Hospitable Conditions

When a private real estate firm, the Tabani Group, bought the 429-room Crowne Plaza North Dallas Hotel in Addison this fall, it marked the third Dallas-area property sold this year by FelCor Lodging Trust, a real estate investment trust (REIT) that's reducing its holdings in the “Big D.”

Even in Dallas, one of the few soft markets in the recovering hospitality sector, companies such as Tabani are snatching up such prime properties “because supply-demand fundamentals are improving everywhere,” says Bill Stadler, managing director of the Dallas office of hotel real estate advisor Molinaro Koger, which brokered the transaction. “The market has rebounded and prices are up.”

There were more sales, less rock-bottom room pricing and fewer available rooms at the inn in 2004, as renewed business travel emerged in a strengthening economy. Overall occupancy registered 62.7% for the nine-month period ending September 2004, compared with 60.5% for the same period in 2003. Average daily room rates rose from $83.33 to $86.41 and revenues per available room (RevPAR) increased from $48.71 to $54.20, according to Smith Travel Research.

The industry could become even more hospitable for operators and investors as the construction pipeline slows. Smith Travel projects inventory increases of just 1.2% in both 2004 and 2005, compared with the 3% annual increases common in the late 1990s.

“That's set a backdrop in which fundamental improvements will be magnified,” says Bill Crow, a hospitality analyst with Raymond James. With improving corporate growth, businesses are sending more of their salespeople out into the field. Business travelers also frequently end up paying a higher rate because many reserve rooms at the last minute, says Crow.

With upward pressure on daily rates, hotels are putting fewer heavily discounted rooms on the Internet, says Robert Boykin, president of Boykin Lodging, a REIT. “The best deals at discount sites are often undercut now by hotel brands' own sites.”

On the investment side, 2004 could be the biggest year yet for hotel transactions, with $7 to $10 billion in properties changing hands, predicts Thomas Corcoran Jr., CEO of FelCor, which sold 20 properties this year. Transactions in 2004 are running 35% ahead of 2003, while next year's transactions may run as high as 50% above 2004, says H. Keith Thompson, a principal in Thompson Calhoun Fair, an Atlanta-based hotel brokerage firm.

Raymond James analyst Crow believes the industry should enjoy top-line growth of 5% to 7% while hotel companies should see 12% to 15% growth in EBITDA (earnings before interest, taxes, depreciation and amortization) in 2005.

Occupancy is rebounding dramatically in several key markets. In New York, the third-quarter occupancy rate reached 84.7%, up from 79.7% a year earlier. In San Francisco-San Mateo, the occupancy rate jumped from 68.2% to 75.9% in the same period. “A lot of the cities that suffered substantial price cuts post-2001 are now seeing nice year-by-year comparisons,” says Crow. At the low end, hurricane-ravaged Miami dropped from 52.6% to 49.1%, while New Orleans also was soft, dropping from 57.5% to 55.3%.

Still, the consensus is that the industry's vital signs should strengthen further in 2005. “We are going to get a good run before the construction pipeline gets fired up again,” Boykin says. “The next two years are going to be about as good as this industry has seen in a very long time.”

Executive Insights

Name: Thomas Corcoran Jr.

Title: President and CEO

Company: FelCor Lodging Trust

Headquarters: Irving, Texas

Biggest Surprise of 2004:

“For the first time in three years, we are exceeding performance expectations. Expectations for 2001 through 2003 were not met.”

Prediction for 2005:

“The mood is generally upbeat among hoteliers for next year. We're looking for 5% to 7% growth in RevPar. Nationally, we are only looking at a 1% increase in supply, down from the 3% peak in 1997 and 1998.”

Occupancy Average Daily Rate
2000 63.3% $85.29
2001 59.7% $84.14
2002 58.9% $82.97
2003 59.1% $83.08
2004* 62.7% $86.41
* Year to date as of September 2004.
Source: Smith Travel Research

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