BETHESDA, Maryland—Negotiating higher rates on group business has been a slow go for Host Hotels & Resorts. But the real-estate investment trust says the tide is about to turn, and the company will look to higher-rated group business to fuel revenue growth in the near future.
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Ed Walter
Host Hotels & Resorts
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During the company’s second-quarter earnings call Tuesday, CEO Ed Walter said Host’s portfolio-wide rate and revenue-per-available-room growth have been held back because of lower-priced group business, reporting only 1.5% to 2% rate growth on group business thus far in 2012 compared to 2011. He said approximately a quarter of the group business that has taken place thus far in 2012 was booked as far back as 2009, when meeting planners had the upper hand in rate negotiations.
Headed into the second half of 2012 and the beginning of 2013, however, Walter said little business from 2009 will be left on the books.
“It, to some degree, has been limiting rate growth but … the reality is the bookings we got in the last quarter were closer to up 7%,” he said. “That’s a better indicator of where group rates are going in the future.”
Overall, Host’s total revenues in the second quarter were up 6.5% and were largely attributed to RevPAR increases of 6.1% and improvements in food-and-beverage revenues of 5.7%. The RevPAR increase was primarily driven by improvements in average room rates coupled with continued occupancy growth. For the quarter, average daily rate across Host’s portfolio improved 3.7% and occupancy improved 1.7 percentage points to 77.6%, the company reported Tuesday.
“We are pleased with the results of the quarter,” Walter said, “and remain confident about the remainder of year and into 2013.”
Host’s group-booking trends showed significant improvement for the third consecutive quarter, which is consistent with recent commentary from Marriott International, said David Loeb, a senior analyst at Robert W. Baird, in a research note.
“While group business has been an expected, relative laggard so far this recovery, momentum is building nicely and the larger base of group business shrinks the rooms supply and should help push transient rates higher in 2013 and 2014,” Loeb said.
Walter said a number of Host’s special group accounts negotiate last-room-availability requirements, meaning that even though Host may be able to sell a room to another customer at a higher price, they are entitled to leave that room open for the special group account.
Because occupancies were higher in the second quarter and many of Host’s hotels regularly flirted with capacity, “that did hold pricing back a little bit,” Walter said.
“At the end of the day, we were very pleased to see growth in occupancy and there’s not a lot we can do (to change last-room requirements) in the near term,” he said. “But, on the other hand, if you look at what that means for 2013, that strategy will begin to change.
“We will certainly be pushing for higher prices next year.”
Walter said that in 2013 Host will look at doing fewer special corporate accounts with last-room availability because they will have more group business on the books, will be running at higher occupancies and will look to push into higher-rated business.
“In some cases we are able to negotiate better contracts, but it depends on the hotel,” he said. “In markets with higher occupancy we’re having more success.”
Walter said Host is able to increase cancellation fees slightly because groups are more comfortable with their finances and are booking business further out. More than 90% of group business for the remainder of 2012 is already on the books, he said.
“We certainly expect group business will be up significantly compared to last year,” Walter said.
Additional notes
- Host reported that the company’s top-performing market in the second quarter was Philadelphia, with occupancy in the market up 13 percentage points, rate up 4% and RevPAR up 26.5%. Renovations at the Philadelphia Marriott Downtown and the Four Seasons Philadelphia contributed to market-performance growth as well. Host expects Philadelphia will continue to be a top-performing market within its portfolio.
- Walter said in the near term he’s very confident Host will be a “net acquirer” of hotel assets. However, he said that will be dependent on where pricing goes. “We’ll evaluate it the same way we always have: look at long-term cash flow for the asset and if we can generate a return on the asset that would exceed our cost of capital,” he said. Walter said during the last cycle, circa 2006 and 2007, Host started to see pricing that was so strong the REIT wasn’t competitive as a buyer. “Not because we didn’t have low cost of capital, but because others were being over-aggressive. We were better off as a seller,” he said. “I fully anticipate that will happen again at some point in this cycle, probably not in 2013, but that’s hard to predict.”
- In the third quarter, Walter said Host expects to raise $400 million through a credit facility term loan and will use the proceeds to repay debt.
