At LIIC, it’s fundamentals vs. financing The Lodging Industry Investment Council debates rate drivers and what factors will bring REIT buyers back Los Angeles—As 2012 rolls into the second quarter, the hotel industry faces the challenges posed by a market characterized by improving fundamentals coupled with a static financing picture. Lodging Industry Investment Council members, who met during two separate meetings in Los Angeles in January, said they’re betting on a continuing rosy forecast for hotel operations, not only to keep revenue coming in now, but also to support an overall better financing picture in the future. “We live in two different worlds in the hotel business,” said Steve Van, president and CEO of Prism Hotels & Resorts. “The one that is improving is operating fundamentals, and the one we don’t talk about—where do we get the money for this stuff?” FUNDAMENTALS Operations company executives on the panel said they’re committed to growing revenue per available room through rate this year. “We had a good operating year as an industry in 2011,” said Mike DeNicola, EVP and CIO of FelCor Lodging Trust. “Fundamentals look good this year, especially with low supply growth. Whether financial markets can come back and rebound, that’s yet to be seen.” Vail Brown, VP, global business development and marketing for STR, reminded LIIC members that from an ADR growth standpoint, it will be another three to four years before industry-wide rates bounce back. “Our industry continues to be profitable,” she said. “Rate growth will be driving RevPAR growth over the next couple of years, we think.” STR forecasts overall industry RevPAR to grow 4.3 percent this year. In terms of rate drivers, several hoteliers said they are forecasting more conservatively in 2012 because 2011 ended up surprisingly well. “We thought RevPAR would be 50 percent rate-generated in 2011,” said Kevin Mahoney, COO of Stonebridge Companies. “I have a higher degree of certainty it’s going to come from rate in 2012.” Doug Kessler, president of Ashford Hospitality Trust, said rate growth most likely would come from transient travelers, because group still has yet to bounce back. “But you’re starting to see commitments for group bookings happening further out,” countered Bill Reynolds, senior managing director of MHR Capital. CAPITAL Operating fundamentals play a big role on the financing side—something the LIIC buyers and sellers feel keenly, particularly since public hotel company stock has dropped since August. “Once there’s greater confidence in the market, that will bring an increased flow of funds back into the REIT segment,” Kessler predicted. Bernard Siegel, principal of KSL Capital Partners, said it’s difficult “to predict a scenario where REITs will return to the high multiples.” David Loeb, senior research analyst and managing director for Robert W. Baird & Co., addressed some possible triggers to boost hotel REIT stock prices. “For most companies, it’s about what was the price of your latest equity deal, and can you issue equity at a price that’s similar to that last deal,” he said. “The trigger for issuing debt is all about stock price.” However, the combination of still-poor valuations and lack of capital is reflected in assets for sale. “We have two different worlds of hotels available,” said Mike Cahill, CEO of HREC-Hospitality Real Estate Counselors. “There are the hot, desirable ones, and there are the difficult ones to sell.” And buyers still haven’t seen quality distressed assets hit the market yet. “The product we’ve gotten from special servicers are the dogs,” Cahill said. “They’re holding on to the better properties until they can get better pricing.” With REITs pulling back, Cahill and Kate Henriksen, SVP of investment analysis and portfolio management for RLJ Development, said sellers lost some confidence in putting higher-end assets to market. That cycle likely won’t break until REITs begin to buy. “You’ll continue to see the REITs chase the bicoastal trophy assets, but it’ll be a game of what comes first?” Henriksen said. Jim Butler, partner at Jeffer Mangels Butler & Mitchell, said U.S. hoteliers would be wise to keep an eye not only on waxing and waning consumer confidence during an election year, but also on global economies. “The elephant in the room is still the global financial crisis,” he said. “European governments still have not dealt with their crises—they are where we were in 2007-2008. The economies of the world are so tied together. I see a huge cloud over the improving fundamentals, and it isn’t going to have a quick fix.” La Quinta signs three-property deal in Colombia New Orleans–For La Quinta Inns & Suites, it’s all about guest satisfaction, and the brand has committed to its “Here For You” branded guest message since its 2011 launch, posting a 40.7 percent increase in guest compliments. Expanding into Colombia was the other major headline out of La Quinta’s annual brand conference in New Orleans. The company signed a partnership with Colombian based owner-operator Grupo TAO to develop three La Quinta properties over the next three years in the country, with the first to break ground in Medellin, Colombia, shortly. performance “This year we’re going to intensify what we were inspired to do in 2011,” La Quinta president and CEO Wayne Goldberg told the more than 1,200 franchisees and other attendees at the 9th annual conference, riffing off the conference theme of “INNtensify.” On the growth side, the brand is picking up steam, announcing its designation from STR as the fastest-growing select-service brand over the last decade. La Quinta closed out 2011 with 828 properties open in the United States, Canada and Mexico. The company opened 20 new properties, including three in Mexico, and signed 39 new agreements. Goldberg said the brand has a pipeline of 168 properties, 92 percent of which are new-construction hotels. Goldberg shared key performance numbers including: ◾ La Quinta’s system-wide revenue grew 10 percent year over year in 2011 from $1.2 billion to $1.3 billion. ◾ Rooms sold grew 7 percent, to 18.5 million. ◾ RevPAR grew 8 percent. ◾ Occupancy grew 5 percent. ◾ ADR grew 3 percent. ◾ LaQuinta.com revenue grew 6 percent. ◾ Brand-wide RevPAR index grew 1.1 percent. “La Quinta not only has grown, but it has grown smart and it has grown well,” said Rajiv Trivedi, EVP of franchising and chief development officer. MOBILE PROJECTS Goldberg calls La Quinta’s new mobile platform “a game-changer.” La Quinta CMO Julie Cary detailed the LQ Instant Hold feature, which debuted in early March and allows guests to hold a room reservation for four hours with their phone number. Cary said the feature ties into the cloud-based La Quinta property-management system, and the best available rate. Guests using instant hold will get a return text with the details and a second reminder text. The company added another simple enhancement to the new mobile site—a larger phone number. “Our goal was to make it easy to be able to book a room no matter how you do it from your cell phone.” In addition to the new mobile site, the brand launched new Apple and Android apps at the end of March. Also on the online front, La Quinta will incorporate reviews from TripAdvisor and Yelp onto its sites. Colombia expansion Trivedi called the partnership with Grupo TAO to develop La Quinta properties in Colombia part of the brand’s “determination to grow very smart internationally, especially in Latin America.” Luis Fernando Toro, head of Grupo TAO, said La Quinta will appeal particularly to the business travel segment of Medellin, an industrial city that supports a large chunk of the country’s banking business. “We are building our hotels for Colombians and South Americans,” Trivedi said of the development deal. “Because of our name, it’s easier in this part of the world for people to accept us.” Trivedi said all three properties will be part of high-rise mixed-use developments, and will contain lounges and restaurants, similar to how the brand has developed properties in Mexico. Grupo TAO has invested nearly $10 million excluding land into the entire mixed-use development, and Toro said he expects the first project to take about 18 months for construction and open in about 20 months. The La Quinta hotel component will have 73 guestrooms. BREAKFAST AND UNIFORMS This spring and summer La Quinta will test new breakfast presentation designs. Prototypes feature a new signature icon of La Quinta’s breakfast program—a green apple—along with bamboo-style serving ware and a slat wall. The company also is testing a new way to serve oatmeal. Also at the property level, La Quinta is rolling out new polo shirt uniforms for employees, a new shirt style for housekeeping staff and an updated orange nametag.