Top CEOs: Both good, bad signs for hotels
Top CEOs: Both good, bad signs for hotels
08 FEBRUARY 2016 8:28 AM
The CEOs from some of the top C-Corps and REITs say there are signs that could both lead to optimism and pessimism for the hotel industry.
LOS ANGELES—Hoteliers collectively seem to have their antennas up lately looking for signs of where the hotel industry is headed, but all the signs aren’t saying the same things and people aren’t necessarily looking in the same directions.
Some of the industry’s top CEOs met during a “View from the Boardroom” panel at the 2016 Americas Lodging Investment Summit to try to cut through the noise, but still ended up pointing to different conclusions from different indicators.
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Marriott International President and CEO Arne Sorenson spoke about a general sense of cautious optimism among his peers and dismissed concerns that supply growth could be pointing to bad times for hotels.
“We’ve never had a supply-led recession in the hotel space,” Sorenson said. “Now, obviously supply can contribute to that.”
He acknowledged there are some troubling factors for the global economy—including the likelihood of wage growth, lagging oil prices and continued issues across the globe in places like China, Europe and Brazil—but that doesn’t mean it’s time to pronounce the end to solid growth for hotels.
“Nothing grows to the sky,” Sorenson said. “But 2016 feels a lot like 2015. It’s a point lower (revenue per available room) growth, but it’s in the same stadium of what we’ve seen the last few years.”
Hilton Worldwide Holdings President and CEO Chris Nassetta agreed that hoteliers generally should put some faith behind the industry’s strong fundamentals and not just assume the cycle has hit some imaginary expiration date.
“The markets are obviously telling (us) different,” Nassetta said. “It’s easy to go back to 2008, go back to the recession and the decline in the cycle before that at 9/11, but there were a lot of different conditions. … The thing to guard against is thinking this cycle is similar to prior cycles.”
He pointed out that prior to the previous two cycles, RevPAR only dropped a single time and it only contracted 1%.
“Why was that?” Nassetta asked. “We didn’t have the combination of excessive supply with one of the events that was catastrophic for demand, so we had much gentler cycles.”
And Nassetta said some of the international turmoil can be read as a positive sign for U.S. hoteliers.
“The U.S. is one of the safest and most transparent growth economies in the world,” he said. “What you see as a consequence of that is people wanting to put their money here.”
But LaSalle Hotel Properties CEO Michael Barnello preached more caution and less optimism than his counterparts, saying there are several dire signs, at least for the industry’s short-term prospects.
“We look at where we are now in year seven of the cycle, and your supply is ratcheting up and demand decelerating,” Barnello said. “We’ve had five straight quarters of decelerating RevPAR. What’s happened in the past is RevPAR has either been negative or has gone negative shortly thereafter. You’re seeing a bunch of headwinds. … The strength of the dollar is not helping business at all. The S&P 500 has been a big struggle this year. Corporate profits are down for what will be three straight quarters. That’s manifesting in our portfolio as less corporate travel.”
But Monty Bennett, chairman and CEO of Ashford Hospitality Trust, said there are some signs in the market that the hotel industry is being undervalued. He said that may be due in part to drops in other markets that investors have long associated with success in the hotel industry.
“The lodging markets have for some time followed the high-yield, junk bond market,” he said. “Whenever you see the spreads on high-yield debt widen, you see lodging stocks drop, especially on ownership groups such as the (real estate investment trusts). That premium has been widening since about January 2015. So the high-yield debt market is getting worse and worse and worse. And the lodging industry is reflecting that. Right or wrong, that’s just what is happening.”
Bennett said that scenario puts hoteliers in the position of deciding whether that particular dynamic is an indicator of where things are headed for the industry or if things will “tighten up” so the markets more closely resemble the health seen in the industry’s key performance indicators.
What do mega deals indicate?
There has been much discussion about what drove a recent wave of high-profile mergers and acquisitions in the hotel industry at the end of 2015. 
Sorenson, whose company plans to merge with Starwood Hotels & Resorts Worldwide to form the largest hotel company in the world, said the deals are somewhat of a recognition from the industry that several big, powerful companies are looking to carve out bigger pieces of the pie when it comes to travel. He said some of the players, like the online travel agencies, are already doing so, while other massive, influential companies like Google are just getting ready to make their move into the space.  
“They’re aware of how much money there is to be made in the travel space,” Sorenson said. “They’re tempted to get in and have extraordinary power. So then it becomes ‘How do we build as big of a group of consumers as we possibly can?’ It’s not to trick them, but to know them and let them know we’re delivering tremendous value in return for them coming to our loyalty program. That, and technological innovation is a significant part of it.”
Nassetta did caution, though, that companies should not start to think that size is a cure-all or more important than delivering on their core business.
“People have preyed on (the hotel industry) because we have a profitable model,” Nassetta said. “Because we’re profitable most of the time, we haven’t been as intelligent as we could’ve been. So, I caution our team all the time that while we have to be better, the one thing we better not forget is the business we’re in is the business of hospitality.”
He said continued success for hotel companies will depend on “extending the journey beyond check-in and check-out” and “reclaiming that direct relationship with the customer.”
REITs aren’t sitting (completely) idle
A gap between hotel REIT values and private values have largely sidelined REITs as buyers in the industry, Bennett said, and in some ways it isn’t clear what the next step is for the publicly traded hotel owners.
“A lot of investors are scratching their heads on how to handle this,” Bennett said. “The easiest thing is to sell.”
But Barnello said the fact that REITs have been consistently undervalued on the stock markets has made it clear where they should be spending their available capital.
“From our perspective, buying (properties) doesn’t compare to buying our stock back,” he said. “It’ll be much more accretive to buy back that stock. Because of all the world events we’re talking about, there hasn’t been any stability in the lodging stock markets. Where they’ll stabilize, who knows, and it’s hard to know when. So the current choice is to buy stock back or do nothing for now.”

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