By Rick Swig
Hotel Real Estate Owners
Face a Brave New World
WITH 2009 NEARLY HALF OVER, THE HOTEL SECTOR
is clearly in a brave new world. The trends for the first few
months of the year showed average national declines of
10.5% in occupancy and 6.5% in average daily rate. This
decimated gross operating profits and related EBITDA by
at least 30%, even with significant and successful efforts by
hotel operators to cut expenses.
Few owners today actually know the value of their individual assets. Those that do are part of a minority who were
actually able to sell. Cap rate erosion coupled with general
EBITDA declines would equal more than a 50% reduction
in a hotel’s worth. Does this mean that hotel real estate
values have been halved? Some owners might object to
that assessment. By comparison in 2002, there was a
23% decrease in per available room value based on a 30%
EBITDA decline with fairly stable cap rates.
A key issue affecting RevPAR is the practice of room
rate discounting, which endless studies have concluded
does not build occupancy. Discounting stems from panic
by myopic operators desperate to capture market share at
the risk of accelerating profit and property value declines,
undermining brand value and having a long-term impact on
pricing power. In the 2001 recession, as a result of rampant
discounting, room rates did not return to 2000 levels for
five years. Based on the current RevPAR trends, which are
exacerbated by ill-fated discount mania, the 2010 national
RevPAR forecast of $54.85 is almost on par with 2000
RevPAR of $53.79, according to Smith Travel Research.
The real issue today is EBITDA, or what is actually left from
revenues to pay debt. Recognize that during low occupancy
periods, decelerated profits accompany RevPAR declines.
In the previous recession there was a 22% RevPAR drop
with a 32% GOP collapse between 2000 and 2002 across
all segments. A general decline of 28.5% in RevPAR and
47% in GOP between 2008 and 2009 is likely, with even
steeper drops in the luxury segments.
Since hotel revenues plummeted after October 2008
in most markets, many owners are barely able to make
payroll, much less debt service. This issue, in conjunction
with little to no available financing, would lead one to believe
that the lodging sector is about to enter the next phase of
suffering: default due to non-performance.
This is the fifth recession the hotel industry has seen
since 1973. The current downturn, although seemingly
more grave, is similar to the 1980 recession because of the
limited supply increases in recent years and relatively little
development on the horizon. Additionally, given the government’s injection of capital into the financial system, there is
great risk of inflation coupled with high interest rates, which
neared 20% in the early ’80s.
Historically, there has been less than a 1.5% annual
increase in inventory growth in the first four years after the
start of a recessionary period, which indicates that no significant new supply would appear before 2014. Furthermore,
after what might amount to a 10% decline in ADR in 2009,
with some additional dropoff in 2010, room rates will begin
to accelerate in 2011. Rates will likely exceed 2007 levels
in 2013, with occupancy reaching 2007 parity one to two
years after. So don’t panic yet. Just think of the opportunities that may await investors with available capital to buy
some lower-cost assets later this year or in 2010.
Just think of the opportunities that may await
investors with available capital to buy some
lower-cost assets later this year or in 2010.
There will be many factors to determine the timing for
hotel transactions. These would include the narrowing of
the bid/ask gap between sellers and buyers with differing
opinions of current value declines of between 20% and
50% from 2007 levels; the process by which lending institutions either force or create a sale of distressed assets;
the availability and the cost of credit; and the risk tolerance
of buyers during the recovery. It would seem that hotel
owners with loans coming due and with no ability to refinance might create some quick dispositions and bargain
values, although there is a strong belief that lenders may
gain little or no value in foreclosure. However, look out for
some lender epiphanies resulting in some temporary foreclosure reprieves. ◆
The views expressed in this article are those of the author
and not REAL ESTATE FORUM.
Rick Swig is president of RSBA & Associates, a hospitality
industry consulting firm based in San Francisco. He may be
contacted at firstname.lastname@example.org.
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MAY/JUNE 2009 REAL ESTATE FORUM 79