With the numerous questions now arising throughout most organizations due to the latest economic environment, I felt it was important to communicate how we expect current trends in buying behavior to impact HEI during our continued recovery period. On top of this, I also wanted to provide updates on our first quarter results for 2022, as well as a more detailed description of the strategies we will be deploying to react to the latest trends. As I have said in the past, the key to tracking the current marketplace is not necessarily looking at business compared to last year, but how it compares to last week and last month. This mindset allows HEI to recognize trends earlier than our competitors and quickly determine how to best manage our organization in the current landscape, by taking what these trends are indicating and developing strategies that maximize opportunity.
This deep dive into the latest behavior of the hospitality industry has been split into two parts that will each be sent to you in separate correspondences. In the Part 1: Revenue Analysis, which is contained in this update, I will explain the latest factors influencing the revenue environment and how HEI is adapting and harvesting the opportunities created by the new buying behaviors. In the Part 2: Expense Analysis, I will highlight the impact that current high levels of inflation are having on expenses and how HEI is leveraging our infrastructure platform to combat the effects and drive continued value. We will be sending this part out to you next week.
Of course, this expense analysis will feature the HEI Loves Culture that we continue to nurture and grow. We’re so proud of this culture, which not only provides a more positive, fulfilling environment for our associates, but (as my colleague Anthony Rutledge shared in his latest owner correspondence) also simultaneously creates value for you, our owners.
While the content today has caused this announcement to be on the longer side, and thus separated into multiple parts, I think it is necessary to communicate some of the many ways we’re working to drive value for you, our owners. Additionally, if we had sent the entire announcement in the same correspondence I fear the impact of some of the information might have been lost due to its overall length. As such today, let’s begin by jumping into Part 1 and tackling the topic of Revenue.
At HEI, we have continually observed that revenue success comes from creating a progressive improvement in key transient and group segments compared to the previous week or month. HEI’s “Step Recovery” approach of focusing on generating revenue improvement each month over the previous month has fostered a dynamic mindset that enables us to adjust key areas, such as pricing, more nimbly and effectively. It has also taught us that sometimes patience is key as we continue to understand and anticipate the direction of the latest market trends. So that being said, let me provide an update on the trends we have experienced so far in 2022, and our process for recognizing these trends and creating improved strategies that capitalize upon them.
Trends in Occupancy
The revenue trends we’re currently experiencing are very positive for our Step Recovery, with each week and month showing improvement over the previous. This gives us confidence that in 2022 we will continue to experience recovery to 2019. And, as long as there is no interruption caused by possible downturns or economic recessions, we are confident that 2023 should be the year in which most hotels will return to the occupancies achieved in 2019, combined with ADR benefits of enhanced mix and pure rate lift.
During the last few months, we have seen an improvement in total occupancy from a low of 43.4% in January, stepping up to 58.1% in February, and then stepping up again to 68.2% in March. This steady increase continued in April with final occupancies of 71.7%, and our current projections for May are coming in at 72%.
We can dive deeper into occupancy performance by day of week and segment to illustrate some key month-over-month growth trends. Most critical to our overall occupancy recovery is the return of our premium transient guests, which is a combination of our retail and negotiated transient customers, and whose travel pattern is typically midweek. Looking first at our overall midweek occupancy, January came in at 38.7%. This stepped up to 54.2% in February, rose again to 67.1% in March, and continued upwards to 72.9% in April. Meanwhile, our premium transient occupancy across all days has also risen every month this year, with January performing at 16.5%, February at 21.2%, March at 24.1%, and April finishing at 24.5%. Both of these patterns show positive trends towards the return of our most lucrative customers. At the same time, group business has also ticked upwards consistently – another good sign. In January, group comprised 13.4% of total occupancy, February was 16.5%, March was 17.7%, and April came in at 24.0%.
You can see that our month-to-month progression in these segments has been positive, but we can also review how these latest trends compare to 2019 performance – not to abandon the Step Recovery mindset mentioned previously, but simply to put the market recovery in the proper context. So far in 2022, we are still showing significant occupancy deficits to 2019, but our experience with the very positive trends related to the stepped-up increases are strong indicators of continual improvement. For example, in January we were 37.4% behind 2019, in February we closed the gap to only 25.7%, March’s deficit was only 17.2%, and April was only 13.2% behind 2019 (although thanks to average rate and check increases, as well as our efforts to maximize total profit per transaction, total revenue was down just over a point).
The occupancy opportunity is very apparent in the current market. The critical next step is to strategically fill that occupancy opportunity by utilizing these trends as the basis for our actions moving forward. This includes determining which of our existing tactics are still working and applicable, as well as which plans (if any) need to be tweaked or replaced.
Impact on Strategies for Group
What is also important in this trend analysis is understanding what to do strategically to maximize the opportunities from the evolving customer buying decisions during this recovery period. Over the years, most of us have learned that the same trends of the pre-downturn performance never fully return once the recovery period is over. There are always changes in buying decisions and customer profiles that become permanent. So it is our responsibility to analyze those behavioral changes and new buying trends to revise our strategies and maximize the new opportunity.
This is undoubtedly where we have an advantage against our competition, many of whom still assume that the marketplace will return to exactly how it behaved prior to the downturn. Both our new infrastructure platform and our pivot from traditional comp sets to expanded submarkets give HEI the advantage in capturing the new opportunities that will arise throughout the recovery period. We have taken aggressive efforts to measure how we are performing in rate index, occupancy index, sales per occupied room, and profitability per occupied room so that we can sail past pre-pandemic performance, rather than focusing on how to get back to it.
The biggest illustration that customer behavior has permanently changed is in group, where there is now a much higher focus on near-term, urgent corporate events. It is no longer an environment that favors long-term deliberation periods where customers are focused on blocking space, nitpicking over rates, and engaging in a complicated contracting process. Instead, in the current environment most group events that end up booking have a high sense of urgency and are typically consumed within 90 days of the original lead initiation. While it is impossible to predict how long this exact behavior will last, it is clear that it will influence overall group room performance throughout 2022. Therefore, we have nimbly and successfully modified our culture to increase our success by being first in the marketplace to respond with a rate designed to close. We have trained our people to focus on the most highly probable bookings and educated them on the importance of understanding the new urgency for closure speed that exists in this market. This is a simple but important example of how customers’ purchasing behaviors have changed. It also demonstrates how our decision in the early part of last year – to shift our emphasis away from closure rates alone to instead measuring closure rates based upon the quality of the lead and the likelihood of actualization – was the right move.
Looking closer at our March and April performance, we see evidence that our strategic shift to focusing on short-term group (i.e. events in the next 90 days) has been successful in capturing more than our fair share. By correctly recognizing that short-term group dominates property lead flow, we were able to develop and maintain a strategic approach that has led us to group share within the submarket of over 116.5% YTD through April. This represents a 160 basis point improvement to the same time last year and an improvement of over 1000 basis points to the same period in 2019, thanks to our strategies and the execution of our property and above-property teams. Meanwhile, we’re capturing more from each group customer. Our meeting room rental (including event fee) per group room is up 47.1% to 2019, further showcasing the benefits of this strategy (not to mention the advantages of our profit-per-customer focus).
Impact on Strategies for Transient
New behavioral changes are also materializing within our transient customers. Looking at the last 120 days, it is clear that the Organic Demand within the current environment is shifting its buying behavior to focus more on location, brand, service, reputation, and facility. I am using the term “Organic Demand” to refer to the natural supply of customers that exists within a marketplace, without including artificial demand that is less likely to reoccur – hence “organic” in the sense of true market demand. Because this business naturally exists within each environment, it needs to be understood so it can be capitalized upon. Luckily for us, the Organic Demand we are currently witnessing has a significant amount of premium transient customers in its mix. It is always a good sign to see a healthy supply of premium transient customers in the market. This is because they are the most beneficial business within the transient family, as they are more likely to buy products that fit within the “preferred” boundaries of brand, location, facility, and reputation and are less influenced by rate in their buying decision.
Thus, the goal here is simple. The Organic Demand currently in the market is seeing a rise in premium transient customers, who have a separate booking cycle trend and a different reaction to price vs. value. By separating these premium transient customers from other, “value” segments, we can utilize that value business (as well as short-term group) to extend our occupancy share premium. At the same time, we can improve the rate index of our premium transient customers by closing off the programs these customers would typically use to find discounted pricing. At HEI, we commonly refer to this approach as “Closing the Pricing Backdoor.”
To quickly recap, “Closing the Pricing Backdoor” on premium transient customers means recognizing that these customers (typically experienced travelers who know all the tricks of the trade) know that if they hold off booking until close to arrival, desperate hotels (hoping to capture more last minute occupancy using the OTA market) will drop their rates. But, these OTA discounts in the last week before arrival also provide premium transient customers the same opportunity to book at deeply discounted rates through the OTA channel. Worse yet, because brand parity rules mandate that a hotel’s brand restricted rates must match its OTA rates, if a premium transient customer is a member of a brand loyalty program (which most are), these guests could even cancel their original, higher rated booking without penalty and rebook on the brand.com site at a much lower rate. To avoid such situations, HEI hotels strive to capture more value customers and short-term group business earlier in the booking cycle (i.e. further out than seven days from arrival) so that they have enough occupancy to avoid having to rely on last minute discounting. Without these discount channels, premium transient customers’ booking options are then limited to a combination of BT and retail.
By preventing brand and OTA discount programs from diluting the rate opportunity of premium transient customers, we can successfully improve our midweek rate index while still expanding our occupancy using our developed strategies and tracking tools. Furthermore, even after confidently maximizing our premium transient business, we can still be focused on the full occupancy potential and revenue opportunities of the submarket. The fact is, in most markets we still have occupancy availability on just about every day of the week. By expanding submarket occupancy penetration early in the booking cycle with value customers and group, then combining that occupancy base premium with strong premium transient rate performance later in the booking cycle, we can take full advantage of the trends we are tracking today. This, in turn, maximizes our profit per occupied room since the full revenue opportunity of the submarket is being captured.
Isolating customers by buying behavior based on the latest trends in the market and then strategically targeting them is what HEI does best. Our focus on increasing our premium transient mix and reducing our brand discount dependence has also already been productive. For the month of March and April, we experienced a consistent 28% share of occupancy in our premium transient and a slight reduction in our discount transient, resulting in improved midweek rate index performance. In summary, by first targeting the value and short-term group business that dominates the early part of the booking cycle, we can close off the backdoor discount rate programs to premium transient. With this backdoor gone, the aggressive discount programs that entice our premium transient customers to trade for less have been minimized. Instead, these high-spending customers are forced into premium BT and retail segments to purchase the rooms that we know they want, thereby improving our overall rate yield.
By improving execution in maximizing premium transient short-term rate performance, in combination with aggressive and accelerated group lead performance, we were successful at increasing our overall RevPar submarket share by 900 basis points. This is even more impressive when you realize that we were able to accomplish this result through significant improvement in our rate index of over 480 basis points. Thus, at HEI we are once again proving that we are the leader of the hospitality industry as it relates to trend analytics. Through the use of our advanced tools for understanding and adapting to market trends, we continually move faster than any of our competitors in implementing revised strategies and measurements that successfully capitalize on the latest opportunities in the market.
End of Revenue Analysis
This concludes Part 1 of my ownership announcement for the first quarter of 2022. Next week we will be sending you Part 2, in which I will dive into our expense results and current success with our new infrastructure platform. I will also discuss how the HEI Infrastructure Platform and HEI Loves Culture work together to allow our organization to “Build Better Supervisors” – a top initiative here at HEI that empowers our excellent leaders, helps grow and develop our talented associates, and provides our owners with the most devoted and skilled workforce in the industry.
Ted Darnall, Partner & CEO of Lodging and Technical Services