The severe downturn in the hotel business during the past two years began claiming its first casualties this summer, as three small-to-midsize hotel companies either saw properties declare bankruptcy or start to sell off assets. At the same time, hotels' operating costs have continued to rise, putting more pressure on margins. A study released last month, for example, reported that insurance costs for full service hotels rose 62.5 percent in the past two years.
While the major multi-brand companies remain on fairly secure financial footing, the declining fortunes of Le Meridien Hotels & Resorts, Adam's Mark Hotels & Resorts and Ian Schrager Hotels added to a sense of uncertainty surrounding the industry as a whole. The timing also provides travel buyers with further evidence that they will continue to hold the upper hand as negotiations for 2004 room rates get underway.
For buyers, any industry upheaval that leads to consolidation is a cause of concern because it potentially limits the number of competitors vying for their business in a market. On the upside, new ownership of hotels frequently means buyers can negotiate better deals since owners are eager to drive trial usage.
Lodging industry consultant PricewaterhouseCoopers this week is scheduled to report that revenue per available room, a key determinant of hotel profitability, will show practically zero growth in 2003. Yet, performance in the second half of the year is expected to be more positive than in the first half. In fact, as PwC previously reported, the fall-off in hotel demand seems to have reached its lowest point in the first quarter of the year. The drop in room rates reached its ebb in the second quarter.
"These troughs appear to mark the end of a period of volatile, month-to-month or even quarter-to-quarter results," said Bjorn Hanson, global head of the firm's hospitality and leisure practice. "That volatility now has worked itself out."
The financial crisis at Le Meridien reached a critical point in July when the Royal Bank of Scotland—owner of 11 of Le Meridien's 135 hotels, including its two London flagships—demanded payment of back rent. Bankruptcy temporarily was averted when the bank agreed to an elaborate refinancing package. At about the same time, the management contract on the Le Meridien Dallas was awarded to Westin Hotels & Resorts, which is part of Starwood Hotels & Resorts Worldwide. The management contract on the Le Meridien New Orleans earlier in the year was given to Marriott International, which now operates it as a J.W. Marriott.
Soon after the present Le Meridien chain was formed in 2001, then chairman Jurgen Bartels announced an ambitious plan to convert select properties to a boutique approach he called Art & Tech. "We're creating a brand within a brand that's going to claim the territory of cool hotels," he said
(BTN, Dec. 3, 2001). Yet, the decline in occupancy rates and room revenues due to the downturn in business travel hampered the pace of Bartels' overhaul.
Adam's Mark in August sought a buyer for 10 of its 22 properties, according to Jim Patrick, CFO of Hodges Ward Elliott, the hotel brokerage firm hired to conduct the sale. It's not clear if a single buyer will be found for the entire portfolio or whether there will be a series of single asset sales.
Adam's Mark, an upscale chain, recently sold other hotels in Memphis, Tenn., and Houston. The Memphis property in April became an affiliate of Hilton Hotels Corp., known as the Park Vista Memphis. Following extensive renovations, it is scheduled next spring to change flags again and start operating as the Hilton Memphis.
An earlier deal to sell six Adam's Mark properties failed to close. Knud Svendsen, vice president of sales, in March told BTN that the chain had adjusted its strategy to go after more group bookings as a way of supplementing its lagging transient business.
While all of Ian Schrager Hotels' properties have suffered in the business travel downturn, losses at The Clift in San Francisco have been most pronounced. With the San Francisco market hit doubly hard because of the collapse of the dot-com industry, the hotel in August filed for bankruptcy protection, reportedly $57 million in debt. A Schrager spokesperson confirmed the filing, but would not comment further.
Of the three reversals in fortune, the decline at Schrager Hotels is the most revealing since the chain's fashion-conscious properties in New York, London and Miami were the epitome of the boutique hotel craze in the late 1990s.
The 62 percent jump in insurance costs for full service hotels from 2001 to 2003 is in sharp contrast to the late 1990s when these costs actually declined, according to the lodging industry tracking firm of Smith Travel Research, which compiled the data. The jump in costs reflects increased safety and security concerns post-September 2001.
Insurance costs for limited service hotels increased significantly as well, noted STR president Mark Lomanno, though the jump was not as dramatic as for full service hotels. This might be attributable to location since most full service hotels are in downtown locations, where security concerns would be greater than the suburban/highway locations, where midprice hotels are more prevalent.