Photo byShutterstock.

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Prism Hotels & Resorts is a Dallas, Texas-based full-servicehotel management company that manages premier hotels and luxuryresort properties across the US for leading brands, as well asindependent and boutique hoteliers.

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GlobeSt.com recently spoke with Prism President & CEO, SteveVan about the state of the industry—and about what he expects thehospitality landscape to look like in the months and years ahead.In this Q&A, Van pops the hood and takes a closer look behindsome of the national numbers, discusses trends in individualmarkets, and suggests some reasons for both optimism and cautionfor hotel owners and operators.

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What follows are some of the highlights from thatconversation:

There has been a lot of talk about the surprisingly durableperiod of growth and strong performance—not just in the hotelindustry, but with respect to larger national economic numbers.That's obviously welcome news for hoteliers, yes?

SV: You won't find any complaints, no. I will say, however, thatthe headline numbers are about the past- and the longest growthperiod in history. Things get more complicated and concerning whenyou start to take a closer look at some of the trends—and theindividual market numbers across the country.

Tell me about some of those complications.

SV: The January 27th STR report on U.S. hotel industryperformance has some really fascinating numbers. On the one hand,December RevPAR nationally was the strongest it has been all year,at 2.6%. On the flip side, transient annual ADR growth is now downbelow 1%, and, more importantly to my mind, expenses are going up.The rising cost of labor isn't helping things. Here in Dallas in ayear that experienced a 0.3% RevPAR decline – hospitality workers'pay increased 7.2%. With expenses growing around 3-5% on averagenationwide, operating income and profit are trending in the wrongdirection. It's not a catastrophic drop, but it's not ideal. Andkeep in mind, at the same time, we're adding more than 4% to theroom supply.

So profits and bottom lines are the real story here?

SV: Absolutely. Increased demand and increased ADR make forgreat headlines, but I truly do believe we need to talk more oftenand more openly about profitability. The single most importantstatistic in the hotel business is net operating income, and thepicture there is less rosy than the public narrative would have usbelieve.

You mentioned individual market performance earlier. Can youelaborate?

SV: Fundamentally, the hotel business is a market-by-marketbusiness. And we are seeing a lot of variability betweenmarkets—much more of a mixed bag than the aggregate top-linenumbers might lead us to believe. The difference between the topmarkets and the bottom ones right now is alarming. While Phoenixand Denver are doing well, the STR report I mentioned earlier hasNew York City, Seattle and Houston all with a RevPAR decrease ofmore than 3%. The Los Angeles LAX hotel sector is also lookingpretty grim right now.

Do you have any thoughts about what that variability might meangoing forward?

SV: Yes. Some hotel markets will see increasing defaults andforeclosures much sooner than others. These weaknesses coupled withthe potential effects of the coronavirus, could produce hugeproblems for local hotel owners. The virus is headed our way. It isnot a minor matter and is already dramatically affecting marketslike LA. And with the gap between transient and group businesshaving grown from 16% in 2005 to around 34% today, we are liable tofeel the impact of a downturn more quickly than in the past.Oversupply also makes us a little more vulnerable in that respect.We are seeing some eye-opening numbers in places like Nashville (a13% increase in supply) and New York (a 10% increase).

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Finally, the fear of coronavirus economic damagedisproportionately impacts hotel stocks. Last Monday when the DOWwas down around 3%, Hilton was down 11%, and Marriott 8%. Lodgingstocks seem to be in a free fall.

Some of that is fairly sobering. So what good news do you havefor us?

SV: I think the biggest piece of good news is that the industryis in a much better spot today than we were before the last bigrecession in 2008. Occupancy went down about 8.6% during the worstof things back then—bottoming out around 54% or so. Today we arestarting closer to 66% than the 62% we were seeing in 2007. So withmore meat on the bone, even if a recession takes a big bite, thehotel business as a whole is in a better place. Even if we werefaced with another precipitous drop, that difference between 54%and 60% is a pretty big deal. There's a better chance in thatscenario that hotel owners and operators can still cover theirfixed costs. In other words: it could be the difference betweensurvival and losing your hotel.

So even if a recession hits, there's less reason to suspect thekind of devastating impact we saw 10+ years ago?

SV: Exactly. Risk Adjusted Returns has gotten to be a prettypopular metric for investors. And there's just less risk now thanthere was in 2007. We have a broader occupancy base and more roomfor error. That doesn't mean that right now is the best time toinvest, however. This isn't doom and gloom at all, but it alwayspays to be smart, and I think savvy and experienced hotelprofessionals are keeping their powder dry for the time being.

What are some of the other trends and storylines from aroundthe industry that are catching your eye right now?

SV: There's still an awful lot of new hotel rooms inconstruction or in the pipeline, as I mentioned. And the spike innew brands is definitely noticeable. I do wonder if now is the besttime for that, given that the time and expense involved in buildinga brand up to a critical mass of national viability might not beavailable before the inevitable market downturn.

 So your bottom line is to be watchful and proceedwith caution, then?

SV: 100 percent. Nationally, RevPAR is flattening out, even asexpenses continue to creep up. The data is telling us we are onthin ice. And if you're on thin ice, you don't keep walking outfurther toward the middle of the lake. That doesn't mean we shouldbe fearful or reactionary, but it does mean we should bethoughtful, cautious and strategic.

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