State of the Industry

Jason Freed, Senior Editor

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Industry veterans agree 2009 was among the worst years in hospitality.

The following headlines fromHotel & Motel Management tell the story as it unfolded ...

2009 Year in Review

2009 Year in ReviewMarch 1, 2009A near-total shutdownLenders, buyers, sellers and operators discuss stagnant hotel real estate market and the difficulties facing the industry in 2009.

April 20, 2009Starwood sues Hilton, former execs for espionageMudslinging between Starwood and Hilton over trade secrets and corporate espionage continues.

August 31, 2009Hyatt IPO plansIn a move that has raised a few eyebrows in the hospitality community, Hyatt Hotels Corp. announces the company filed papers for a potential $1.15-billion initial public offering.

2009 Year in ReviewSeptember 11, 2009Maximize the value of your distressed propertyMany hotel owners are dealing with properties in distress. Depending on the particular loan situation, there are a variety of options borrowers need to consider.

September 23, 2009Hilton refreshes corporate identityHilton Worldwide unveils its new corporate name and logo, which coincides with the hire of former Club Med CEO John Vanderslice as the new global head of luxury and lifestyle brands.

September 25, 2009Travel Promotion Act: Hope or hypeThe Travel Promotion Act has been discussed in hospitality circles for years and is very close to having an impact on international travel.

2009 Year in ReviewOctober 1, 2009Why some operators choose to ignore rate adviceAs often as industry experts preach that lowering daily room rates can only be detrimental, one would think owners and operators would avoid dropping rates. But average daily rate across the U.S. was down nearly $10 from July 2008 to July 2009, meaning some hotels did not heed that advice.

October 12, 2009Motel 6 opening signals brand's new directionMotel 6 debuts the first new-build Phoenix property.

October 27, 2009Franchisees stuck in middle of OTA battleAt a time when lodging industry players should be banding together to get heads back in beds, a power play between Choice Hotels International and Expedia.com causes a roadblock.

2009 Year in ReviewNovember 9, 2009Marriott to launch new hotel collectionAt the Cornell University Dean's Leadership panel, Marriott International announces it will launch a new branded collection called the Autograph Collection.

December 14, 2009Las Vegas landscape getting makeoverThe HotelWorld Network editorial team followed the Las Vegas market closely since the inception of CityCenter.

December 18, 2009Thayer, Jin Jiang Hotels purchase InterstateThe all-cash transaction is valued at approximately $307 million, as all of the outstanding common Interstate stock will be purchased at $2.25 per share.

The following are in-depth looks at the most pressing issues facing the industry today:

Hot Topics

Transaction market turbulence

Pricing

Distressed hotels

In today's economy, property brokers say the process of a hotel changing hands is taking longer, mostly because sellers expect returns close to what they received in more positive times, yet buyers are looking for major discounts.


Most transactions are complicated

Alternate sources of financing do exist

Deals getting done: select-service properties in lower-stress markets

Ed James, Mumford


Jim Butler, partner, Jeffer Mangels Butler & Marmaro

Lee Pillsbury, chairman and CEO, Thayer Lodging Group

"There is always some level of disconnect between the buyer and seller. The disconnect is fairly wide in this market. Sellers have certain expectations and that's the gap we have to bridge. That gap has widened considerably in the last year."

“The other shoes to drop are the credit card mess, commercial real estate and employment. The pump hasn’t gotten primed. This is the start of something. It may be the start of a double-dip with more pain to be endured. All commercial real estate, even hotels, they’re buckling down.”

“It is inevitable that the forecasters are going to see a continuation of the current [trends], that their views are going to tighten around the current slope of that line. And it’s also inevitable that that won’t happen. There will be a turn in the market. From my perspective, the recovery is going to be extraordinarily steep. … Every single [recession] has been followed by a very sharp recovery.”

For most hotels, it's almost a given that fewer dollars are coming in now—be it from group business or leisure revenue—than a year ago. Therefore, it makes sense to take full advantage of the guestrooms or meeting spaces that are being reserved and get the most possible dollars for those rooms.

Many experts say managing revenue will be the industry's savior

Revenue management is a broad term for many complex practices

Can be implemented at the corporate level, property level or both

U.S. ADR down $10 from July 2008 ($107.90) to July 2009 ($98.41)

STR predicts it will take 10 years before rate is back

Who’s discounted rates in 2009 and why?

Pricing

Jim Rozell, director of revenue optimization, Carlson Hotels

Pricing

Cathy Enz, professor of strategy, Cornell University, on discounting

Justin Taylor May, revenue manager for Charlestowne Hotels

Klaus Kohlmayr, director of Ideas Advantage revenue management

"The key to revenue management is making an informed decision to do more with less. [In this downturn], we can't afford to miss an opportunity. It's always been important; it just hasn't been a priority until now."

“It’s certainly not because folks in the industry are foolish. They’re trying to make some complex tradeoffs.”

“The average figure could be skewed if the higher-end properties are drastically reducing their rates.”

“There are myriad ways of how you get around reducing your rate. Historically we know once you discount it takes three to four years to get rate back to where it used to be. So think about where you want to be in three to four years and if you can afford to suffer.”

It’s far from an ideal situation, but it’s a reality of the industry—many hotel owners will deal with a distressed property. After accepting this reality, borrowers must form a specific plan to maximize property value, minimize personal financial loss and move on.

Distressed hotels

Workouts aid borrowers if they believe the property will rebound

Buyers will eventually acquire distressed assets at a great value

Owners of higher-end product still are working with their lenders

Paying cash now and refinancing lateris a solid strategy

A comprehensive analysis benefits borrowers and lenders

Jim Butler, partner, Jeffer Mangels Butler & Marmaro

Distressed hotels

John Sturgess, chief development officer, Hunter Hotels

Jeff Carter, CW Capital Asset Management

“The truth is you don’t know [what’s going to happen]. So you build the scenarios and lay out your cash and you place a value on everything. This is what consultants do. They look for anticipated revenue flows.”

The buyers are there and they are eager. The product has not yet arrived in large numbers, and it will be spread out over a longer period of time than originally anticipated, [but] it will arrive.”

“In June of 2007, we had three hotels in special services. The loan balance on those three was $26 million. By January of 2008, we had eight properties [in special services] with a loan balance of $44 million. By January of 2009, we had jumped to 37 properties and a loan balance of $372 million. Now where we stand nine months later, it’s 106 properties and $1.4 billion of hotel loans in special services. It gives you a sense of the meteoric rise of distressed assets.”

It’s official: Flipping the calendar page from 2009 to 2010 didn’t cause an avalanche of available debt to tumble down,or open up a clear path to recovery. While hoteliers breathed a collective sigh of relief that 2009 was over and were prepared to kick off 2010 with optimism, the data wasn’t quite there to support it.

ALIS 2010 Outlook

Hoteliers, brand leaders are focused on the best recovery strategies

Forecasters all over map trying topinpoint how long recovery will take

Reflected on group demand, which was decimated

Franchise company goals: brand clarity, boost customer satisfaction,focus on conversions

Ed Walter, president and CEO of Host Hotels & Resorts

ALIS 2010 Outlook

Gary Mendell, CEO of HEI Hotels & Resorts

Mark Lomanno, president of STR

“I’m not sure any of us have a true sense of what 2010 will look like.”

“I don’t think any of us expected to be down 18 percent in group demand [at the end of 2009]. And that was mostly cancellations. This is unprecedented. I don’t think anyone could have foreseen anything like it.”

“I’m having trouble convincing myself that the industry is going to embrace an aggressive pricing strategy. I don’t know if they should, but they should definitely be looking at it.”

Steve Joyce, president of Choice Hotels International

ALIS 2010 Outlook

Hubert Joly, president of Carlson Hotels Worldwide

“What are the opportunities that this year is going to bring? Are there going to be brands available to buy? I don’t know—there weren’t last year. But this is the year that maybe some things become available, and we’re going to be a very aggressive looker and inquisitor of anything that becomes available.”

“We’re going to invest in the properties. We’ve said that before, but this time we’re going to do it.”

Forecasts for 2010 and 2011:

2010 2011Supply 1.8 1.0Demand 1.8 3.2Occupancy 0.0 2.2ADR -3.2 2.0RevPAR -3.2 4.2

*as of March 2010

Industry forecast

Mark Lomanno, president of STR"We think 2010 will be a better year, but it will be 2011 before we see significant improvement."

2009’s Voice of the GM survey in Hotel & Motel Management gives an accurate portrayal of how this economy and this changing culture is affecting property managers. Comparing 2009 responses to 2008 and prior, the survey results detail the evolution of managing a hotel during a downturn.

2009 GM Survey Results

Increase in brand standards having impact on a hotel’s financial results

Two important brand standards: flat-screens, wireless connectivity

John Price, GM, Hard Rock Hotel in Chicago


“Flat-screen TVs are a must-have at this point. In the future, you’ll see more interactive services available on that flat screen, such as being able to order room service and control different aspects of your room.”

“It’s a given that adhering to brand standards is more stressful in this environment, but it depends on the brand and the depth of the branding that occurs. Softer brands like [Hard Rock], we can experiment more and do a lot of things differently. That’s the beauty of being a lifestyle brand; experimentation is part of the deal. Being a harder brand would be a lot harder.”

Paul Litter, GM, Hampton Inn in London, Ky.


“Right now, wireless is the hottest thing in the hotel as far as technology goes. Years ago, when we built, we put in 16 phone lines. Last year we had it cut down to four, mainly because no one uses the phones anymore. People get all that stuff on the Internet … Everyone wants it and wants it faster with no hangups.”

“You have to have standards that you guide the hotel by, and you have to take them by the letter of the law. A traveler goes to one hotel and if [the hotel doesn’t] follow the standards, they most likely won’t go to that hotel again.”

purchasing


purchasing

2009 Hotel Trends Data

Management and Franchise Fees

13.0%

Cost of Goods Sold2.1%

Utilities, Taxes, and Insurance

18.4%

All Other Supplies and

Services29.6%

Salaries, Wages, and Benefits

36.9%

Where The Dollars Go — Limited Service Hotels122 Rooms, 64.9% Occupancy, $83.18 ADR

purchasing

2009 Hotel Trends Data

Factors on Purchase Decision ProcessFurniture

Criteria % of RespondentsQuality of Product 45.3%Quality of Service 16.4%Discount Arrangements 14.9%

Speed of Delivery 14.3%Ease of Ordering 3.2%Range of Payments 3.2%Other 2.6%

Jason Freed, Senior Editor

For a copy of this presentation, visit www.hotelworldnetwork.comor e-mail [email protected]

State of the Industry

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