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Hello Ladies and Gentlemen,

As you are all in the throes of developing, or defending, your budgets the following article may be helpful. Last year I had offered some articles that alluded to the same propensity of optimism (that’s a really good thing, by the way) although it does make for a difficult year to achieve results! This year, the future is somewhat cloudy although the general sentiment is that the second half should bring some relief by way of stronger and growing demand.
As we all know, at the end of the day, this demand is so regionally specific and equally more specific to your sales and marketing efforts within the sectors that are likely to show this increasing demand.

Be strategic in focusing the efforts of your sales force and keep a handle on undue expenses, particularly those with minimal guest impact.
For guest impact items and for marketing to the strategic segments, it should be full steam ahead with no hold back! It’s the surest way to hold what you have and shift share.

Enjoy the PKF article. Good luck and have a great weekend,

Nagib.

Surprised, or Stubborn? U.S. Hotel Managers Missed Their Budgets In 2008 - By Robert Mandelbaum
Date: 2009-10-22

The U.S. lodging industry rebounded strongly after its 2001 to 2003 industry recession. RevPAR growth exceeded 7.8 percent each year from 2004 through 2006. While hotels achieved a relatively strong 5.8 percent growth in RevPAR in 2007, industry performance started to show its first signs of softness. During the year, demand grew less than 1.0 percent contributing to a slight drop in occupancy (-0.4 percent).
Despite the decline in 2007 occupancy, U.S. hoteliers remained optimistic when preparing their budgets for the following year. Hotel management forecast increases in occupancy, ADR, RevPAR, and profits for 2008. In hindsight, we now know that the U.S. hotel industry suffered declines in all major performance measurements during the year

When preparing their 2008 budgets, did hotel managers miss the early warning signs observed in 2007, or did they stubbornly follow the historical practice of not budgeting for performance less than the prior year?

To answer this question and assist U.S. hotel management in the preparation of their 2010 budgets, PKF Hospitality Research (PKF-HR) examined the accuracy of 518 hotel budgets for the year 2008. The data was taken from the Trends(R) in the Hotel Industry database of PKF-HR.

Budget Inaccuracy
Looking towards 2008, the hotel managers in our survey sample were budgeting for a 6.8 percent increase in total revenue. Unfortunately, at the end of the year, total revenue declined 1.8 percent.

The main reason for the revenue shortfall was an overestimation of the number of rooms expected to be occupied. The properties in our research sample budgeted for a 1.6 percent increase in occupied rooms in 2008, but actually ended up accommodating 3.7 percent fewer rooms than they did in 2007. Fortunately, hotel operators were able to raise their room rates to some degree. In 2008, the ADR for the sample grew 2.1 percent, but fell 2.9 percentage points short of the budgeted growth rate of 5.0 percent.

Growth in ADR was welcome news, but not enough to overcome the deficit in occupancy. The net result was an actual 1.8 percent decline in RevPAR in 2008, far short of the budgeted increase of 6.5 percent. Since rooms revenue comprised 64.7 percent of total revenue for the hotels in our survey sample, this explains most of the underperformance in budgeted total revenue.

Facing less revenue growth than expected, the hotel managers in our survey reacted by controlling their costs. Total operating expenses (operated departments, undistributed departments, fixed charges) were budgeted to grow 6.5 percent from 2007 to 2008, but only increased 0.5 percent. Part of the moderation in expense growth can be attributed to the reduced occupied room count and corresponding reduction in the variable expenses that would have been needed to serve these rooms.

Despite controlling their expenses, the hotels in our survey sample were unable to achieve their target net operating income (NOI). NOI was anticipated to grow 7.3 percent in 2008. Instead, the sample properties suffered a 7.7 percent decline on the bottom-line. At the end of the year, hotels fell short of their budgeted profit levels by 14.0 percent.

Looking Towards 2010
PKF Hospitality Research has been tracking the accuracy of hotel budgets since the late 1990s. During this time, we have learned that hotel managers are very adept at budgeting during prosperous periods for the lodging industry. However, when the industry suffers through a slowdown, the accuracy of hotel budgets deteriorates dramatically. Under poor market conditions, hotels have missed their profit targets by as much as 20 percent.

Budgeting for 2010 will be extraordinarily tough for U.S. hoteliers. Current year market conditions continue to deteriorate each month, thus creating an environment of pessimism. While the final results are not in, it is expected that most hotels will not meet their budgeted performance marks in 2009. In a June 2009 survey conducted by PKF-HR, 86 percent of the 407 managers surveyed stated that their property will perform worse than their budget for the year.

Compounding the current negative situation are forecasts of continued declines in the overall performance of the U.S. lodging industry for 2010. According to the August 2009 edition of Hotel Horizons(R), PKF-HR is projecting RevPAR to decline 2.7 percent next year. With the decrease in RevPAR driven mostly by a 3.1 percent decline in ADR, PKF-HR is predicting that unit-level hotel profits will drop 8.3 percent.

Given these factors, it will be difficult for hotel managers to buck historical stubborn behavior and budget for further declines in revenues and profits during 2010. However, as we have observed in the past, external pressure from the corporate offices of the management company or ownership may force the establishment of more aggressive operational targets.

Robert Mandelbaum is the Director of Research Information Services for PKF Hospitality Research. He is located in the firm’s Atlanta office. For more information on the reports and services PKF-HR offers to assist hoteliers in the budgeting process, please visit www.pkfc.com/store. Parts of this article were published in the September 2009 issue of Lodging.

Hello Ladies and Gentlemen,

A very interesting article and one that Chairman Robert Alter of Sunstone Hotel Investors sees as something that is going to become a more utilized move here in the United States, per the article below.

Of course, many investors, particularly family-owned enterprises, have full recourse loans and, hence, the dynamics of an option such as this pose a whole different set of issues. It is, nonetheless, likely we will see more situations such as this, especially after the summer.

Many owners are hoping for a shot in the arm from cash flows over the summer season. In the event this does not meet expectations, some hard decisions will become imperative over the fall. Lenders, it would appear, also have their challenges. Many articles have been written on the perspective from that vantage point. In many cases, working out an accommodation with the existing owner may be to the lenders advantage rather than they being transformed into a hotel operator in an environment even the best operators find an uphill battle.

Good luck to you over this season!

Nagib.

With many sectors of the lodging business in turmoil, most specifically hotel real estate, hoteliers are being forced to make some real tough choices. And one of the most difficult is letting a hotel go into default. On the surface it seems like the antithesis of a smart business decision. But in today’ reality, letting a hotel be taken back by the bank may actually make the most fiscal sense for an ownership group.

It’s a business model some are predicting will become a trend in the next couple of years as billions of dollars in commercial mortgage backed securities (CMBS) debt becomes due. And with room rates and occupancy depressed making those payments as originally agreed up may become impossible.

So how exactly does letting a hotel slip into receivership make sense? It was a subject that came up this week at the Americas Lodging Investment Summit Summer Update, held this week in Los Angeles.

Turns out that in some instances letting the property go can actually help the health of a company that has many other solid hotel investments. So freeing yourself of a property that cannot be saved financially may be an organization’s only recourse.

The most notable company to take this route of action is Sunstone Hotel Investors, which last month decided it was a better move to let the 258-room W San Diego slip into default rather than pump in $65 million of cash to what they considered losing situation.

According to Sunstone Hotel Investors’ Chairman Robert Alter, the company is sitting on $200 million cash stockpile and owes the bank $65 million.   “[We] chose not to make payments because we viewed it as sending more bad money after good. It looked like in the analysis [to us] the value was not going to reach the $65 million debt limit,” said Alter.

In addition to that property, the lodging real estate investment trust (REIT) has interests in 43 hotels comprised of 14,755 rooms primarily in the upper-upscale segment. Sunstone’s hotels are generally operated under nationally recognized brands, such as Marriott, Hilton, Hyatt, Fairmont and Starwood.

When Sunstone bought the property in 2006 for $92 million company executives expected the San Diego hotel industry to remain stable. But more supply flooded the market such as Hilton San Diego Bayfront which has 1,190 rooms and the uber upscale Se San Diego and two other Starwood branded hotels.

“There was a lot of equity initially in hotel and then income fell dramatically. New hotels opened. So that income went down dramatically,” said Alter.

According to Sunstone, the $65.0 million, fixed-rate CMBS mortgage that bears an interest rate of 6.14%. The mortgage matures January 1, 2018, and is non-recourse to the Company. Scheduled 2009 debt service on the mortgage is approximately $4.0 million. The principal amount of the mortgage equates to more than 30-times the hotel’s 2009 forecasted EBITDA, and more than $250,000 in debt per room.

With numbers like that, Sunstone representatives said they tried to work out the loan with the lender but “the special servicer has recently declined the Company’s proposed modifications,” said a press release.

Because of this, Sunstone decided to forgo last month’s debt service payment on the hotel’s mortgage.

Michael P. Levy, Managing Director with Morgan Stanley said he understand why Sunstone made such a decision and that is makes fiscal sense in this instance. “In general Sunstone has a fiduciary duty to its shareholders. You can do a lot with $200 million in capital and they thought that on a risk adjusted basis to deploy their cash elsewhere. This is something that is taking place en masse around the world,” said Levy. He also notes that more often bankruptcy and foreclosure are being used as tools to deal with the issue of committed capital and getting appropriate risk adjusted return on it. “That decision is taking place around the world today,” he said.

Michael Murphy, Head of Lodging and Leisure Capital Markets with First Fidelity Companies said the move will also free up more cash very month to also be utilized elsewhere. “Now they can clean up their balance sheet. Its axiomatically better and [they] saved [themselves] $2 million in cash flow,” said Murphy.

Alter sees this as something that is going to become a more utilized move here in the United States.

“When you can’t engage a servicer in a conversation, what else can you do? I believe by taking that action you set up the rest of industry to be put on notice. There was a lot of non recourse debt out there and people will look at the facts and decide how to proceed,” said Alter.

Nagib Lakhani   - RevMax Hospitality Consulting Services
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nagib@RevenueMaxConsulting.com

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