Kong: Hope is Not a Strategy

PHOENIX-“Things are looking great right now,” said David Kong, president and CEO of Best Western International Inc. Despite a Lodging Stock Index that was down 25%, low business-consumer confidence and the close relation to the fluctuating stock market, Kong was still bullish that 91% of the country was employed and spending money. His outlook, however, was not all fuzzy bunnies and flowering rosebuds. “Hope for the best,” Kong said. “but hope is not a strategy.”

The “View From the Top – Part 2” at the 2011 Lodging Conference gathered some of the top men from the industry to discuss their indications and plans for the market. Along with the afternoon panel, “Deal Under $20 Million,” some advice was doled out to those in the marketplace, large and small.

The morning panel was conducted by Jeff Higley, VP, digital media & communications, HotelNewsNow.com/STR and was composed of: Kong; Jim Kauffman, COO, The Americas – Western Region, Marriott International, Inc.; Thomas Magnuson, CEO/principal, Magnuson Hotels; Joseph McInerney, president & CEO, AH&LA; and David Pepper, SVP, Global development, Choice Hotels International.  

Kauffman agreed with Kong’s outlook, noting that he liked the Smith Travel data, but could not be “blind to the market.” Technology companies were booking large for 2012, so that was a good indication of some of the business confidence in the market. McInerney was also positive, noting that Washington was always an uncertain place but that “We’ll see growth in our business, because we don’t have supply coming in.”

With few exceptions, the panel members were looking at urban markets where growth was strong and opportunity existed. Pepper noted that there was new construction if it had the right fundamentals and underwritten well, and that Choice was trying to grow its Cambria Suites brand, seeing good fundamentals in its market.

Kong recommended brands drive revenue to hotels as a strategy. Best Western was budgeting for more marketing and upping sales budget to up the sales presence. He also recommended that an elite web presence was essential as younger travelers were the future of hotel growth. Magnuson pointed back to fundamentals for hoteliers, “You can’t sell yesterday’s room.” Hoteliers are not like bakers, he joked, you can’t stretch a room an extra day. “Be nice, keep a clean house because everyone’s watching.” And most importantly, keep a lid on costs. Pepper recommends avoid OTAs if you can to keep costs low, it’s sometimes necessary but a costly way to sell rooms.

Kauffman noted, “you can’t cost-cut your way to heaven.” Pepper concurred saying the best thing for a brand was to be able to change your strategies quickly. TV ads might not be where the best marketing is, sometimes a better push is to move money away from PIPs and put them into online marketing or iPhone applications.

McInerney pointed to a new study AH&LA is releasing at the end of the month, giving a comprehensive look at distribution channels and how much each generates. They partnered with STR and Oxgord economics. Magnuson, to that point, said the best way for hotels to earn rooms now is to keep a steady mix of distribution channels, don’t put your eggs in one basket.

The “Deals Under $20 Million” panel was not as positive, but held some solid recommendations for buyers and sellers in the market. Moderated by GlobeSt.com’s managing editor, Ryan Clark, the roundtable was composed of Lee Hunter, COO of Hunter Realty Associates, Inc.; Matthew LeMaster partner, Davis Wright Tremaine LLP; Rick Rogovin, VP Hospitality Finance Group, Wells Fargo Bank; Michael Sonnabend, managing partner PMZ Hotel Finance Group; and Gus Stamoustos, EVP development, Wyndham Hotel Group.

Deals under $20 million are happening out there, but there are a lot of problems that come with them from the buyer and the seller side. “How do you tell someone their sister is ugly?” Lee joked, remarking that this was the dilemma his company often faced when regulating sellers’ expectations. A seller goes on GlobeSt, for example, and sees that Hersha just bought a property for $250,000 a key, Lee explained, and says ‘Well, let’s call Hersha,’ but you have to tell them their property is in Alabama and a hotel in New York is getting $250,000 per key, not their hotel. The bid-ask gap is still a difficulty.

With that said, there are still opportunities in some mid-level markets, Stamoustsos said, if you can get the money, which is always the issue. Sonnabend agreed, noting that some buyers don’t have enough money and want to use subordinate loans, which he tries to talk them out of doing. If they need an extra million dollars or two, I tell them to go to their family members or go to their friends and ask for it, don’t get another group involved, it’s too much of a headache. Le Master concurred, noting that once you ad a third party to an already complicated deal, for a couple million dollars, you could add twelve lawyers along with their fees and months of negotiating to an already cumbersome process. For deals this size, that extra money is not worth the pain and additional cost, since even after all the negotiating, it might not work out and then you are back where you began.

Rogovin pointed out that Wells tries not to get into too many of the deals this size, but they are involved on the other side of transactions as borrowers often defaulted and they are forced to work with them as sellers. For buyers, he recommends looking at local banks. Stamoutsos notes that concessions and a good relationship will help convince a local bank to make the smaller-size loans, but as a buyer you’ll have to assume a lot of additional resonpsibility up front. Rogovin also noted that if you’re in danger of defaulting, do not lie about it or try to postpone the inevitable, the sooner you come clean and explain the problems, the more willing a bank will be to work with you on a solution.

Lee advised sellers, if you’re going to sell, do it now because the market is going to be flooded in the next couple of months with defaults and outage sales, particularly in the economy and sub-$5-million levels. Conversely, and for the very same reason, if you’re a buyer, you could due to wait a few months until that market is flooded and you can easily find bargains.