1Q Earnings Bode Well For Hotels

First-quarter room revenues for a range of hotel companies increased—in some cases by double digits—according to earnings announcements last month. The strong performance is evidence that the turnaround in lodging demand, fueled mostly by a rebound in business travel levels, that began in the fourth quarter of 2003 is gaining traction. The lodging industry's excitement at the results, however, was tempered by the fact that the year-over-year numbers were to some degree a reflection of what Wall Street analysts call "easy comparisons," meaning that demand in the first quarter of last year especially was weak because of the pending war in Iraq.

The industry's continuing turnaround story is a mixed blessing for buyers. In terms of property maintenance and service, a healthy lodging industry is to the buyer's advantage. However, as far as this fall's negotiations for 2005 rates are concerned, strong revenue numbers suggest that hotels will be less willing than in the past few years to negotiate favorable terms.

"Group bookings and transient demand accelerated steadily through the quarter, and we are encouraged by the indications for the rest of the year," said J.W. Marriott Jr., chairman and CEO of Marriott International. "Business travelers are back on the road worldwide, going to group meetings, making sales calls." Revenue per available room at Marriott hotels in North America rose 5.4 percent for the quarter.

Barry Sternlicht, Marriott's counterpart at Starwood Hotels & Resorts Worldwide, noted that decisions made during the downturn are beginning to pay off. "It's gratifying to see the strategies made in the recession drive our performance now," Sternlicht said. RevPAR at Starwood-owned hotels worldwide jumped 11.6 percent in the quarter.

Yet, in the critical U.S. market, some gateway cities continued to struggle, despite the overall positive results. According to Stephen Bollenbach, president and CEO of Hilton Hotels Corp., which posted a 2.9 RevPAR increase for the quarter at company-owned hotels, San Francisco remained a generally soft market, while Chicago posted weak results owing to a reduction in the number of citywide conventions. Sternlicht also cited Chicago, along with San Diego and New Orleans, as markets that struggled during the quarter. Buyers planning to bring additional room nights to these cities in the coming months could benefit from this extra negotiating leverage.

A challenge for the industry, regardless of market, is that room rates increases have not kept pace with improvements in occupancy. At such a single brand company as LaQuinta, for example, the discrepancy was significant. While RevPAR for the quarter jumped 11 percent, "the improvement was driven by an occupancy increase of 10 percent," said president and CEO Butch Cash. RevPAR partially was offset by lower average rates.

Raising room rates remains the industry's objective. "Our goal during the quarter was to generate higher room rates," said A.F. Petrocelli, chairman and CEO of Prime Hospitality Corp., which posted a quarterly RevPAR gain of 1.4 percent. Petrocelli noted progress had been made in this regard "through better yield management and less reliance on discount distribution channels." Moving forward, he is counting on further increases in business travel demand to have a positive effect. "As business travel improves, we believe there is further rate potential," he said.

Increases in the rate of supply growth remain a cause for concern to the industry since a flood of new properties coming on the market would dilute the effect of strengthening demand. However, the pipeline remained in check—and, in some price segments, even fell—during the period. "A steady decline in full service supply growth bodes well certainly for the remainder of the year and, we believe, for future years," Hilton's Bollenbach noted.

Yet, such a chain as Fairmont Hotels & Resorts, which actively has expanded distribution for its single brand during the past few years, stuck to this strategy. The company announced new properties in Mexico and Dubai during the quarter and, according to CEO William Fatt, is on the lookout for other such opportunities. RevPAR at Fairmont during the quarter jumped 12.9 percent at company-owned hotels.

Similarly, Marriott, which continued to set aggressive expansion goals at all of its brands through the downturn, remains committed to the strategy, whether the growth occurs through new construction or conversion. During the first quarter, Marriott added 38 hotels to its inventory, accounting for almost 7,400 rooms, and is on track to add between 25,000 and 30,000 rooms for the full year.

Pegasus Solutions, which provides hotel reservations services as well as technology, last month also reported a successful first quarter. Reservations for the Utell portfolio of independent hotels and small hotel groups, which Pegasus represents, rose 7 percent year over year. Reflecting other lodging executives' optimism, Pegasus chairman and CEO John Davis credited increases in corporate travel for the positive showing.