigns in the markets.
Many workers are once again just glad to have a job, and wage pressures at the less-skilled levels are easing. The material savings on energy are mostly being saved or going to buy cars and pick-ups. They are not going to be staying in hotels as was predicted.
I have a theory that the crash in 2008 was so scary for everyone that, just like what happened to the generation that were young adults in the Depression and the war years, people saved their money because they were so seared by the experience. Today, people are not going to change that behavior until we have a new president who is a leader and can instill real hope and confidence, and the world is a much less scary place.
We are a long way from that happening.
China had been the source of a huge influx of tourists all across the world. That is now muted. China has numerous major problems that are only getting worse this year. I represent Asia and mainly Chinese investors, and the news is not encouraging for Chinese tourists who want to come to the United States, which they now cannot afford. The exchange rate for the yuan versus the dollar is likely going to deteriorate. The dollar has made travel here from Europe very expensive.
Retailers in Manhattan have seen a substantial drop in European tourists. Canada is in a major recession that is getting worse, and the Canadian dollar is far below past levels. Canadians are not going to be rushing here. Russia is in a major recession, and the flood of Russian investors and tourists has essentially disappeared. Airline fares have been under pressure and are declining.
Corporate earnings have declined for several quarters, and it has gotten worse this last quarter. The factory sector is now in recession. The quickest and easiest thing to cut is travel and group events. As baby boomers see their 401k and mutual funds get bashed by stock markets decline, and little hope of recovery this year, they will cut travel. That is the first thing to cut back. Japan is in recession, and so Japanese tourists will not likely be pouring into the U.S. this year. The capital markets are going to continue to be in turmoil for a long time. Currencies are being manipulated by central banks around the world, making it more expensive for all foreign tourists to come here.
There is nowhere to look that has any reason for optimism.
All of this ignores terrorism, which will rear its head again this year. Terrorists like to attack hotels. All we need is one of those attacks to really put a damper on travel. Just look around the world today: ISIS; Iran versus the Saudis; Syria refugees; Turkey and Russia on the brink of a war; Libya in total chaos and war. The list of geopolitical crisis is endless.
RevPAR is meaningless
The industry still refuses to pay attention to the numbers that matter: net operating income. Nobody wants to talk about that, but it is the only number that really matters. Cash flow return on equity. RevPAR is meaningless unless it flows to the bottom line, and that is not happening to the same extent now.
Online-travel-agency commissions are rising. Higher minimum wage is getting more prevalent as the Democrats push their agenda. Increased regulations cause rising costs, and as occupancy declines it will be difficult, if not impossible, to raise average daily rate. It is a natural law that when occupancy declines, hoteliers lower rates, especially as more new product and Airbnb cut more deeply into market share.
The party is over. Hotel values will decline in 2016. It took eight years for inflation-adjusted NOI and values to recover to 2007 levels. That is worst performance compared to all property types and far worse than the earnings recovery of the S&P 500, and it took eight years to get back to the base line. And now values will decline as NOI decreases, lending becomes much more costly and leverage levels decline, as the regulators step up pressure on banks to reduce risk on commercial real estate.
You might have labeled me Dr. Doom, but the black swans are on your roof, and you failed to notice. The “golden age” ended in the fall of 2015. Five-percent RevPAR increases are history now.
Here are some things you can do now.
1. Contact a good broker
Get a good sense of what you can sell for quickly before things get worse. Depending on what the broker tells you, put the asset up for sale. Don’t hold out for what you wish. Try to get what the broker thinks, but settle for a bit less because the broker is undoubtedly giving you his highest guess. Selling sooner is better than holding out for a better price that is not going to come. You are already too late to hit the top. That was last year.
2. Cut costs now
Cut staff where it will not hurt revenue. Sit with your managers, and in detail go through all your expenses and find a way to cut them 10%.
3. Hold your ADR
Do not do what hoteliers always do: race to the bottom. Lower ADR is worse than less occupancy to a point. Revenue management is key.
4. Ignore appraisals
Appraisals are mostly nonsense and never really give you an accurate value. They are just a bunch of assumptions based on silly projections.
5. Reduce your debt
If you have some excess cash, keep it available to cover debt in case things get bad. If you have a maturity in the next year, get it refinanced now. The debt markets might be closed later in the year if things in the capital markets get more chaotic.
6. Be ready for unexpected events that suddenly affects occupancy
Have a plan in place if there is a terrorist attack that results in a sudden drop in business and you need to cut staff and expenses quickly, like after 9/11.
7. Market harder
Get more meetings business under contract. Look at your website and social media and update it or make it better. Guests go on the Web to find hotels, and they use social media to refer or be negative. Ask guests to comment on travel sites like TripAdvisor if you think they are happy with their stay. It matters.
8. Hunker down
Even if I am wrong, you will be prepared in case I am right.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real estate financing firm he launched in 1981. A Wharton School graduate, Ross began his career on Wall Street as an investment banker in 1965. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage, and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. Ross also was a founder of Market Street Investors, a brownfield land development company. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross served two tours in Vietnam with the U.S. Navy.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.
Correction, 1 March 2016: An earlier version of this story stated that RevPAR was down 0.2%.