HEI Owner Letter

HEI Owner Letter


Having finally passed through the dog days of summer, I want to take this opportunity to reflect on the trends we experienced over the summer months and look forward to what our on-the-books and pickup statistics look like for the fall. While summer produced mixed results in most of our hotels, our destination resort properties did well with strong, late-summer leisure bookings. HEI predicted this return to more historical market trends for non-resort properties and, despite a negative comparison to 2020 and 2021 trends, this return to pre-pandemic leisure travel is a sign of recovery for our industry. Some emerging trends we are seeing in corporate bookings appear to be signaling a new positive pattern that could be around to stay, much to our benefit. With the continued success of the HEI business platform setting the stage for continued cost reduction and increased profits per room, it will influence how we set up our budget and measure our success in 2023.

Summer Leisure Trends Return to Pre-Pandemic Behaviors

The unusual – and ultimately unsustainable – surge in leisure travel in 2020 and 2021 was not repeated over the summer of 2022. Instead, we saw booking patterns align with that of 2019 trends, although we remain 12 points behind in occupancy every month. While leisure bookings peaked in July of 2021, we expect in 2022 to see our highest occupancy in October, which is consistent with these pre-pandemic trends, indicating a steady recovery to traditional corporate booking trends. Our data indicates that once again price is a greater consideration in leisure travel with the exception of our destination properties, and our non-destination properties encountered more traditional pre-pandemic rate competition return to value-driven booking over most of the summer. These changes are a positive trend that is consistent with HEI’s belief that a conversion back to historical – and more sustainable – trends is necessary to achieve full industry recovery.

Summer Leisure Trends Return to Pre Pandemic Behaviors

The combined return to pre-pandemic leisure trends and reduced traditional group demand opportunity during August produced a difficult month for group bookings. As people got back into their normal leisure patterns and spent more of their time on summer activities and less time on traditional corporate activities – even with this leisure demand change – we were however very encouraged to see continual signs of growth in our corporate bookings that resulted in our August corporate transient business behaving less like a traditionally high vacation month. But based upon close examination of our corporate transient trends, we continued to see non-holiday weeks grow in our week-over-week premium transient segments. Although this reallocation of time resulted in an overall slowdown in leisure pickup during the month of July and first two weeks of August, with the positive growth of corporate transient, particularly in the non-holiday, we were still able to achieve a 100% market share in group and ended these months with a slight occupancy premium over forecast.

New Corporate Behavior

New Corporate BehaviorSince May, we have observed small but consistent increases in premium corporate demand, both in transient and group. This positive trend found through deep analysis of our portfolio gives us confidence in improving the success of our portfolio as we demonstrate steadily closing the gap between current and pre-pandemic corporate occupancy. Surprisingly, August represented our best individual business transient results since the pandemic and, despite the slowdown in seasonal group opportunity, contributed to our share success. We are excited and confident that our interpretation of these results indicates continued improvement in our corporate transient buy. Seeing this type of individual corporate activity and the growing base business we have on the books for non-holiday weeks in September and October is an indicator that we could be experiencing continued and critical corporate recovery with both our individual premium and group travelers. While it’s fair to say that our total percentage of available rooms is still behind the pre-pandemic peaks, recovery in these premium transient segments is not only instrumental to our overall revenue performance but is also a key indicator of what we can expect in coming months. We believe that the most effective way to measure true, sustainable market recovery is by looking at the week-over-week changes in our premium corporate customers both in the transient and group categories. And things are looking up.

Summer Market Recap

While our resort properties experienced a very short-term pickup that achieved 2020/2021 results with continued strong rate opportunity, non-resort leisure buys returned to a more traditional, pre-pandemic trend. A last-minute surge in short-term leisure transient bookings during the last two weeks of August is indicating a hopefully positive customer buying behavioral trend that could be a permanent choice to spend more of their disposable income on leisure experiences. This is the most positive change in customer behavior we have experienced and, if sustainable, combined with the corporate recovery trends we are now experiencing, could in fact develop into more permanent, stronger destination property results and have a positive occupancy impact on urban hotels in more leisure destination locations.

Summer Market Recap

As we progress through this recovery period, the combination of continued incremental recovery in our corporate demand, changes in leisure buying habits and a seemingly permanent migration in the group market to purchasing more directly – and short-term – indicates a positive future for the industry. Because of the urban nature of our portfolio, the continued improvement in the corporate trends both in our premium transient and group categories means that if the short-term group demand continues to dominate in our group booking opportunity within a 60-day period, this short-term demand will continue to be more valuable in profit per rooms sold than what we experienced before the pandemic. Our profitability per group room has demonstrated approximately a 40% improvement in our group room night profit per occupied group room, leading us to the conclusion that remaining competitive with all group opportunities and continuing to focus on short-term business closure rates will further enhance our profit contribution from group rooms while maximizing our market share opportunity. The fact is that our new group operating element of our new operating platform has delivered the highest group share in our comp hotels in the history of the firm.

Fall Forecast

Currently, the on-the-books business in premium transient and corporate segments for September and October is at the highest levels we’ve experienced throughout the recovery period. If the short-term corporate surge continues, as we predict it will, this fall we will see the best corporate demand since 2019 on our current occupancy base. Since corporate bookings are our most profitable as well as a sign of industry recovery, we remain cautiously optimistic, short of experiencing a recession, about the overall effect this will have on our GOP.

Fall Forecast

No talk of the future is complete without mentioning the impact a potential recession could have on our business. While there is no current evidence of a recession in our data – as a matter of fact, we are seeing only positive market trends – we recognize that if it comes, it will come quickly and it will have immediate impact on our business. If we pick up on any negative trends in any key categories through our careful analysis of market data, we will notify all of our owners and property teams immediately so that adjustments can be made in contingency management along with a forecast of the next 10 days. A nimble pivot to the successful environment we created during the pandemic will help us to adjust costs quickly for short-term pickup results.

Continued Success of the HEI Business Platform

Our basic intent with the introduction of the HEI business platform is to reduce costs in order to increase profits. The first step in this process is to reduce fixed expenses and maintain those decreases as occupancy rises, followed by improving the variable cost of each unit sold. Our long-term goal is to transition our operation focus to profit per unit sold and lessen the possibly dangerous focus on market share and revenue per available room gains alone. Many years ago, in fact two recessions ago, I learned in this industry that “average rate is good, but cash is king.’’ While the focus on revenue and revenue opportunity is good, we want to ensure that the profit contributors such as acquisition cost of each room we sell, length of stay and other key factors are considered in identifying and selecting the most profitable customers to pursue, ensuring that we are focusing on the most highly profitable customer and not simply on share alone.

Continued Success of the HEI Business Platform

We are making great progress toward our commitment to stabilization at a 150-basis-point improvement in GOP performance compared to 2019 on like revenues and in the months we exceeded the 60% occupancy threshold, which we have mentioned earlier is the optimal performance requirement for the HEI new business plan to reach material impact. That said we have in fact experienced a 200-basis-point increase in GOP performance. We also saw a material increase in other profit contribution areas such as meeting room rentals, average check increases and credit card recovery fees, and parking opportunities, ensuring that we understand the profitability of each transaction that happens on a daily basis in our hotels.

The industry has changed, and our management must evolve to accommodate the growing complexity of the industry. We have to be more efficient in overhead and effective at handling the intricacies of the day-to-day operations of our hotels. Through reinventing our business platform in the post-pandemic environment, we’ve discovered the high level of integration between what was traditionally considered to be separate departments or activities. It is no longer about identifying a singular line item or segment to show how we are achieving this commitment, but it is a combination of efforts throughout the profit and loss statement. There is no one element alone that achieves these results. It is this completely integrated platform that has led to the highest level of consistent results since its implementation in this post-pandemic period.

2023 Budget Projections

2023 Budget ProjectionsWhile measuring ourselves against the trends and achievements of 2019 is still useful, it’s just a matter of time until that comparison becomes obsolete. In 2023, it is critical that we compare our reduction in cost of operation and our overall profitability against direct competitors. It is the HEI platform that has – by all evidence – allowed us to achieve the highest overall GOP performance that exceeds all peers within our industry and sets us apart by our expertise, reputation and results. We are confident that the changes we have made at all levels of the business will help us to continue to accomplish cost reductions. In fact, based upon close overall operating analysis of the key competitors that make up the urban luxury, upper-upscale, independent lifestyle and destination resort markets, I am confident in saying, when compared to the HEI business platform, we deliver a 16% to 43% lower cost of operation without sacrificing any revenue share. I learned early in my career that attempting to have the same level of competency in everything business class within an industry often simply results in overall mediocrity. So our business plan to focus our efforts, systems, procedures and platform on luxury, upper-upscale, premium select-serve and destination hotels has led to the creation of a business platform that is simply more efficient, productive and more customer focused than those that attempt to be experts at all but leaders of none. As we begin building the 2023 budget, our focus will be on how our platform will keep us a leader in the industry classes we serve and have chosen to excel in.

The 2023 budget projections will clearly display the overall financial benefits associated with the HEI business platform. Our understanding of the effects of integration has brought us to a level that I have never experienced in my career and has clearly set the stage for the future. We plan to once again use CoStar data as a basis for market projections while continuing to look at our projected revenue results both on the sub-market and competitive set levels, ensuring that we have identified all revenue opportunities within the marketplace and will expand into any new opportunities.

As Always, Thank You!

I say with great pride that we have the best, brightest and most committed team I’ve ever had the pleasure to work with in my career. I have that same pride in the quality, dedication and alignment of the owners with whom I have the honor to serve. As always, I want to end my note with a huge thank you to all of the team members who make up our company for supporting us in this quest to reinvent the industry, including the implementation of the industry-leading, associate culture–building elements of HEI Loves, while demonstrating our ability to effectively reduce fixed expenses. Your continued efforts and support in understanding the value and importance of profit contribution are what make us successful in this endeavor.

We have created something very special in the alignment and confidence that has been created between our management organization and our ownership community. Fifteen years ago, when I decided to join HEI, it was because I believed there was a better way to run a management company. Today I can say with pride that we are achieving that aspiration and now have a foundation to build upon to take us to a level I never could have imagined when I made that decision 15 years ago.

And on a personal note, let me also thank my partners and principals for a commitment and support that I have never had the pleasure of working with before, that – with such a dedicated team and individual competencies – allows us to have the confidence in the successful development and implementation of the industry-changing HEI business platform.

Ted Darnall HEI

Ted Darnall, Partner & CEO of Lodging and Technical Services

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