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One of the largest U.S. lodging real estate investment trusts expects leisure travel to bounce back from the coronavirus downturn in travel first, but the company is still banking on business group bookings.
Host Hotels & Resorts, owner of hotels like the New York Marriott Marquis and the Manchester Grand Hyatt San Diego, lost $630 million in group bookings in the first quarter, the company announced Friday during an earnings call. Roughly 90 percent of Host Hotels’ group bookings for the first half of 2020 were cancelled. Similar to most hotel analysts and executives, Host Hotels President and CEO James Risoleo expects drive-to destinations will fare better in the initial recovery than fly-to. But that doesn’t mean he’s giving up on group business travel.
“We continue to believe in group meetings,” Risoleo said. “In the long run, we believe group volumes will remain a cornerstone of the lodging business.”
Host Hotels, with many Marriott and Hilton-flagged convention hotels in its portfolio, saw a significant wave of business group cancellations as coronavirus spread across the U.S. in the first quarter. A bulk of the company’s lost total group revenue came from six markets: San Diego, New York City, Orlando, Phoenix, San Francisco, and Boston. Nearly 12 percent of the group business travel cancelled by May 4 has been rebooked, most of that in the second half of 2020.
Risoleo is optimistic the overall group business travel sector will return, but he acknowledged the timeline hinges on a coronavirus treatment and eventual vaccine.
“We feel group travel is not likely to start meaningfully coming back to hotels until mid-2021,” he said. “At this point, with the need for cleanliness and confidence in consumer safety, I would say until we have a vaccine, it’s not likely you’ll see group come back in any meaningful way.”
Shaving Costs Into a New Operational Model
Revenue per room, or RevPAR, at Host Hotels’ 80-hotel portfolio dropped 23 percent in the first quarter, mainly in March when coronavirus began to noticeably spread throughout the U.S. RevPAR began the year up 2.2 percent but plummeted 65 percent in March along with a 52 percent drop in occupancy, Host Hotels & Resorts Senior Vice President and Principal Financial Officer Brian Macnamara said. Group business, which accounted for 35 percent of Host Hotels’ 2019 room sales, fell 25 percent in the first quarter.
While Host Hotels’ leadership looks to the future, the company almost certainly has another tough quarter ahead. The portfolio had a 29 percent average March occupancy, and initial April forecasts show a 12 percent average occupancy due to travel restrictions in many U.S. states. Because of the low April occupancy, Macnamara said he expected as much as a 95 percent drop in RevPAR for the month.
Host Hotels suspended operations at 35 of its hotels, and Risoleo said they will reopen when they have the “ability to generate revenue greater than the incremental costs of staying open.” The company reduced operating costs across its portfolio by as much as 75 percent to mitigate the downturn in travel.
Cost-savings measures included furloughing 80 percent of the workforce across the 80-hotel portfolio, reducing fees, suspending food and beverage outlets, temporarily suspending brand standards, and closing off unused guest floors and meeting space at hotels that remained open.
A New Operational Model
While some cost-cutting measures won’t be permanent, Host Hotels’ executive team recognized the downturn could lead to a shift in operational strategy going forward.
“We view this opportunity and crisis as an opportunity to redefine the hotel operating model,” Risoleo said.
Host Hotels also sees opportunity in further reductions to property costs, focusing on brand standards and determining which can be eliminated or modified, and adapting to changing customer preferences. Those preferences could incorporate expanded technology features that eliminate or reduce contact at high-touch areas like a check-in desk, Host Hotels Executive Vice President of Strategy and Analytics Sourav Ghosh said. The push to technology would likely minimize the anticipated costs associated with a variety of new standards of cleaning rolling out across the portfolio.
Host Hotels views its ties to global brands like Hyatt and Marriott position it well for an industry recovery, especially with travelers expected to value cleaning standards higher than before. Both of the hotel companies have announced new standards of cleaning that call for the use of new products and social distancing measures.
“We think this is a distinguishing factor relative to the independent hotel operator,” Risoleo said. “We can tell you, based on some focus groups that have taken place, the customers don’t really care so much about [Average Daily Rate] as they do their personal safety.”