• Geller:More Optimistic about 2012
  •   Laurence Geller, CEO of Strategic Hotels & Resorts, Chicago, which owns upscale hotel properties operating under the Four Seasons and Ritz-Carlton brand as well as a stake in the Hotel Del Coronado near San Diego.

    Laurence Geller

      After some pricey purchases, Geller’s company stock tumbled to US$0.61 in 2009 and was close to forfeiting properties before making an impressive and swift recovery. Now, Strategic’s stock sits above US$5 and Geller is optimistic about near-term prospects. Here are some of his comments about the marketplace and the way forward.

      HOTELS: How is your portfolio performing?

      Laurence Geller: On a macro basis, we are currently having some of the strongest future production booking weeks we have ever had. We have been measuring since August and we are hammering at corporate group future production. Our group rate is up a good 5% to 6% for next year.

      Because 50% of my rooms business is group, I think we are a good forward indicator of business confidence, and I am not seeing any turn down. My non-rooms business has been terrific. Groups are spending up more than a year ago. They haven’t extended the length yet, but they are spending up on coffee breaks, meals, etc.

      I keep waiting for the hammer to come down, but I just don’t see it.

      HOTELS: I keep hearing about more mixed reports than your forecast.

      Geller: It depends on what sector of the market you are in. I am generally in supply-constrained markets with big boxes or luxury boxes, and it really is about supply. Compression nights are up – sometimes up 15% to 20% year-on-year. Compression rate is up. It is beginning to get better. I am going to say the velocity of growth will be less than anticipated for 2102, but I have a feeling 2012 will be better than what people are saying.

      When you look at Marriott, they are saying 3% to 7% growth. That is a heck of a range, but I think it will end up on the higher end of that. Right now I see no reason why not. The other side is that our cost reductions are holding in place. We are not adding anything.

      HOTELS: How do you see macro-conditions effecting business?

      Geller: I go to Europe all the time, and a month ago I was pretty pessimistic that politics in Europe wouldn’t get its act together. But the global reverberations are so serious and the pressure on the Europeans to recapitalize the banks is so great that I have a feeling we will get about an 80% solution out of Europe.

      Politically here in the U.S., we are in stasis. We are not going to get a boost or hit from the government in the next year, so what we have is what we have. There is no change in China; India is calming down; and Brazil is hyper-inflated so I think we will see flight money out of Brazil. People say it is time to take money out and I think Brazil will slow. Canada is strong, underpinned by energy. So I am more of an optimist now than I was six months ago, and as we get through 2012 I think we will see unprecedented years of profitability.

      At my end of the market, if we get to 2007 revenue levels, we should have a couple hundred basis points more of profit. The systemic changes in labor are so big that they are going to make the industry more profitable. It should make hotels more profitable permanently with technology-driven labor systems reengineering hotels.

      We have taken 21% of our management costs out of our hotels and it is staying off. For the first time, labor at the senior management level and down is getting cut. Chains have used senior management as a farm system and now it is getting cut. Executive committees are down from 7 to 5 people. If a member of that committee is all in at US$250,000, and you get two off at US$500,000, and I am on a 5 cap rate, that is US$10 million of value to my company by losing two executive committee members. I will buy some technology to do that.

      HOTELS: What else does the future hold for hotel operations?

      Geller: I think labor is permanently changed, but there is one last frontier that I think will change the industry again. Gen Y is driving Gen X habits. Marketing is the last frontier and I think our current model is completely outdated. We are marketing as we always have. Marketing will have to be done completely digitally. The way you market is totally different, yet what we haven’t done is take the bold step of rethinking marketing.

      You have a large portion of costs at corporate office, the sale staffs and so many other redundancies. As a result, I think what will happen is marketing to new demographics will be so electronic that the money will be very differently spent, and you will be able to get rid of so much of the way we have done business. We will have different dynamics. But the way chains are doing it at the moment, and we are at the in between stage, is that they are adding on programs rather than rethinking the model. The first chain that rethinks the marketing conundrum wins.

      We have gone to several chains, allocating a large some of money, and have offered two of our hotels as beta tests for completely rethinking the marketing structure. At the end it changes how chains do business and how marketing money is allocated. All in cost of marketing a hotel is 10% to 12% of revenue. I believe there are 300 basis points that can be saved as there is so much stuff not yielding anything.

      If I see more stability in the market, we will accelerate our beta testing because it must be the way. It is the last place I can get 200 or 300 basis points out.

      HOTELS: When will further deleveraging of assets start?

      Geller: I would have said it won’t happen, but now I think it will happen. In the next two years you will see complete deleveraging. Once the credit markets reopen, then you will see it. I will guess if we get stability in the next six months, credit markets will gradually open again and you will see the next wave of deleveraging, and then it is over.