Without a doubt, interest rates and inflation were top of mind for hotel investors and led to a year of lowered transactions. Hotel Business caught up with Dennis Craven, EVP/COO, Chatham Lodging Trust; Todd Hargreaves, president/chief investment officer, Service Properties Trust; and Scott Kucinski, EVP/COO, Sotherly Hotels, to find out how these issues affected their organizations and what they expect for the new year.
—Gregg Wallis
There were a lot of questions coming into the year about what the travel industry would look like. What are your thoughts on the year that was?
Craven: About as expected. It was pretty obvious to us that leisure travel would begin to lose momentum and business travel would pick up steam. There was just no way domestic leisure travel could maintain the levels of 2021 and 2022 as international travel really opened up, and also that employees were asked to return to the office more so than last year.
Business travel, including group travel, has certainly improved in 2023 for most industries and should continue into 2024. Tech-related travel (including training, intern and product development) was severely restricted in 2023 as a result of the massive layoffs and cost-cutting initiatives that started in late 2022 and continued into early 2023. These same companies are back to hiring and investing significant dollars into artificial intelligence, rehoming of chip manufacturing and other product development across the space and hopefully, with that, increased travel spending from tech companies, which would be a huge boom for our portfolio.
Hargreaves: Much of the double-digit year-over-year RevPAR growth that we experienced in 2021 and 2022 at many of our leisure-oriented hotels has normalized but still remains above pre-pandemic levels. Though we have seen leisure travel level off recently, resort destinations like The Royal Sonesta Kauai Resort and Sonesta Hilton Head continue to have strong demand.
We continue to see that business travel is growing and that group and contract-related business is building momentum. Performance at urban hotels is improving as office utilizations increase and major events and conferences resume. Additionally, corporate travel policies have also started to open, allowing for an influx of business travelers.
Kucinski: In general, the year has materialized in line with our expectations. We have seen leisure travel continue to be strong, though further growth expectations has moderated. Group travel and events have come back with a vengeance, with forward group bookings being healthy. Lastly, individual business travel has continued to build back, albeit slower than all other segments. In certain markets where we have continued to experience weakness, it is due to the slow recovery in individual business travel and nearby office vacancies that previously provided demand.
Dennis Craven Chatham Lodging Trust
Are you focusing more on buying existing properties or are you building new ones? Why?
Craven: We will continue to opportunistically look at both. Given the significant rise in borrowing costs, seller pricing expectations really haven’t adjusted enough to make many deals pencil from the buyer’s perspective. With the expectation that interest rates are going to remain elevated longer than most expected, something has to give. We believe more acquisition opportunities will come in 2024, and our balance sheet is well-positioned to do deals.
Hargreaves: Given the current economic climate and rising interest rates, SVC is well positioned to pursue value enhancing growth opportunities. We are focused on acquiring high-quality hotels to strengthen our portfolio and broaden our geographic reach.
Earlier this year, SVC acquired the 250-room Nautilus hotel in Miami, a high-end destination resort property with an irreplaceable beachfront parcel in the heart of Miami Beach, near numerous high-end luxury and upper-upscale hotels. Initially branded as The Nautilus Sonesta Miami Beach, the property will undergo a $25-million repositioning and reopen in early 2025 under Sonesta’s high-end lifestyle brand, The James. As long-term holders of real estate, we understand the value of this core asset which we expect will ultimately generate increased EBITDA, resulting in an attractive return on SVC’s investment.
SVC has committed around $200 million in annual capital expenditures throughout our hotel portfolio which includes Sonesta, Hyatt and Radisson branded properties. SVC’s manager, The RMR Group, has a robust development function that we can leverage to improve our assets. Currently, RMR is overseeing the renovations of 17 Hyatt Place hotels owned by SVC, which are expected to be completed in the first half of 2024.
Kucinski: We have historically only acquired existing properties, typically those that need physical and operational repositioning. We are focused on full-service hotels in A+ locations within CBD or resort destinations. We have found that there are plenty of opportunities to acquire assets that meet those criteria where value can be created at a lower cost basis than attempting to build similar from the ground up.
Todd Hargreaves Service Properties Trust
What do you expect for 2024?
Craven: We have a lot of internal growth upside given our exposure to tech-related travel and at this point, expect that segment will be better in 2024 than 2023. For our portfolio, we must continue to push room rates higher and get even more efficient on the operating side. We are hopeful to increase our portfolio holdings through opportunistic acquisitions and potentially commence another hotel development.
Hargreaves: In 2024, we hope to see continued RevPAR growth particularly as business and inbound international demand continue to improve. SVC will continue to invest in our hotels and be opportunistic as acquisition prospects arise in preferred destination markets targeting attractive yields. Through our equity stake in Sonesta, of which SVC owns 34%, we expect increased brand growth will occur through the expansion of Sonesta’s new franchising platform. Overall, we remain confident that SVC’s hotel portfolio is well positioned for long-term success.
Kucinski: We anticipate a flattening of leisure travel, moderate growth from group travel and a continued recovery from business travel. All of this rolled together should result in some of our markets that have not yet fully recovered to continue along their recovery path, while other markets will begin to flatten out. We are cautiously optimistic that the macro economy will not have a material impact (neither negative nor positive) on the travel industry in 2024. We also believe that inflation is becoming more stable, which will give us an opportunity to continue to manage our costs at the property level and deliver solid marginal profit from the portfolio. All of that said, we continue to look at strategies to bolster our balance sheet, preserve cash and efficiently navigating the challenging debt markets to ensure our company is prepared to weather any storms that may arise in the near future.
