Why a Full Hotel Is Not Always a Profitable One, with Jan Freitag

Episode Transcript

Jan Freitag: I think we have learned that in certain situations, cutting rate does not induce demand like in 2020, and that indeed you can be better off not running a full hotel as long as you run profitable. So the focus on high occupancies to the detriment of room rate is hopefully something that people have learned needs to be really taken with a grain of salt. A good hotel is not a full hotel. A good hotel is a profitable hotel going up.

Robin Trimingham: Welcome to the Innovative Hotelier podcast by Hotels magazine with weekly thought provoking discussions with the world’s leading hotel and hospitality innovators. Welcome to the Innovative Hotelier Podcast brought to you by Hotels magazine. I’m your host, Robin Trimingham. Historically, the travel sector has frequently been the last to experience the negative impact of a recession and also quite frequently the last sector to recover afterwards. Interestingly, however, despite two consecutive quarters of negative GDP growth in the latter half of 2022, the hotel sector did not experience a decline. And this is fuelled and optimism that not everyone believes is realistic. So the big question is what will 2023 bring and how can hoteliers best position their operations to weather a recession if one does happen? My guest today, Jan Freitag, the national director of Hotel analytics for COSTAR, is here to chat with me about all of this. Please join me now for my conversation with Yen. For the last 15 years, Groupe G has been a leader in the luxury cosmetic amenities industry. The group proposes a 360 solution for manufacturing to distribution, with over 40 international brands and its worldwide distribution network. Groupe GM offers different shapes and sizes of eco friendly products in hotels all over the world. Discover more on www.GroupeGM.com. That’s group with an E, GM dot com. Welcome, John. It’s great to chat with you today.

Jan Freitag: Thanks for having me. I appreciate the opportunity to be with you.

Robin Trimingham: Well, I think we’re going to have a very interesting conversation because there’s been an awful lot going on. And hopefully you’re going to help us get the correct lay of the land here. So let’s just start off by very quickly recapping what happened in Q4 2022. And what about it is fueling the initial optimism as we head into 2023.

Jan Freitag: So when you think about US room demand, they are sort of a three legged stool. There’s leisure demand, corporate transient demand and corporate group demand. And leisure travelers continue to spend their own dollars. And group demand in December was basically in line with December 2019. The thing that’s missing is corporate transient for a variety of reasons we can talk about in a minute. But the other positive sign and your audience has lived this is very, very healthy room rate growth. And we just continue to see that compared to 2019, that room rates are up for the full year. They were up 19%. And that growth rate obviously is not sustainable, but that’s what fueled the healthy results last quarter.

Robin Trimingham: So and I think you also hit on what might be causing some of the confusion to some of us who are not expert the way you are. Do you feel that any of this optimism is unrealistic because there’s been such a big increase already, as you said? What’s the data saying?

Jan Freitag: So this year, 2023 is the first year that STR and I’m with coast to coast our own STR and our macroeconomic forecasting company called Tourism Economics. The first year that we’re forecasting growth in Ravpower despite a slowdown in the economy. So rapid growth in a recession that hasn’t happened in the 30 year data set that STR has. So that is certainly reason for optimism. A recession is never good, but being able to drive revenue not a whole lot, but drive revenue a little bit in that is noteworthy. So that’s good. The other piece that makes us feel good is that we talk to our clients, the large publicly traded companies. They’re saying from what they’re seeing looking forward that things are also pretty healthy. They have good pickup in in the quarter for the quarter. They feel that when they talk to small and medium sized companies that drive in like a three or four state radius that drive limited service demand that those companies are healthy and traveling. And it seems like the American leisure consumer is really ready to continue to spend. Now, I want to be clear that the growth rates we’re projecting are nowhere near the double digit 20, 30% growth rate that we’ve seen for the last couple of years. I don’t think anybody’s expecting that. But we’re also not seeing a decline. So we continue to see growth. Our expectation is to see growth just in the room rate call the 2% range or so.

Robin Trimingham: Okay. So that makes more sense to me. I think what might be leading some analysts to say that maybe this isn’t going to be sustainable is a couple of the really unique things that have happened as a result of the whole COVID thing. Initially, all we could do was travel domestically, so traveling for a staycation became a thing for people who might never have considered it before. And the pent up demand to travel internationally suddenly is being released because all of a sudden we can go anywhere. When the analysts who are not as positive as you are about all of this are suggesting that the recent recovery might be short lived because of things like this and other macro data. What do you feel that they’re missing in all of this?

Jan Freitag: Well, I think we’re all looking at the same data point. I think it’s a question of interpreting it right. So you can say, yes, Europe’s on unsafe, right. Because of the strong dollar. There is absolutely this this idea that we’ve been to Yosemite the last three summers. Let’s now go to Venice. I get that. But airfare plays a huge role in that calculation. Right. And airfares are very, very. They’re very, very much higher than they were for the last couple of years. So I would not be surprised that people who could afford to go abroad might say, you know what, maybe I’m going to do another vacation in the country just because, you know, I liked it. It’s good time with the family in the car. Now, I have been presenting to very, very high end travel advisors and luxury hotel brands, and they see no slowing of the outbound travel. I’m just not sure that that’s true for all American. Japan opened up and the number of Americans going to Japan December, according to the Department of Commerce, was basically the same as it was in December of 2019. That’s a remarkable reversal from a country that was basically closed to the outside.

Jan Freitag: I get a lot of questions about China. What about China? Is China opening? Yes. Is China letting people out? Well, technically, yes. But they haven’t renewed passports since 2020. So you need to get a passport to leave and obviously to come back. And then China is a very big country. We’re very curious to see what the Chinese New Year celebrations, what they were like, what the travel numbers were like. Those numbers are going to be released here in a week or so. I’m not sure that we’re going to see a huge influx of Chinese travelers to the western seaboard in the first half for sure. Maybe that eases a little bit. We see a couple of more Chinese coming. I think they’re going to be in Korea, Vietnam, first, Cambodia before they come to the West Coast. So going back to my initial answer, I think there are two ways to look at this data set. We’re just saying Americans will continue to travel. And I think that’s going to lift the results for this year, not by a lot, but it will.

Robin Trimingham: I can see where you’re coming from on all of this. And I think you made a very insightful point when you raised the issue of passport renewal, because you’re absolutely right. In a lot of countries, the delays in ability to travel have really caused a backlog in the passport renewal process. Even when you’re in a country where you absolutely can get a renewal for your passport, if you will. Let’s play in what I’m going to call the middle ground just a little bit here. I’m going to call it a time of economic uncertainty, because as you wisely pointed out, there is more than one way here to interpret the data. So let’s try and offer some help as best we can. In a situation like this. Do you think director of revenue should be running multiple what if scenarios, and if so, to prepare themselves? Can you give us a couple of examples of what would be a good idea?

Jan Freitag: Yeah, I think what if scenarios make sense, but I think you need to do it by basically customer source, right? So you need to understand what is your what is your 2019, 20, 20 share of leisure travelers or group travelers or corporate transient demand. So now let’s play this out. Leisure travelers who are coming to our hotel that they’re flying or they’re driving, you know, we know that higher gas prices don’t really impact drive to demand. We have studies on that. Good. But it’s quite fair to assume that if a lot of them are using an airplane, the total cost of travel, airfare, plus hotel, plus rental car may have people say, oh, you know, maybe I’m not going to fly or maybe I’m not going to come on this long weekend vacation, maybe that I’ll skip. So on the group side. I’m very bullish on this whole not being in the office, this whole not returning to the office hybrid work or so I think. And then us being online all the time on teams or on Zoom, I think has really solidified that we need to be together in order to be productive, in order to be human, right? So we can do this for a while. But then if you’re the head of HR of a large corporation, you still have to build culture. And how do you do that if people aren’t in the office around a water cooler? Right.

Jan Freitag: You need to get them into a room. And how do you do that? You say, All right, Tuesday night, everybody comes to Orlando, Wednesday morning training, Wednesday afternoon team building, Wednesday night, another dinner and everybody leaves. Or maybe add a day or two for your or pleasure or whatever you want to call it, vacation. But so I’m very bullish on group because I think we have learned the hard way that we have to get together and not substitute for getting together. So as a revenue manager you figure out, okay, who are the groups that we always had? Who are the groups that may be adding poll trips or maybe even just room nights? And then lastly, the last piece is corporate transient. If you’re relying on tech companies, wow, that’s going to be tough. You know, they’ve had, what, 90,000 people laid off in January alone. That’s a lot of corporate transient travelers that are not going to be traveling. So you have to figure out who are your source companies and what is the sense of those corporations. Are they saying, hey, we’re back on the road or we’re not? And that’s what public traded companies are telling us when they look at the small and medium sized corporations, they’re absolutely back on the road. So if that is who you’re dealing with, then it’s interesting for you to observe. Those people are likely back and back to 2019 level.

Robin Trimingham: It’s interesting when you mention group because you’re right, an awful lot can go on with group business after it’s booked because there can be a big lag time between when you booked it and when they’re actually going to be on property. How carefully do you think they should be checking over these contracts, looking for escape clauses, looking to see what group might wash, what group might need more rooms than you expect it.

Jan Freitag: Yeah. I mean, I think after after 2020, the language in those contracts is a lot more. But also we want to be kind to the people who deal with us because we want them to come back. My anecdotal conversations are purely that people are saying that sales directors on property are saying, wow, groups are picking up more rooms than we thought than they thought. Just because people saying, Oh, I want to get together.

Robin Trimingham: You’re making me think of a secondary question because the other side of suddenly having more rooms needed than you thought can have implications in your cost centers like housekeeping, labor costs, your food and beverage ordering and all of that. So it would make me think this would be a good time to really be liaising with all your other departments regarding what’s coming next week, next month, in the short term.

Jan Freitag: Yeah, absolutely. The other piece to that is that if the group, let’s say, meets on a Thursday and Stephanie Leonard, who used to be with Marriott, had this very interesting quote I keep using all the time at NYU two years ago where she said Thursday used to be a checkout night. Now it’s a check in night. So if you have a group on a Thursday, it’s possible that you bump into your leisure demand. And so then if the group meeting planner comes to you and says, Hey, I need what, five, six, ten more rooms, the revenue manager has to say, well, yes, you can have them, but I have to charge you bar because I have leisure customers who would pay me that exact number. So that’s an interesting conversation that we may not normally have.

Robin Trimingham: Yeah, that’s a challenging one too, because of course you want to be kind to the group because they’re your repeat customer. Yeah, I can definitely see the dilemma in a situation like that. Did you know that offering top cosmetic brands is a delight for your guests? For the last 50 years, Groupe GM has been a leader in the luxury amenity industry. The group proposes a 360 solution for manufacturing to distribution on cosmetic amenities and dry accessories. With over 40 international brands such as Greenland, Nooks, Italia, Cologne. The group offers different shapes and sizes of eco friendly products in hotels all over the world. This is possible thanks to its worldwide distribution network. Thanks to their care about the Earth’s programme, you can offer your guests top cosmetic products with a reduced environmental impact. Discover more on www.Groupe Gm.com that’s Group with an E GM dot com. Let’s talk about it from the customer perspective for a minute here because as a result of all the things we’ve just been talking about, there has been hyperinflation and there’s been a labor shortage. And I’m oversimplifying of course, but the end result here is that rooms that were hypothetically $100 a night once upon a time are now as much as $200 a night. So what’s your advice to hoteliers on how you maintain margins without scaring off the guest base that you have been relying on heretofore?

Jan Freitag: So I’m from Germany. Hyperinflation is not what this is, okay. In the 1920s, we had hyperinflation in Germany, which is the wheelbarrows. Yeah. This is 9%. So and the forecast from Oxford Economics is that this at the end of this year, inflation is going to be in. Has it going to be a four handle going to be in the 4% range? So we were there. I think we’re going to hopefully get out of it as the interest rates continue to be higher. But your question on margins is right. That’s the question that every revenue manager and general manager is wondering about, because driving the top line is all fine and dandy, but your expense lines are also rapidly accelerating, a rapidly increasing on the labor front, on the insurance front, on the energy front, on the eggs, whatever. So, yes, people talk about in America. So how you manage that, the delta between how you drive revenues up and still fulfill the guest expectations while at the same time manage your cost base so that your owners continue to be happy? That’s absolutely the conversation that’s going on up and down the land. That is the conversation.

Robin Trimingham: So you’ve just mentioned owners and cost base in the same sentence. So you know where I’m heading next here. Where do you stand on capital expenditures at a time like this? Do you think they should be deferred? Do you think there are certain types that should definitely be proceeded with your opinion?

Jan Freitag: I mean, we have deferred FFA and CapEx expenditures for the last two years, arguably. So we’re telling the customer, hey, the room that you’re getting is three or two years older and we haven’t done anything to it, or maybe we last renovated it in 2015 or so and we wanted to do it in 2020. Now it’s 2023, but it’s gone up by 30% or so compared to 2019. You know, there’s a little bit of a disconnect. Brands, I think, have been very kind and not pushed pips and brand pips, but I think they are also at the end of their rope to say, hey, you know, really the brand standard is X, let’s play ball and get your property back to what the brand standard is. So it’s not so much about my opinion, it’s about what’s the conversation between the owner and the bank that has to lend the money or the owner that doesn’t have the money may have to find some rescue or what people call recovery capital, or may say, You know what, I have a portfolio of ten hotels. I need to just get rid of five to save the other five. So I think there are ongoing conversations about this exact topic, but I think the outcome is that more money will be spent on property just because we have.

Robin Trimingham: You’re making me think of another question. You mentioned the very real possibility that some brands might decide to let a few properties go in order to be able to bolster the rest of them. Is there a situation in which this is a buyer’s market for somebody who wants to extend their portfolio of properties?

Jan Freitag: So I was not talking about brands, I was talking about owners. You know, owners have a portfolio. Yes. They may say, look, some are not our strategic fit anymore. Maybe we focus more on urban or maybe focus more on resort and focus more on the West Coast or whatever, you know, and we just sort of cull the herd, so to speak, and get rid of some of the property. Now, brands may do the same thing. I think what you’re alluding to is very, very true, that brands are saying, look, we have brand standards for a reason. We’ve been very kind. Time’s up. So show me that you have the plan and the money, or you may not meet our brand standards anymore. You may not be part of this brand family anymore, and hopefully those conversations are few and far between.

Robin Trimingham: Yeah, because those ones get very, very difficult, don’t they?

Jan Freitag: Yeah. It’s the next owner then, who has to really step up and include the whole PIP in the understanding of how much this, what they’re paying for this property, knowing full well that they’re writing a check to the seller, but also they have to then write a check to the contractor to continue to improve the property. So back to your original question of is this an opportunity at the America’s Lodging Investment Summit, the A-list conference which happened last week in LA, one of the brokers was on a panel and he made this quote that stuck with me, and I use it all the time. But he was asked, what’s trading? He said, trophies and trauma. So the very high end and it’s stuff that’s broken, arguably. And I think we will see some of that this year. Now, the trophy piece is already well underway. You saw that two days ago, the diplomat in Florida sold for the largest amount post COVID $835 million to tourney investment out of Hawaii. So that was certainly a milestone event to say, yes, full service resorts are here and they spend going to spend a lot of money making it even nicer and up flying it from curio up to a higher end Hilton brand.

Jan Freitag: So that is ongoing. On the other side of it, we have 30 billion or so CMBS loans come due. Hotels that are in the CMBS pool that need to be refinanced, Some of them may not be able to refinance because the initial owner interest rate was 3%, 4%, and now it’s 8%, 9%. And that’s just a very big difference. And some owners may just say, look, this is not really worth for us to put good money after bad. So we’ll see. There may not be as much distress as people are hoping for. Part of that is, of course, that there’s a lot of money on the sideline. A lot of people are willing to step into an equity position or a mezzanine position or just a senior debt position. So there will not be this sort of flood, the tsunami of distress that we saw that did not happen in 2008 and nine. It did not happen in 2020. It will not happen in 2023, but there will be select deals where some owners need to step away.

Robin Trimingham: You know, you make an interesting point when you mention the money currently on the sideline. I know more about the stock market than I do about the buying and selling of hotels. I will admit that openly. Do you think that some of this money on the side is trying to time the market, trying to figure out when is the best time to jump in?

Jan Freitag: Yeah. I mean, I think they all try that. It’s just the question is if you take the diplomat shown here is group true investment says this is the right time for the largest purchase price post 2019. Some other buyers may say, wow, that’s a crazy number. We’re not ready to do that. Others may say, Oh, it was an awesome opportunity. I wished I’d done that deal. You know, it’s a little bit in the eye of the beholder. A little bit in the eye of the seller.

Robin Trimingham: Yeah. Interesting time, indeed. So over the last couple of years, as a result of COVID, extended stay has been like the buzzword the darling of the industry, if you will. Talk to me a little bit about this, because my understanding is that there’s quite a bit of extended stay property in the pipeline. Is this interest in this category justified or is this going to be sort of a fad?

Jan Freitag: Justin was a CEO of Access to America, was on a panel at Alice, and he said, wow, for the last, I think three and a half years supply growth, cumulative has been 40%. And everybody sort of in the audience like, wow, that’s a lot. He’s like, Yeah, but demand growth has been 43%. So, you know, he’s like, this is a great part of the industry. And I think we saw in the middle of 2020 when there was no demand, when people did not travel, extended stay, did phenomenally well. I always like to use this one data point, which is sort of scary and interesting at the same time. But the week of April 7th, 2020, which was the low point in the American lodging industry when there was no demand and we were basically in lockdown, the American hotel industry sold 1 million rooms a night. So you’re like, Wait, who travel? Who is on the roof staying in a hotel? And yes, there are traveling nurses and engineers and consultants who have to be on site and people who have life changes and need to move out or they move across the country for another job.

Jan Freitag: All of those people, a lot of them stayed in extended stay properties. And if you look at the occupancy for the extended stay sector overall in 2020, and if I just showed you the line and didn’t tell you it wasn’t the pandemic, you’d be like, yeah, it’s a little bit lower than what it was, but it looks pretty strong and it was pretty strong. You know, they still have an occupancy of over 60% in the worst and worse and worse time of the industry that the industry has ever seen. And I think that has given a lot of people pause and it’s given a lot of people interest in this sector of the industry, which is arguably, if not recession proof, then at least recession resistant. And you saw that immediately with the Starwood Capital, Blackstone deal taking Essar Private and then taking over a bunch of other extended stay brands know they said, yes, we’re going to put our money where our mouth is like we like this sector, let’s go here. And so I think we’re going to see this sector going to continue to find a lot of willing investors.

Robin Trimingham: I think you’re making an excellent point, because you’re right. If nothing else, the situation that we’ve been through is really shown what the level of demand for this kind of product is and can be. Question I’ve been asking everybody lately, what do you feel is the biggest mistake that hoteliers need to avoid making right now? And why do you say this?

Jan Freitag: I mean, I think we have learned that in certain situations, cutting rate does not induce demand like in 2020, and that indeed you can be better off not running a full hotel as long as you run profitable.

Robin Trimingham: Yeah.

Jan Freitag: So the focus on high occupancy to the detriment of room rate is hopefully something that people have learned needs to be really taken with a grain of salt. A good hotel is not a full hotel. A good hotel is a profitable hotel. And I think to understand that relationship, it’s not all just about the top line and about standing in the parking lot at night and seeing all the lights in your hotel on and saying, Oh, wow, this is a good hotel. That, to me is maybe the most important takeaway out of 2020 is that be very mindful of how you manage your your rates and the occupancies that come with it.

Robin Trimingham: I think that’s a great way to end. But I am going to ask you one more question. What would be your one piece of advice that any hotelier listening to us today can do to improve their ADR as we move through Q one and into Q two?

Jan Freitag: Buy more data.

Robin Trimingham: Excellent response. Thank you so much, Jan. You’ve been listening to the Innovative Hotelier podcast. Join us again soon for more up to the minute insights, specifically for the hotel and hospitality industry. You’ve been listening to the Innovative Hoteliers podcast by Hotels Magazine. Join us again soon for more conversations with hospitality industry thought leaders.