Investment

The recovery is real, as we reported in our last update in Hospitality Innsights. Double-dip recession fears are just that – “fears.” It has become clear to forecasters that the bearish predictions for 2010 were a bit over the top. On a macro basis, gross domestic product grew 3 percent in the first quarter of 2010, down from the nearly six percent growth in Q4 of 2009. This growth seems to be more sustainable, and unemployment levels seem to inching back, albeit at a slower pace than all of us would like to see.

Tourism spending rose at an annual rate of 3.9 percent during the first quarter, led by increased spending on hotels and other accommodations, according to The Bureau of Economic Analysis. The increase is significant when compared with a 1.5 percent drop during the fourth quarter of 2009.  Spending on hotels and other accommodations rose at an annual rate of 11 percent in the first quarter, after falling at a rate of 7.9 percent in the fourth quarter. The BEA said accommodations were the largest contributor to the growth in travel and tourism spending.
Read More About Economic Forecast ~ July 2010

The budgeting process for 2010 has been very difficult but we have the answers.  PKF Consulting just came out with a forecast saying that nine straight quarters of declining lodging demand will come to an end in the second quarter of 2010. They are forecasting continued erosion of average rates.

Most investors expect continued declines in revenues and net income and that will result in lower asset values. While all of this is bad news, I am very bullish on the long-term prosperity of the lodging sector, especially in San Diego. In this article, I will provide insights into San Diego’s current, and near term financial performance based on a wide variety of factors.
Read More About Creating a Business Plan for 2010

Mezzanine finance is that part of the capital structure between bank debt and equity. It has emerged as an enticing and in many cases “only” new finance option for hotel owners or buyers increasingly faced with a credit squeeze from banks. Market conditions have created an increasingly favorable climate for mezzanine debt financing, elevating it to critical component status.

This stems from the fact that Wall Street has a severely reduced appetite for large securitized, individual asset loans as well as development loans with inexperienced borrowers. Banks currently understand the local markets better and offer the best terms in many markets if they are still lending; however, they are not offering much leverage. This creates an opportunity for a “mezzanine debt fund.”

U.S. hospitality markets have begun to hit the bottom of the cycle and we are now in a period of slow growth. Banks have not yet assumed that an upturn is imminent. These banks will, however, eventually loan money again with tougher terms and conditions and increased spreads on existing or refinanced facilities when they do believe the cycle is coming back. Hoteliers will have the option of looking at new funding sources, including mezzanine finance.
Read More About Mezzanine Funding – An Option

During periods of economic recession, there is typically a shifting of market share from traditional channels to discount channels. In 2008, brand sites had 73 percent share of the market. According to TravelClick, it is 70 percent in 2009. Another sign that we are in the economic doldrums is when corporate bookings disappear and the consumer leads the market. Weekends are up in 23 of the top 25 markets according to Smith Travel Research (STR) – considering that each of those top 25 markets is down in revenues year over year, corporate bookings have got to be lagging badly.

RRC Associates states that leisure trips are not impacted like corporate bookings. While that is heartening, those of us who are full with leisure travelers know that they are not paying for rooms without negotiating aggressively for the very best deal they can get. To date this year, REVPAR (revenue per available room) is down 21 percent in those top 25 U.S. markets. In San Diego, it is down 25 percent according to STR. The RRC Associates study indicated 32 percent feel that the business travel recovery will be in 2011, ahead of 19 percent who say it will be in Q3 of 2010, 19% Q4 2010, 13% 2012, 17% beyond 2012 and there is a major shift or “trading down” of accommodations from luxury to upscale and upscale to mid-scale.

Big negative changes in average daily rate have fueled big drops in net operating income. This has already had a massive impact on the ability or lack thereof to refinance. One of the following scenarios will actualize in 2010:
Read More About The Hotel Industry Recovery: A Primer

Five strategical points that will lead to success: location, product, management, marketing and financial structure.

There are over 450 hotels in San Diego County, representing over 57,000 rooms and suites. Chains and institutions own most of the larger hotels, but small business operators own many. It takes an entrepreneurial spirit as well as a willingness to take financial risk to be successful in this game. After all, hotel performance has ups and downs. The capital markets virtually walk away from the hotel market when times are tough…and tough is an understatement today.

This year, at each lodging conference, analysts talk about the commoditization of the industry due to the transparency of rapidly declining rates, difficulty in obtaining any kind of financing and the inability to determine where the bottom of this cycle is. Generally, the conversations have turned rather pessimistic for the short term. Hence, is it a good time to get in the game? My typically contrarian answer is yes. San Diego’s lodging industry is resilient and growing, and with the proper ingredients, success is very possible.

Today, the supporting team is more important than ever before. The pace of change in technology alone keeps most entrepreneurs close to a technology advisor. Further, investors, partners and lenders are often required and these individuals can make or break a business plan. The quality of and relationship with key employees and team members is paramount to the success of a hotel. One entrepreneur cannot optimize revenues and expenses, go out and make sales calls and handle the financial end of the business.

Read More About Entrepreneurial Success in Today’s Ridiculously Ugly Hotel Environment

By: Robert A. Rauch, CHA

No, we’re not talking about former President Bush.  The “W” hotel is the talk du jour as they basically handed the keys back to their lender this past week.  Is this the first of many to come? While the underlying market value of hotels typically declines only 20-30 percent during a recession, there will be some distressed assets that will trade at an even deeper discount.  In the case of the “W,” the owners, Sunstone, made a strategic decision. They are a public company with a non-recourse loan, and the value of the asset as well as the cash flow no longer footed to the debt on the property.  Any hotel purchased or refinanced in the “go-go” years of 2006 and 2007 might find themselves in a similar loan default.

What is the proximate cause of the decline in values and subsequent defaults?  One is the hotel finance market and the other is declining net income (NOI).  Read More About It’s Not About “W”

Recent occurrences within the hospitality industry and the nation have resulted in a market with extremely different characteristics than those of just a few years ago. Consolidation, globalization, and business failures continue to reduce the number of industry participants; lending and building excesses have been widespread; and the ability to acquire, finance or sell hinges upon international capital market events. To review R. A. Rauch’s perspective on industry events, visit our press section.

According to Yoram “Jerry” Wind, professor of marketing at the University of Pennsylvania’s Wharton School and founding director of Wharton’s SEI Center for Advanced Studies in Management, “wealth is created during periods of uncertainty. Making money depends on identifying opportunities in a turbulent marketplace.” Wind proposes three essential characteristics of organizations that flourish in times of turmoil:

1. Disciplined opportunism. Think of the world right now as one magnificent fire sale. “There are huge tactical opportunities to buy cheap assets,” Wind says. “You can buy technology or talent for very little money and build assets that will create the great companies of the future. But you need to have discipline about this,” he continues. It’s one thing to snap up a failing technology outfit for half of its book value. It’s another to land an asset that truly plays to your company’s strategic strengths.

Read More About Creating Wealth in Turbulent Times