Asset Managers Hunt for Flow Through

For most property owners, the effects of an economic downturn take a while to sink in. It becomes harder to renew leases, it takes longer to fill space. Eventually, vacancies rise and rents fall. Hoteliers, however, like the airlines on which they depend, sell their inventory every day and customers can disappear instantly, as they did after 9/11.

Three years later, hotels are just recovering but the early 1990s were even worse: foreclosures and bankruptcies swept through an overbuilt, over-leveraged industry. But, this time “we have come off a really, really tough three years and the fact that we have as many people still standing is a testament to how we have adjusted and how we have asset-managed,” says Pamela Greacen, principal with the Santa Monica Hotel Group. She not so humbly attributes that resilience to greater professionalism among asset managers (like herself).

Greacen is a director of the Hotel Asset Managers Association (HAMA), whose 110 members are responsible for over 1,300 properties with 400,000 hotel rooms worth more than $5 billion. The 13-year-old group is dedicated to bringing greater discipline to buying, selling and operating hospitality properties by using professional asset managers.

“Favorable interest rates kept people afloat — there were far fewer foreclosures than a decade ago,” says Greacen. “But it's more than interest rates. We have better debt structure and good management, so the breakeven threshold is lower in this cycle. Working with asset managers gives owners greater profitability.”

Having weathered the storm, the industry is poised for strong growth in 2005, says current HAMA President Kevin Mahoney, who is also president of Hotel Asset Management and Investment Advisors in Denver. While the industry is still far off its pre-9/11 peak, he expects to see RevPar growth of 4% to 6%. “The challenge is to make sure that the revenue flows through to the bottom line.”

Pressures on Many Fronts

Asset managers, who represent owners and hire and supervise property managers, see themselves as critical to that effort. They look for ways to manage around costs that are often beyond an operator's control, such as fuel oil and insurance. Deno Yiankes, former president of HAMA and president of White Lodging Services Corp. in Merrillville, Ind., says that energy isn't the only uncontrolled variable. “It's most frustrating not to see the benefit of the rate increases because of double-digit increases in insurance, benefits and energy. You can increase revenue and fail miserably on the bottom line with things that you have absolutely no control over,” Yiankes says.

Raising the top line isn't easy, either. HAMA members represent top-tier properties in major urban and resort markets, but they experience the same pricing pressures as all hotel operators — thanks to the Internet. “The hotel industry, from a pricing standpoint, has turned totally into a commodity,” says HAMA member Rick Swig, president of RSBA & Associates in San Francisco. “We are in a very weak position when it comes to pricing and the true value of a hotel room.”

That means asset managers must continue their decade-long effort to achieve greater efficiency — in part by cutting staff. Technology has a big impact, too, says Swig. “You now have centralized communications services, so you don't have separate operators. Also, customers don't look for a bellman anymore, because they are all on roller bags. They just want to get through check-in and to their rooms. It's a whole different service paradigm.”

Investors Turn Bullish

The good news in 2005 is on the deal side. “The investment community woke up a year ago and said it was okay to go into the hotel sector again, and there was this rush of capital into hotels,” says Swig. Prices have been rising and cap rates have fallen to the mid-single digits.

(Yearly Averages for RevPar in Top 50 U.S. Markets)
2001 2002 2003 2004* 2005*
$61.71 $58.51 $58.05 $63.33 $68.18
% Change Year-Over-Year
2001 2002 2003 2004* 2005*
-10.5% -5.2% -0.8% +9.1% +7.7%
*Projected figure
Source: PKF Hospitality Research, Smith Travel Research, Torto Wheaton Research

The high velocity of hotel sales should continue because even at today's prices hotels still sell below replacement cost. “Hotels are still a huge value,” says Swig, when compared with other property types that have seen huge price increases.

So, hotel owners will see better operational results and financial returns when they sell. They may not be able to boost room rates rapidly, but if they can fill more rooms, 2005 will continue the recovery. And, says Mahoney, demand looks solid. “The pendulum has swung back. Bookings look good, the economy is better and business travelers are spending more.”

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