Caliber’s overall portfolio of assets has increased its stake in the hospitality sector substantially over the last 12 months, leaving many of our current clients and like-minded individuals asking one question – Why Hospitality? At Caliber, every move is strategic, and though obvious to those of us familiar with the inner workings of these deals, we want to take the time to help our clients better understand why we are further venturing into the market of Hospitality.
Understanding the Metrics
Like any acquisition, it is important to understand the metrics that are used to judge how the asset is performing. In the hospitality industry, RevPAR (Revenue per available room), is calculated by multiplying the ADR (average daily rate) by the average occupancy rate of the hotel, and, is regarded as the key metric for potential hotel investors. Current industry studies show that experts predict RevPar will continue to grow by 5-6% over the next few years – when looking at the metric from a historical perspective, this number impressively sits at the high end of growth.
Where the market is going… and why
The future of the hospitality industry looks strong, but why? There is a pretty simple economic explanation for why this is happening – a lack of new development. This drought of development within the hospitality industry in recent years has caused the supply curve to become more inelastic, or vertical, since the options for consumers are not growing.
How does Caliber plan to take advantage of the obvious potential currently lying in the Hospitality Industry?
Increased occupancy is always a main concern for Caliber when over taking distressed hospitality assets. This is a vital move – as occupancy increases, room rates increase as well, thus ultimately increasing RevPar. Elastic Supply demonstrates long run perspective showing an increase in options for consumers, which ultimately flattens the supply curve and in turn brings down the price per quantity demanded.
As for the types of Hospitality assets that Caliber is involved in, and why these hospitality assets are good investments, the answer revolves around the typical hotel guest. Caliber operates in the mid-upper scale, full service hotel arena – this means we do not own high end luxury resorts, nor do we own limited service assets. This submarket of the industry that we choose to pursue are, in general, occupied by the standard business traveler. Why cater to this specific guest? Recession resilience. Among many benefits, no matter which way the economy is heading, individuals are still traveling for business. High end resorts can undoubtedly thrive in a time of economic expansion, however, during an economic contraction, families will generally have less discretionary income and thus are less likely to book that long desired resort vacation. In addition, these business travelers are generally filling up the hotel during weeknights, which can vastly drive up the assets profitability. Aside from certain seasonality constraints, any hotel in a large market should be able to increase occupancy on weekends given the asset is in a strong location and equipped with a sound marketing team. Consider that all our assets are strategically located and on-site teams are proficient in increasing occupancy rates even outside of our standard Monday-Thursday business traveling guest, and you can see why Caliber chooses to operate in the mid-upper scale, full service, hospitality submarket.
Finally, Caliber wants to convey to current hotel investors, along with prospective investors and like-minded individuals, that Phoenix is a strong market bursting with investment opportunities. According to global business travel, Phoenix is the 5th most popular destination for individuals traveling for work. The four cities that rank above Phoenix, in order, are Chicago, San Francisco, New York and Philadelphia. While ranking 5th, Phoenix is still outpacing these cities as it relates to population and employment growth, and, the market is less saturated with wealthy individuals and large institutional money that ultimately results in artificially driving prices up. Adding to Phoenix’s impressive resume, Phoenix Sky Harbor International Airport is the 9th busiest airport in the country. Once consolidated, this should make our hotel entity consisting of three airport hotels, Crowne Plaza, Phoenix Hilton, and Holiday Inn, a very attractive asset for large institutions.
Understanding the in’s and outs of the current market, and utilizing the proven strategies to increase profitability, makes investing in the Hospitality Industry a clear choice for Caliber and our clients. Ultimately changing the question from “why hospitality” to why not hospitality?