As the economy goes, so goes the hotel business, and the signs aren't encouraging, says Laurence Geller, president and CEO of Strategic Hotel Properties, a Chicago-based real estate investment trust (NYSE: BEE). U.S. gross domestic product grew 4.9% in the third quarter last year but only 0.6% in the fourth quarter, according to the Bureau of Economic Analysis. Morgan Stanley forecasts a GDP decline of 0.5% in the first quarter of 2008.
Even though it boasts an attractive portfolio of Four Seasons, Intercontinental, Ritz-Carlton and other upper-upscale and luxury hotel properties totaling 9,044 rooms, Strategic is not immune to the economic downshift, Geller says, especially as business travel begins to slow. But since lodging is a lagging indicator, the company's key metrics are still strong. Revenue per available room for Strategic's North American portfolio increased 9.5% in 2007 over 2006 levels. Occupancies rose from 72.6% to 74.9% during the same period.
Since last summer, through a variety of cost-cutting measures and refocused marketing efforts, Geller says, Strategic has been preparing for the storm. But that doesn't mean that Strategic is ignoring the growth opportunities that it perceives. Late last year, for instance, the company started work on a 90-suite resort hotel property, as yet unflagged, at Punta Mita on Mexico's west coast. Strategic also spent about $45.8 million for 60 more acres of oceanfront land for a future development near its existing 160-suite Four Seasons Punta Mita Resort. NREI spoke with Geller about the outlook for Strategic and the industry.
NREI: Is the hotel industry at the beginning of an economic downturn?
Geller: No one can say for sure how long and how deep the problems will be. As of early this year, there hasn't been a weakening in corporate or luxury leisure business either for us, or the industry. But we'll see a diminution in demand in our corporate transient business before long as people cancel their future bookings.
NREI: Total returns for the lodging industry dropped nearly 30% for the 12-month period ending in March. Meanwhile, Strategic's share price is down 40% from its 52-week high of $24.35. What's the cause of such a precipitous drop?
Geller: It's unfair because our earnings and quality of portfolio and unique locations really differentiate us. But we aren't managing for short-term shareholder price in any case. We're doing the prudent things we should be doing in this difficult environment, such as cutting overhead and taking steps to increase liquidity.
NREI: Does Strategic still plan more international expansion?
Geller: Yes, we are expanding in both Mexico and Europe. For instance, we took the following bet in Mexico: About 10 years ago, the country still seemed exotic, but we thought it would become a mainstream destination before long, especially the west coast of Mexico. It was a good bet. Mexico is becoming mainstream.
NREI: Strategic puts a lot of emphasis in catering to what you call the “super affluent.” Give us some insight into that rarified sector.
Geller: We take that segment very seriously, and do a lot of research on what they want and expect from a hotel. We ask them what they want, and then we design around that. We know the customization, pampering and discretion that they like. For example, they love to collect wines, so now we have 10 wine-tasting rooms in our hotels under a brand we call ENO, and it's proven quite successful. Each one costs about $1 million to put in, and they make a 30% to 40% return per year. Demographically, we hit that one on the nose.