How Bad, How Long?
The few willing to talk on the record are waiting for a ray of sun in a cloudy 2009 forecast.
By Jeff Weinstein, Editor in Chief -- Hotels, 11/30/2008 11:00:00 PM
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As this story takes shape in mid-November, it is very hard to find good news or forecast anything but hardship for the hotel industry in 2009. For the week ending November 15, Smith Travel Research (STR) reported U.S. RevPAR down 13.2% with the en vogue boutique hotels down a staggering 21.1%. U.S. hotel analysts are now forecasting a 6% to 8% decline in 2009 revenue. In third quarter earnings reports, industry giants IHG, Marriott and Starwood put positive spins on business conditions as results through August were reasonably in line with expectations. In 2009, however, Marriott expects -3% RevPAR, Starwood forecast -5% RevPAR, while IHG told the investment community the current financial conditions are impacting the availability of debt finance and new signings are taking longer to finalize.
No doubt, hoteliers are budgeting for difficult operating and growth conditions in 2009 with plans in place to do whatever they can to control costs and capital spending. In the United States, STR expects 2009 average daily rate growth to be 1% with occupancy dropping 3.5%, and some see that forecast as optimistic, as both business and leisure demand continue to dip in the face of worsening economic conditions. In mid-November, Host Hotels & Resorts reported that it expects comparable hotel RevPAR will decline 9% to 11% in the fourth quarter and will decline approximately 3% for the full year.
Contingency Plans
Hotel companies looking to come out of this downturn in shape to take advantage of distressed asset sales are doing everything they can now to shore up their balance sheets, from cutting dividends and capital spending to delaying development projects. For example, Strategic Hotels & Resorts, Chicago, cancelled its deal to purchase a condo-interest hotel in its home city, while LaSalle Hotel Properties cut its dividend by 51% and pushed back its Chicago development plans.
“The year 2009 will be worse than 2008. RevPAR is expected to drop by 6% to 8%,” says Homi Vazifdar, managing director of Canyon Equity LLC, Larkspur, California. “The pipeline will reopen in earnest in the second quarter of 2010. In 2009, there will be more blood on the street and we can expect to find assets at significant discount to markets. However, the exception to this is in the ultra-luxury segment, where high-net-worth owners will not part with trophy properties.”
Discounting Begins
In the day-to-day fight to maintain revenue streams, operators far and wide are starting to discount. British budget hotel chain Travelodge in October announced £5 million (US$7.4 million) worth of price cuts for the rest of 2008, which could lead to a price war in the UK budget sector. No doubt, a move like this is bound to put pressure on the likes of Whitbread and IHG.
Other hoteliers are taking a more traditional approach to driving revenue. “We are obsessed with driving the top line and look at every opportunity to do so, through more focused revenue management, e-distribution and sales tactics on a hotel-by-hotel basis,” says Jean Gabriel Pérès, president of Zurich-based Mövenpick Hotels & Resorts. “We have streamlined our corporate contracting process and will be employing additional sales executives at different levels and locations. New partner marketing and other marketing initiatives are also planned or in the process of being rolled out.”
If you are looking for some good news, inflation growth appears to have been tamed, as both oil and commodity prices showed serious declines in the fourth quarter of 2008. In addition, the sovereign wealth funds and institutions that require little debt or have access to debt will continue to be net buyers of hotel assets.
“We have established a very close relationship with a limited number of Middle Eastern investors who see Mövenpick as their right partner to operate assets they will acquire in Europe and possibly Asia over the next six to nine months,” says Pérès. “We are actively looking at opportunities in Paris, London or at small portfolios of upscale hotels.”
Further Insights
That being said, the few people willing to talk to HOTELS' Investment Outlook about their take on 2009 didn't have a lot of wonderful things to say about the business as it stands today.
“The year 2009 will be a very difficult year to grow our portfolio because of the very limited availability of debt,” says Ramsey Mankarious, CEO of Cedar Capital Partners, London. “It is extremely difficult to acquire a hotel and still achieve our return objectives without a significant portion of the purchase price coming from the debt provider.”
The perspective from Derek Gammage, EMEA managing director, CB Richard Ellis Hotels, London, is not much different. “We see the standoff between owners, sellers and buyers only being broken by 'forced sales,' which will give the market some traction as it gives a benchmark. In reality, this is unlikely before the end of Q1 in 2009 and more likely Q2 or Q3.”
As to what types of deals can get done considering the conditions, Gammage adds, “Taking luxury out of the equation, the only deals we are seeing done at anything above smaller single-asset level is where there is a strong level of banking support. This can mean the incumbent bank staying as they see a fresh covenant driving the quality of their existing loan, or where the intended borrower enjoys exceptional relationships with their lenders.”
When considering product type, Gammage says budget hotels remain the cheapest entrypoint and most resilient. Otherwise, he points to forced sellers—poorly branded, under capitalized assets in regional markets selling cheaply as repositioning plays.
Even on deals where land has been acquired, development is being put on hold. “We have put our projects on hold primarily due to lack of financing,” Vazifdar says. “We have put them on hold and aborted 75% of our pipeline.”
What could help open the pipeline and how long will this dearth of deals last? “Financing, financing, financing,” exclaims Vazifdar. “Opening some private equity shops [would help]. This mayhem will last through at least through 2010.”
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