‘Constant Battle to Drive Profit’ in Hotel Business

Rising costs, flat revenues, and global turmoil pose stiff challenges for Interstate Hotels CFO Carrie McIntyre.
David McCannDecember 19, 2016
‘Constant Battle to Drive Profit’ in Hotel Business

The ultimate cyclical industry, always flowing and ebbing in tandem with the economy, the hotel business is in something of a holding pattern these days.

Carrie McIntyre

Carrie McIntyre

Like most industry players, Interstate Hotels & Resorts — which manages 427 properties flying the flags of the best-known brand names in lodging, like Hyatt, Hilton, Marriott, Sheraton, etc. — is in a period of relatively flat results amid the current slow-growth economy.

Interstate’s CFO, Carrie McIntyre, has seen it all, having gone through a few up-and-down cycles for the lodging industry in her 15 years with the company.

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The company, which was acquired last May by private-equity firm Kohlberg & Co., doesn’t own the properties it manages, except a handful of small minority stakes. Interstate operates 347 hotels across 42 states, and most of its international presence is in the United Kingdom (58 properties) and Russia/CIS (11).

Finance chief since 2013, McIntyre recently spoke with CFO about the lodging industry’s fortunes and recent events, as well as what it’s like to run finance at a hotel management firm. An edited transcript of the discussion follows.

What’s your view of the state of the hotel industry and its prospects?

We’ve had solid growth in [revenue per available room] since the downturn in 2009 and 2010, but it’s starting to level off now. This was a very flat year in terms of occupancy, and occupancy is actually expected to decline in 2017 because new supply is outpacing demand. Revenue grew this year in the 2% to 3% range, and for next year it’s looking like 1% to 2%, but that’s all driven by rate.

Demand is also affected by the volume of inbound travel and all the uncertainty internationally. Everybody is surmising that with the change of presidential administrations, people are going to be holding off on spending.

At the same time, we’ve had increased costs in areas that are significant to this industry — big increases in health-care costs, and there will be minimum-wage increases next year. Energy costs are up too. All of this is happening at a time when revenues are flattening out. It’s a constant battle to drive profit in this environment.

I’d think your energy costs would actually be down.

Recently, yes, but the [health of] the oil industry affects many of our markets. There’s the actual costs, but then demand related to that industry hurts us. So it’s both an up and a down.

It’s the same way with the new presidential administration. Every day there are headlines about President-elect Trump. On the demand side it’s unnerving, because we’re not sure what he’s going to do about the trade agreements, for example, and how that will affect our international presence and inbound and outbound travel.

At the same time we’re looking at some of the deregulation he’s proposing and the people he’s putting in place, and that could be friendly to us from a cost perspective.

Is there anything else driving the international uncertainty that you mentioned?

There are risks that make me get that feeling in the pit of my stomach. We saw Brexit happen and Britain’s gross domestic product plunged overnight. And two years ago the ruble went from 30-something-to-1 to 70-something-to-1 in a heartbeat. When oil prices go up, it’s better for the ruble.

But we’ve chosen not to buy hedging instruments on our international-denominated exposure, because we’re somewhat naturally hedged. We have certain structures and investments that leave the revenue in [foreign] countries in those countries. So there’s little exposure from that revenue coming to the United States.

Still, when things are going a little haywire, you get that feeling of, did we do enough? Are we exposed? We’re constantly analyzing it, making sure we’re thinking it through. You try not to react at the wrong time.

What kind of financing needs do your hotels’ owners have?

We have 150 different owners. Some of them are institutional, and they manage their own capital structure. Others that are one-off owners may need help finding financing, and we do help them, but debt is in the owners’ name and under the owner’s control.

Now, as the management company, we certainly need to be aware of that capital structure and of the capital needs for a property, such as for renovations and meeting brand requirements, so we have to be in sync with that and manage accordingly. But we don’t control what they spend or what they spend it on.

But do the owners ask for your advice on those matters?

Yes, certain owners don’t have the expertise in-house and need some handholding. That’s partly with our business development team and partly with my team. We generate models for cash-flow forecasting, for example, and a lot of times they use what comes out of our shop to go get debt. We generate the cash flow and distribute the cash to them to pay their debt service.

How will the recent hotel-industry consolidation and ownership changes impact Interstate?

We’ve been going back and forth on whether it will impact us. Obviously we need to understand what standards [new owners will] come out with and how to operate on behalf of the combined company. And in certain areas we might now have a couple hotels in the same competitive set in a city. That might actually help, because we could share resources.

Interstate itself was acquired this year. What changes have come out of that so far?

Our prior owner was a joint venture between Thayer Lodging and Jin Jiang International Hotels, and Thayer owned real estate. We owned five hotels, and we liked that, because at the time we thought it balanced out our portfolio. The hotel business is very cyclical, and you can have some real upside from owning the real estate.

But our new owner, Kohlberg, invests in services businesses. They don’t want real estate. So we spun off those five hotels and now we’re a pure third-party-management company. We do still have small joint-venture interests, in the 5% to 15% range, in about 20 hotels.

There’s financing in place for growth, but Kohlberg is focused on organic growth first and foremost, winning one quality contract at a time.

What was it like working on that transaction?

I was heavily involved, and it was a very long process — working with a broker, going through all the diligence, and doing the negotiations.

With something like that going on, how do you do your day job?

You just work twice as many hours, and it gets done. I have a very understanding family, but I just said listen, until this is done you’re not going to see me much.

What’s unique about the hotel-management business?

The hardest part of the learning curve when I started was the third-party-management model.

I came from an IT-services company, and I was able to equate the hotel industry to a service business. In a services company you have a utilization rate and a rate that you charge for your time, and in the hotel business you have a utilization rate and an average daily room rate. So that part wasn’t hard.

But third-party management is different. We have 30,000-plus employees but we don’t own the hotels. It was that agency relationship that was hardest to learn. We manage owners’ bank accounts and move the cash for them, but it’s their cash. We employ the employees, which is a cost of operating the property, and they reimburse us for that cost.

Everybody stays in hotels, so anybody can grasp what the deliverable is. But in the business model, there’s a property owner, a third-party operator, and a brand owner. That’s three parties involved in the hotel. It’s not intuitive — nobody thinks about that when they stay at a hotel.