With more hotel companies and brands than ever, the Canadian lodging landscape hit highs and lows in 2008
There’s a three-part credo in our association; one that’s used by other groups of hoteliers across the country. The first is cash flow. The second is cost containment. The third is identifying new opportunities. Every hotel is on this mission.”
Tony Pollard, president of the Hotel Association of Canada, is on the phone from his office in Ottawa, running through the time-tested game plan that every hotelier clung to as the economy took a nosedive in the third quarter of 2008. “They have to pay their staff, bills and utilities, right? They’ve got taxes. So that’s the cash flow; and if you don’t have cash you’re out of business. But cost containment is also critical. How do you cut costs in everything you do, while maintaining the same level of service? And then, where are the new opportunities? Every hotel is doing this.”
In hindsight, 2008 was a bit of a crazy year for Canadian-based hotels. Like a front-running filly in a stakes race, the hotel industry charged out of the gates, hot on the heels of 2007, a record year for hotel activity in Canada. But after a solid start, she faded — fast. “Last year we saw the good, the bad and the ugly,” Lyle Hall of HLT Advisory Inc. told Hotelier in March. Indeed, business grinded to a halt as the stock markets crumbled, some high-profile U.S. investment firms disappeared and access to capital dried up. To make matters worse, as unemployment rates soared, leisure and business travel waned, sending hoteliers scrambling back to the basics.
“To put it succinctly, Q3 of 2008 was actually pretty good,” says Pollard. “But Q4 was ugly. And the first quarter of 2009 was really ugly.”
According to Fran Hohol, principal of PKF consulting in Toronto, the national hotel industry generated an occupancy rate of 63 per cent in 2008, with an average daily rate of $131 and RevPAR of $83. In 2007, occupancy was 65 per cent, ADR was $127 and RevPAR was $83.
But how much of the occupancy drop was driven by the downturn in the economy? “In the fall we started feeling some of the problems from the economy,” says Hohol, “But new supply also impacts occupancy. In 2008, supply jumped 1.8 per cent, but demand fell by .5 per cent.” With so many new hotels hitting the market during the bullish run post-SARS through the summer of last year, the inevitable drop in demand left a glut of empty rooms in its wake, making the lodging landscape more crowded and competitive than
But just as every hotelier in Canada is on a mission to cut costs and seek out new opportunities during the recession, Hotelier magazine has been on a mission to grow its annual rankings to include the 50 most successful hotel companies. Mission accomplished. This year’s expanded list includes Wyndham Hotel Group — which provided its sales for our report ($693 million) for the first time and ranks 5th — Edmonton’s Sawridge Group (36th) and Pomeroy Group of Grand Prairie, Alta. (42nd). But don’t assume a more competitive industry precluded some companies from recording above average years in ’08.
Pacrim Hospitality saw the largest percentage growth on the Top 50 rankings, a strong performance attributable to two key areas, says Glenn Squires, president and CEO of the Halifax-based company. “During 2007 and 2008, Pacrim opened a significant number of new hotels. We’ve been one of the most active hotel developers in Canada over the last several years.” Pacrim is also the exclusive hotel manager for Holloway Lodging REIT, adds Squires, and because Holloway acquired a number of hotels at the back-end of 2007, the full, annualized sales weren’t realized by Pacrim until 2008, bolstering its performance numbers for the year.
As a company that mainly grows its footprint through limited-service properties in suburban and tertiary markets, Pacrim does have a few full-service hotels in urban centres. But in any market it enters, regardless of size, Squires aims to have the dominant property and obtain a premium in terms of ADR, occupancy and RevPAR against its competitive set. “This in turn should lead to a premium in EBITDA,” he says. “In 2009 we’ll also focus on moving market share, maximizing operating efficiencies and ensuring a high level of customer satisfaction. We’re confident these areas will offer the best opportunities for success this year.”
With the recession arriving with a thud in the third quarter, even the best-performing companies had to adapt to the new market conditions quickly, while still ensuring service levels remained constant. “Our main focus was to get everyone at all levels of the organization focused on the basics of the business,” says Squires of Pacrim’s approach.
But adopting a back-to-basics strategy doesn’t mean all business stops dead in its tracks. There remains a host of opportunities for well-positioned hotel companies to keep growing. “We’ll continue to look for new revenue streams as we move into the second half of 2009 and the early part of 2010,” Squires says. “These streams may include new management and service contracts, increased Internet revenues at Intergy, our e-commerce company, and entry into new markets such as Latin America.”
Of the Top 50 companies, Starwood Hotels & Resorts grew the most by revenue, generating some $92 million more than it did in 2007. “Personally, 2008 was the best year I’ve ever had here,” says Scott Duff, senior director, Development – Canada & Alaska. “It was the culmination of some momentum we had on the go for a few years. For instance, we opened the world’s first Aloft hotel at the Montreal airport just over a
Aside from Aloft, in 2008 Starwood also opened the Four Points by Sheraton Levis in Quebec City and the Four Points by Sheraton Victoria Gateway. It also debuted its first Element-branded extended-stay hotel in Boston, which is paired with an Aloft property, in a similar design concept to the Toronto project that’s under construction right now. In fact, Starwood has a good number of big-box hotels across the country, adds Duff, and it’s had a lot of renovation work going on at many of those hotels, which takes some inventory out of circulation while it’s happening. “When you bring it back, the idea is to be able to get a boost from a performance point of view, because you have the shiny new product, and that has certainly helped us. Last year, about half of our portfolio debuted with some sort of renovation.”
With its hands in so many different areas of the market, Starwood fits the big, full-service, luxury-hotel segment, as well as the limited-service, extended-stay and select-service markets, and having that kind of diversity within its portfolio is what makes the company successful. Duff says his team signed about eight deals in Canada in 2008. “Some people won’t think that’s spectacular, but some of those sales were for large, full-service hotels,” he says. “They have a long gestation period and the value to the organization is a lot larger than just a 120-room hotel.” He also points out that most of Starwood’s future Canadian growth will come from the select-service segment. “Our footprint is going to expand the most with brands like Four Points, which is very adaptable, and Aloft and Element.”
While some hotel companies had successful years in 2008, the reality is that 2009 is shaping up to be one of the worst years for Canadian hotels in quite some time. But regardless of how gloomy things may seem right now, HAC’s Pollard says Canadian hoteliers shouldn’t lose sight of where the industry is at, and where it’s headed in the future, especially considering what’s happening south of the border.
“Hotel occupancy for Canada is probably going to fall to about 61 per cent this year, and that isn’t too bad,” Pollard adds, noting that “in the U.S. they’re probably going to drop to 54 per cent.” Another factor to take into account is that the values of U.S.-based hotels are projected to fall about 30 per cent this year, he says. “There’s virtually no equity left, because everything is so highly leveraged. If you take 30 per cent off the top there’s nothing left. And there’s no debt financing available. Almost every property in Canada still has a great deal of equity in it. Fortunately, we’re much further ahead than they are in