Interview by Rosanna Caira and Amy Bostock | PHOTOGRAPHY BY MARGARET MULLIGAN
Rosanna Caira (RC): Now that the economy has fully re-opened across Canada, and around the world, how is your company faring and how does this differ in various regions of the country?
Jeff Hyslop (JH): Since Q2 started, the recovery has been fast and furious. It’s primarily rate driven and primarily in our city centres. We have a large, limited-service portfolio of Comfort Inns — I call them our bond portfolio because they’ve been steady-Eddy throughout the whole pandemic and continue to perform — but for our upscale city centre hotels, the forecast recovery has just been incredible the last few months. In June, our overall portfolio ended up well above 2019, same month, across the portfolio. We’re still seeing occupancies off broadly, but the rate more than makes up for it. And obviously, given you can’t hire any people, the flow-through has been almost too good. So, the bottom line has been very healthy.
Roz Winegrad (RW): It’s been a long run through COVID, but I feel like, looking at our business results, we’re finally coming out of it as of April, May, June. It’s mostly led by leisure — our leisure numbers were up 14 per cent compared to 2019. Group [bookinigs are], as of June, starting to rebound and ahead of 2019 and throughout the end of the year, we’re looking very strong in terms of group. Business travel is starting to come back but it’s been a long run. We’re seeing huge amounts of pent-up demand and interest in travelling — for leisure and bleisure — and just the need to meet in-person, as we’re doing today. There’s an overwhelming need for people to be seeing each other and re-connecting in a much more profound way than we’ve seen.
During COVID, our resort and extended-stay brands consistently outperformed. Secondary and tertiary markets over the last year did better than some of the urban markets, such as Toronto and Vancouver. Calgary is still, today, a challenged market, but we’re starting to see some uptick there, while out east it’s been a mixed performance.
Tony Cohen (TC): Through COVID, [demand was for] resort properties, extended stay and any hotel that was perfectly situated in terms of being close to where central workers or healthcare [workers] were. For us, it’s been about restrictions, and once restrictions started to get lifted, business started to come back. But [demand] is mostly for leisure. We’re certainly seeing rates being very, very strong, which is great, but, of course, the other side of the coin to that is there’s an expectation that goes along with it.
Ray Gupta (RG): We also see a strong leisure demand and feel the corporate business has not returned yet. Right across our portfolio, we’re beating the 2019 numbers and we see it’s going to continue. We have some concerns over the fall months, but for [August and September], business has been very strong.
RC: While pent-up demand is impacting strong business growth, how are airport problems creating new challenges and how has this affected sales?
Aaron Laurie (AL): [The hotel industry] needs to be travel ambassadors and push people to continue to travel more. We need to continue to work with the Hotel Association of Canada (HAC) and [airports] to alleviate some of the congestion we’re seeing. The primary headline we’re seeing coming out of Pearson is that about 50 per cent of flights were delayed over the past two weeks [of August], which just isn’t good enough. In a sense, it’s a good problem to have, knowing that the demand for travel is there, but there has to be a path forward to alleviate some of that congestion, otherwise it’s going to take a toll on the hotels surrounding the airport and some of the areas of the GTA as well.
Carrie Russell (CR): One of the things we talked about is the decrease in business travel and that business travel hasn’t returned. So, one of the concerns I have about airports being the mess that they are is that, if you go back to 2019, it felt like you could jump on a plane whenever you wanted, anywhere you wanted in the world, with such ease. But business travellers have had two years of figuring out ways to do business without travelling, and if the airports are a nightmare for people, I have concerns that business travel will get restricted. The leisure travellers’ expectation of what the airport experience is not as high — they’re used to waiting, they’re used to it being a bit of a chaotic experience. Bu the business traveller is used to showing up, no waits anywhere, smooth sailing, planes leave on time.
Robin McCluskie (RM): Now is the time for the airports to get it together, because from a leisure perspective, most people are jamming in three summers-worth of travel in right now. And come fall, it is absolutely critical. The message has been loud and clear — Susie [Grynol of HAC] is out there along with a lot of advocates trying to solve this with the airports. And it does come down to labour, which does not change overnight. So, they’re working on it and I echo what everybody says — it’s absolutely critical from a business perspective that this improves.
Sylvia Occhiuzzi (SO): Group business could be impacted as well, because you’ve got groups seeing the chaos or have had bad experiences and if these problems don’t get rectified, as [groups] plan travel going forward, Toronto may not be on the list of places they choose.
RC: In recent months, inflation has become a huge issue across Canada, and with more increases expected, how will this further impact rates and supply chain issues?
TC: The nice thing about our business is we have a dynamic pricing model, so we can adjust accordingly. My concern, really, is the expectation that goes along with that increased rate, because we’re going to have to continue to outpace inflation and we’re going to have to continue to pay people more and pay more for goods. So, it’s easy to charge more; it’s not always easy to give the experience that people expect for that higher rate.
RW: I echo Tony’s concerns about the customer experience and the labour impact, which is our number-1 issue. We always see what we call the summer dip, in terms of guest satisfaction, as the number of guests increase over the summer and it’s more leisure versus business, multiple people per room versus one per room. We’ve seen that this year, but it’s deeper and more concerning than in other years and I really worry about that. I worry about both the business and the leisure guests that don’t have the opportunity to experience really great hotels. It’s what we live for and that’s where our pride base is — we take care of customers — but it gets increasingly hard to do that these days, especially with the rate and the rate differential being so high.
JH: What we’re seeing is textbook inflation. Our industry is one of the few that has dynamic rates, where we can change on a dime. The industry is reacting and we’re seeing phenomenal rate growth in this environment and that is really good. Our revenue-management systems and people are realizing that there is ability to drive rate, there’s propensity to accept that and, candidly, we need to pay our people more anyway as an industry, so this will finally give us the opportunity to lift wages and provide good quality service and attract people to the industry.
RG: With Bank of Canada moving the interest rates higher, hopefully the inflation will be curtailed in the next maybe six months or, hopefully by the end of next year — that’s what they’re projecting — and we’ll start to see things getting better in 2024. But at this point, we strongly feel the economy and the hotel business will continue to stay strong over this period of time. Inflation has certain impacts on our businesses, but we’re finding ways to offset [them] on a daily or weekly basis. We take a look at our business regularly and see how we can curtail costs.
RC: How are labour shortages impacting your company and what are you doing to deal with this?
JH: No doubt, this is our number-1 issue. We talk about it almost every day and it’s a challenge facing all of our hotels, from upscale to Comfort Inns. Across our portfolio, we’re about 700 employees short of where we should be. We track this on a monthly basis and it’s getting a little better, but not much. Obviously, on a short-term basis we’ve been looking at using agency workers, but that isn’t a sustainable long-term practice. So, we’re looking at working with HAC through some of the new immigration programs, where we can bring in people from outside of Canada and integrate them into the workforce. So, that’s one avenue. But most importantly, really focusing on engagement of our existing staff and retention of them. During COVID there was a big loss of, I call it hotel culture — working in our industry is not like working at a bank or an insurance company, because it’s fun, it’s engaging, they have great activities and good social networks within hotels. So, bringing that hotel culture back is definitely a priority.
RW: From a managed perspective, we haven’t had to reduce any of our room counts in order to deal with the labour shortage. There’s a new term, I think it’s going to be the word of the year, called quick quits. And that means, by the time you hire someone, they’re going to quit within a couple of days. So, we have to hire 20 or 30 per cent more than we actually need to account for these quick quits. And then you have to think about why people are quitting so quickly and how to overcome that. Certainly, culture, was mentioned. This is a really cool industry and we’re up against other industries such as Amazon or Uber, that appear to be hiring and offering a lot more. We need to bring people in quickly and reduce the amount of time it takes to hire — it used to be three to four weeks, it should be three to four days. We’ve adjusted some of the criteria that we’ve used to accelerate hiring and if we can bring them in right and get them trained right, which is the other thing that we talk about a lot, that we’re putting people on the front line without any training and it’s not an easy place to be, at a front desk, when you don’t know how to use the systems or you haven’t trained on the hotel or corporate culture. So, we’re really looking at the end-to-end process of how we recruit, number of people we recruit, how we bring them on, how we train, and how we introduce the culture of the company and the specific hotel. That’s going to make the real difference for us.
TC: We’ve always had a mentality of wanting to be an employer of choice and creating a culture where people want to work. But certainly, as Jeff said, the pandemic threw that for a loop. And what we found was not only did people leave the industry permanently, but those that left and came back or were furloughed, they ended up coming back and they ended up being out of shape, mentally, emotionally, physically. This is an exciting, fast-paced business and you have to be ready for it. So, that’s been the first issue. And I think the other thing that the pandemic showed is we have to do more with less. Overall, it’s about paying more, it’s offering more, signing bonuses, benefits, not just normal benefits and flexible hours.
RG: We are also outsourcing a lot of our help from third parties. It is a little bit more expensive, but it’s working out for us very well. Retention is very hard these days. We’re offering, wherever we can flexible hours and signing bonuse to retain employees. It’s a weekly topic in our office, how to retain, how to get people. We also reached out, [to] some of the Ukrainians coming into Canada, so that has worked out a little bit for us and some of our properties are utilizing them and they’re turning out to be really good employees and good workers. We have been talking to a lot of agencies about how to bring in more people who are already trained from other countries, you know, who can come in and fit into a workforce.
RC: Are you concerned about the fundamentals of the Canadian economy and where it stands right now?
CR: The U.S. saw that big ramp-up in rates and sort of the quick recovery, so Canada is now in the throes of benefiting from all of that. But if I listen to U.S. counterparts right now, certainly, recession is a word that’s getting used and what happens as we correct for inflation, do we correct properly or do we overcorrect and tip ourselves into an inflationary environment? So, if you look at the U.S. and where the conversation is going there, assuming they’re six months to a year ahead of where we typically are, I think that’s on the horizon. Fundamentally, our economy is meant to cycle through these things, so I don’t have major long-term underlying concerns about the sector. But we’re going to go through this nice ramp-up, coming out of COVID, and there are some potential risks for the economy on the horizon.
RM: We’re generally optimistic. Canada has been able to fare through recessions well and if we do get to that point, the economy will work its way through it. We’re not as concerned about interest rates. We do think that in the short-term, the borrower matters and the sponsor matters. Right now, to go get financing, it is a bit more challenging, but it is still available. Where rates are, when you look at previous recessions, going into it, rates for the industry itself was always a big challenge, but I think coming into it we’re going to be stronger from that perspective.
From a debt perspective, we’re still conservative, so owners should be able to weather it well. Buyers still can’t dictate pricing now. If you’re going out there and looking to buy, we’re not seeing evidence of huge discounts of pricing. This year, year-to-date, there’s four trades, which represents two per cent of total volume, that are distressed. So, even through COVID, we did not see more than five per cent levels and those were mainly in Alberta, where they were challenged pre-COVID. So, from a big-picture perspective, in terms of where the hotel industry stands, we’re in a good position to weather whatever comes next.
Investment Insights
Amy Bostock (AB): How has financing changed during the past two years as the industry has dealt with COVID?
RM: The main change is the rate increases we’ve recently seen. But generally, lenders are still out there, which is great to see. They’re committed to the space. There was a pause at the beginning of COVID, where lenders were taking a pause on putting out new loans, but it comes down to who the sponsor is and what the product is and what the story is. But the great news is we’re seeing lenders across the board still interested in the space. The good news is we beat 2019 in a lot of segments, but for so long we were just looking at 2019 values and closing our eyes on the last couple of years. Now there’s some more strength in the numbers, which helps in giving more confidence to the lenders out there.
SO: The increase in pricing around debt has impacted the way buyers are looking at deals. And even current owners are starting to see the impact of going from four per cent to seven per cent and how that’s impacting them as they’re starting to re-finance. But, again, the lenders are there, they’ve supported the industry — we’re seeing everything from Schedule A banks to credit unions. Where sometimes the issue lies is if there’s a lender that’s maybe over-weighted in a market, they may be a bit more cautious. But, again, the VTB has definitely come to the forefront and is something that we’re seeing more often being critical in order to get deals done. But, again, the VTB has definitely come to the forefront and is something that we’re seeing more and more often being critical to get deals done.
CR: The lending side of the picture is going to change the dynamics of the market right now, because the rates are surprising to some. So, if they’re starting to negotiate a deal two or three months ago and they go to lock in their financing or get to the point where the true rate is coming up, there is sticker shock on that one-and-half or two points of increase on the interest rate, which really does affect the equity return on the deal. I don’t want to preclude that we’re going to see values going down, because we do see this incredible average room rate acceleration and this efficiency that’s coming through, so hotels are going to be making more money and those stabilized numbers are going to look differently than they did in 2019, from a bottom-line perspective. But the reality is, you can’t model it any other way than having discount rates and CAP rates go up, if interest rates go up by a point and a half to two points. So, it’s an interesting time right now to figure out how much our discount rate and CAP rate is going to go up based in this new interest-rate environment. But the good news is that financing is there and owners have figured out a way, with these VTBs, to get deals done, to this point.
AB: What’s the outlook for the hotel industry in the next two to three years?
CR: Well, I’ve had two or three years of a broken crystal ball. The U.S. started by saying it would have a full recovery by 2024. They blew those numbers out of the water. It recovered way before 2024. We originally, during COVID, were saying it’s probably closer to 2025, because we had a lot more concerns about group and international travel coming back. So, we then tightened that up and said, 2024. By the looks of it, the limited-service sector is beyond 2019 numbers right now. So, a lot of properties are beyond the performance of 2019. I would say the full recovery for Canada is some time next year. And if you look at month-over-month, I mean, June, the entire industry was better than 2019. But on an annualized basis, by next year we’ll be recovered. The other piece of it that is going to benefit the hotel sector is that there was quite an onslaught of supply expected, starting kind of last year through 2024, 2025. Some of that supply has tightened up, so there won’t be as much competition for existing hoteliers in the market and that will help the recovery as well.
AB: What are the top three influencers to your company for deciding to invest in Canada?
Duncan Chiu (DC): From Marriott’s perspective, we still see a huge opportunity across the country. We’ve got 266 hotels open now, about 88 hotels in the pipeline and development strategies across the country through different segments. Particularly for Canada, we see opportunity in secondary and tertiary markets to grow our upper-midscale brands, where we think we can significantly and meaningfully move the needle and increase market share throughout the next three years or so. And then, we see a lot of opportunity with what we call our distinctive-lifestyle brands. Quite frankly, in Canada, we’ve got a huge gap for these lifestyle brands and we’re starting to see those brands come in, primarily in urban-core markets, but also upper-secondary markets, where we’re seeing a lot of interest in soft brands and collection brands. And so, we’re extremely bullish on the opportunities in Canada.
AL: One of the challenges we’re seeing right now is construction costs, so we work very closely with our ownership partners to identify ways to mitigate some of those costs. The great thing we’re seeing is increases in top line. We’re working with our ownership partners to understand what their bottom-line expectations are, in seeing what the possibility is for the economic viability of a new construction project, for example. And then we’re also working with consultants, appraisers and lenders to ensure the perspective market value of their project makes sense versus what construction costs we’re seeing today. There’s plenty of opportunity to push on both new-build opportunities and conversion opportunities and we’re quite bullish about primary, secondary, and tertiary markets moving forward for some of those projects.
TC: I always say you make money on a hotel when you buy, not when you sell. We’re entering into a very different environment, but what’s interesting to me is there’s a whole generation of people in the workforce who have never seen an inflationary environment, they’ve never even worked in a recession, quite frankly. It’s about doing things a little bit differently and being a little bit smarter. I remember when I opened my first hotel, more than 20 years ago, we locked in our rate at 8.06 per cent and we thought we were geniuses, we couldn’t have been happier. As an aside, we’ve been talking about rate, and if you look historically at Canada, and certainly the primary cities, have always lagged behind their counterparts around the world in rate. So, we’ve had a lot of great new product in the major cities, which I think has helped, and we’ve also seen, coming out of COVID, that we can charge more. We have great product and that will help to counter the inflationary environment we’re in.
JH: From InnVest’s perspective, Canada’s stable, conservative market is attractive for us. If you compare Canada to the U.S. or other markets, it can be a little more choppy, but if you look at the Canadian hotel industry over time, it’s always been slow and steady and performed very well. Also, the great thing about Canada is we have a growing population — thank goodness Canadians accept immigration the way we do, compared to many other countries in the world — which generally underpins a strong, growing economy over time. The third point would be growing replacement costs. We know how expensive it is to buy land, build and get development approvals and so, when owning and buying assets, you always have [to consider] the cost to replace real estate.
AB: Do you expect CAP rates to stay the same in the next 12 months?
RM: I would say that CAP rates have been irrelevant in the last three years, because you’re not really buying on stabilized income. There’s obviously risk of increasing CAP rates because of interest rates, but what are we increasing from? And especially when your income is going to be improved, arguably, with rates, labour and your efficiencies on your bottom line. So, owners are protected that way. If you’re a seller, I don’t think they’re going skyrocketing up, to be quite honest — there’s still a lack of product out in the market. There’s sellers that if they are selling, what are they replacing that with, because it is a hard market to get into. When you look at what’s traded in the last three years, there’s been so much trading for alternate use during COVID and so you’ve had thousands of rooms also come out of the inventory, which was older stock, that’s going to be re-developed or used for social housing. So, in addition to construction costs and interest rates making it harder to pencil a new build, you also had rooms come out of inventory, which are all going to keep CAP rates where they were — which is really tight in the urban markets and then 100 to 200 basis point different in secondary, tertiary markets. But those markets are also seeing shining stars. You can’t argue that with increased rates you are going to see some movement, but it will be negligible.
CR: I would just add that there’s also an abundance of capital that still is chasing deals. There’s a tremendous [number] of people that have been on the sidelines, for a number of reasons, for a number of years. And so, that, coupled with what Robin already said, is another reason why we won’t necessarily see CAP rates increase quickly or all that much. The other factor is the long-term hold that a lot of hotel owners typically take in Canada. They’re not necessarily cycling through real estate quickly, they’re looking five, 10, longer than that most times, which all of that also goes back to the whole notion of CAP rates not necessarily moving all that quickly.
And while the underlying question is, are CAP rates going to increase, the real question is are values going to decline? What year do you want to pick to CAP, do you want to CAP 2019? Maybe. Or are you done with 2019 and want to CAP 2021? Other places are still kind of ramping up to the recovery, so they want to CAP 2025. Anything you model properly, you have to do some sort of five, 10-year horizon on it and use a discount factor. And when you look at the model like that and not just pure CAP rate, I don’t think we’re looking at any kind of sharp value declines.
AB: How readily available is financing for hotel acquisitions; for development?
RM: For construction, it’s going to start opening a little bit. It’s been tighter, from what we’ve seen. What you’re going to see getting built is the segments that showed the most resilience in COVID, such as extended stay, limited select-service models, which have proven to be the shining stars and the best way, most economical way to build with construction costs and with the interest rates you’re going to pay. People are really evaluating those construction projects. They are going to happen, because I think there are certain markets that really need new product and it will get built with the right builder. So, there is debt out there, it’s just you really have to evaluate those numbers of what you’re going to achieve, to make the project make sense.
RC: One of the new trends fuelled by the pandemic is the increasing trend to remote-office spaces. Is this a new area of growth for your company, and if so, what are you doing to be on the leading edge of this trend?
AL: It’s a great topic right now and it’s one of the reasons, too, why our extended-stay segment is doing so well. You constantly hear the term bleisure now and bleisure is possible right now because of the ability for people to flex on where they’re working. We’re finding travellers are taking the weekend for leisure and they’re either taking the early portion of the week or the tail-end of the week for their business. And their ability to do something like a Teams meeting during the weekday and then hang out with their family over the weekend is allowing us to extend that typical period in an extended-stay hotel. What it will do for us in the future, too, is now that people can work remotely, there’s opportunity for development in a lot of secondary markets, because now that people can work remotely, they’re slowly moving out of the primary urban areas. They no longer need to go to the office, so they’re moving to secondary, smaller regional cities and while population increase does not necessarily stimulate hotel demand short-term, what it does is it creates opportunities for commercial development down the road. And commercial development is what stimulates or helps to stimulate hotel demand and additional demand generators for hotels. So long-term, we’ll see more opportunities for development, for additional rooms to come into some of these secondary markets, because of remote work.
RG: We’re doing something very similar to what Aaron has explained — we’re looking at all the secondary and tertiary markets, wherever we have an opportunity to come up with the extended-stay product. We’re taking a look at whether we can accommodate some shared office space in those developments, but it’s not a major part of our business. We are more focused on the hotel side of it — extended stay is our main focus right now in all the tertiary and secondary markets.
RC: Are conversions still a big trend in the marketplace, and what kind of conversions are being highlighted?
RG: We continue to look at under-valued properties. We’re value creators — we don’t buy on CAP rates, we buy based on what the box can do for us, you know, how we can add value to it. We’re looking at many properties where it’s more than a couple hundred rooms, we can maybe offer a dual brand with a limited-service and the extended-stay service. So, those are some of the initiatives we are taking and we are very, very focused on that. Not in the urban markets or the main metropolitan markets, but outside, on the secondary and tertiary markets.
RW: And I will add, from a Marriott perspective, when we see hotels convert to our brand, the Envoy program, from an economics perspective, you immediately get, on average, 50-per-cent contribution to reservations from our loyalty program. From a conversion perspective, when you convert from an independent to a brand, you’re able to plug into our systems and plug into the economics that we provide, both from a distribution and from an ongoing operations perspective. There’s a really good story there and that’s why we’re seeing a lot of conversion opportunities.
RC: How is merger and acquisitions activity today, relative to the last few years? And how do you expect that to change the hotel industry overall over the next year or so?
TC: On the operations and ownership side in the U.S., we’ve seen a ton of consolidation and there are a lot fewer players. The challenge with a lot of those groups is they are accountable to third parties and accountable to external forces, be it public markets or private equity. So, they tend to have to make decisions not based on the long-term thinking in a good business model, but rather based on can their investors get a return on their investment and what do they have to do.
RW: And I would add to that, that consolidation among operators and owners in the U.S., I believe, we’ll start seeing more of that in Canada here. There’s a lot of interest and a lot of people shopping around for the right platform.
RC: What keeps you up at night?
RW: Labour and service. I really do worry. I look at our service scores every day, across the Canadian portfolio, and when I came here in 2016, I said ‘how hard is it to get all the hotels into what we call the green zone? How hard is it to, across the portfolio, to just move up with training and sensibility and focus?’ But it stymies me still, to this day, and it worries me, because I look at all the verbatims from our consumers and some of the things we miss on are so basic, that I worry that we’ve lost the essence of who we are. We are a service industry, we are here to take care of customers and take care of associates. And that, more than anything, keeps me up at night, today.
TC: Delivering on the service promise, delivering an environment for the associates, and ultimately, for us, our ultimate report card is our client satisfaction. And all that leads into our clients being happy and our clients making money and us staying employed.
JH: What keeps me up at night is college and university admissions, because they are going to be our leaders down the road and they are abysmal right now. Across Canada and the U.S., students are not picking our industry. And this is a big concern of mine, because we already have massive labour shortages today and the next five, 10 years, it’s going to get even worse. So, as an industry, how do we grow without that resource?
SO: For me, it’s what our industry can’t control and that’s the geo-political environment we’re in. It seems very volatile. I think we’ve seen firsthand how quickly things shift these days. The pendulum seems to move really, really fast and so, from that perspective, it’s having to make these really very fast changes in our industry and how that impacts everyone.
CR: It’s trying to figure out, as you’re advising people that are making these decisions, how are you factoring in what the effect of inflation is, what the effect of geo-political is? We’re starting to hear a lot more about the ESG, the environmental, social, governance issues. How does that affect the value of real estate and what do hotels do in that space? And we’re just scratching the surface of what that means. So, it’s really just kind of trying to stay on top of where things are going.
RG: Unprecedented turnover of employees, that takes a lot of time from us on a day-to-day basis. That’s one of the biggest challenges we are facing right now. We can overcome everything else, but that’s something we cannot find ways to overcome.
RM: Another mass closure — I think that scares me. And that relates to the labour and what happens if there’s more closures. We’re just gaining momentum now with the border opening and the airports will get it together when the numbers stabilize, so, we just can’t
go backwards.
DC: There’s always going to be some form of pressure, whether it’s economic or geopolitical. I’m honestly just really encouraged by the pace of recovery — we always seem to bounce back. I’m encouraged by people’s desire to travel. People are willing to spend more and we’re seeing a tremendous amount of demand for our brand. So, I’m honestly very bullish about the coming years in Canada.
AL: I agree with everyone at the table, in particular Jeff. My job is to drive incremental growth — at the end of the day, we have 80 hotels in the pipeline here in Canada and you start to question,, where’s the next generation of talent? Are we going to be able to recruit them, retain them, are they going to be able to fill all the jobs within those 80 hotels? So, that’s what keeps me up at night.
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