BERLIN—Delegates here on the final day of the 13th International Hotel Investment Forum conference were reminded that, unlike the daily swings of the stock market, hotel development is a much longer-term game.
“Development is a lengthy process,” said Simon M. Turner, president, global development, Starwood Hotels & Resorts Worldwide. “You don’t wake up one morning and expect to turn the pipeline on—and it doesn’t turn off either. … It’s a cyclical industry, I think you have to keep plugging away and I think that if you have a longer-term view … if you stick to your basics, and keep plugging along, we’re going to continue to see growth.”
But certainly not all the growth will be in new-build construction.
“These difficult times have also created a lot of opportunities, especially in conversions,” explained Puneet Chhatwal, SVP and chief development officer, Rezidor Hotel Group.
Growth, in large part, may depend on geography as well as segment, said Paul Macpherson, chief development officer, Jumeirah Group.
“Let’s remember, lending has been difficult since July 2007; last year was the most difficult lending year for developers in a long time. But I still think there’s growth; in some markets you’re seeing rapid growth. Look at our colleagues in the economy sector in the U.K.—they’ve had incredible growth. We’ve had our busiest year ever and we think we’ll be busier again this year,” Macpherson said.
Direction for growth
Turner said last year Starwood cut costs at the corporate selling, general and administrative expense levels and aggressively cut $1 billion off their debt. He said the result it that the company’s balance sheet is as strong as at any point in history. But what to do with their cash in hand was the bigger question.
“Are we just hoarding cash to buy each other?” Turner asked rhetorically, looking to other panelists. “There’ve been discussions of mergers [between large brands] for a long, long time. It hasn’t happened. Maybe it will happen in the future.”
The first question, Turner said, is how to spend capital to make the brands they have and the owners they do business with better off.
“[We’ll do] anything that increases the stickiness of the guest or anything that increases guest loyalty—the Web page, the Starwood Preferred Guest program, technology on the reservation system, anything we can do to make our hotels perform better than our competitors’ hotels,” he said.
The second goal is to invest in the significant number of assets they own, to roll out new brand standards in their own properties. Third, he said, was looking at smaller chains that are struggling a little—the type that could use a global distribution system like Starwood’s.
“At some point, one of those are going to pry loose,” he said.
Carlton C. Ervin, chief development officer-Europe, Marriott International, also said he was paying close attention to his balance sheet—and what it could do for him.
“What we’re doing [with our balance sheet] is we’re trying to find ways to enable growth,” Ervin said. “We will look at—and we have a very talented mergers and acquisitions team that focuses on this every day—mergers and acquisitions, but more likely we will be looking at smaller chains that fill a niche rather than redesign our portfolio to fill gaps we might have. When we’re not focusing on [mergers and acquisitions] candidates, we’re looking more at how to enable growth with single assets, so we’re trying to help developers grow and try to find a way to financially enable projects that might not get done in this environment.”
Patrick Fitzgibbon, SVP development-Europe & Africa, Hilton Worldwide, said brands will continue to thrive moving forward.
“This year, for us, is about continuing the growth we’ve had the last two or three years, but it is about taking the opportunity we know exists, particularly where banks are insisting that brands are part of a solution. … Ultimately, you can’t get away from a well-built asset in a great location with a brand on top,” he said.
Moving toward 2011
According to Turner, the cyclicality simply has to work its way through the system.
“I think 2009 was a year of going sideways from a credit perspective. … 2010 will be a year of rebuilding. The banks are beginning to lend, it’s a heck of a lot better than it was this time last year, but loan to values are lower, spreads are wider, covenants are more challenging, and I think that there’s just much, much more equity that’s required,” he said.
Macpherson stressed that is was critical for brands to work with developers, now more than ever, to get projects done.
“There are many viable projects with decent return on investment that are out there. It’s a matter of looking at what is required to support those developers. … It’s really about working with the developer in order to make very sensible projects that, first and foremost, that generate a good return on investment,” he said.
But for brands or developers who worry too much about numbers—of openings, of pipeline projects, of conversions—Turner had a warning:
“The quantum of growth is something you have to look at, but I also think the quality of growth is essential, because I think that for those of us with strong brands, we can turn the spigot on to grow. But at the end of the day, if we’re not adding assets to the portfolio and the brand that actually enhance the position of our brand, yes we might be posting numbers on the growth side, but we’re not doing anything for the long-term health of the brand, for the long-term value of the company for shareholders,” Turner said. “I think there’s a balance, and I think at times like this, the stronger brands really have to stick to their brand standards and say, ‘I’d love to add a few more hotels to the pipeline—but if they’re going to detract from the brand, it’s just not worth it.’”
