Summit Hotel Properties, Inc.

CorePoint Lodging Inc. (NYSE: CPLG) is confident that a refreshed portfolio that appeals to economy-minded travelers offers ample scope to boost revenue and market share.

CorePoint began trading on May 31, following the REIT’s spinoff from La Quinta Holdings Inc. With the transaction, La Quinta separated its hotel real estate from its franchise and management business—which was subsequently sold to Wyndham Hotel Group. CorePoint owns 316 hotels, all of which are managed by Wyndham and almost all operate under the La Quinta brand.

“We wanted to become a REIT because we recognize the value embedded in the La Quinta brand,” says Keith Cline, president and CEO of CorePoint and former president and CEO of La Quinta Holdings. “We’re a compelling proposition because we’re the first pure-play select-service hotel owner with a differentiated focus on midscale and upper-midscale hotels.”

CorePoint’s strategy helps differentiate it from most other lodging REITs, says Michael Bellisario, a senior research analyst with Robert W. Baird.

“REITs usually invest in upscale hotels, with a few invested in select-service hotels. That does make it harder to value CorePoint when there aren’t any great comps,” Bellisario says. “La Quinta hotels are in ‘everywhere USA,’ when REIT investors are used to hotels in places like New York, San Francisco, Washington, D.C., and Boston.”

Prior to the spin-off, La Quinta was aggressively pursuing a three-prong strategy, says Cline, including driving consistency in product, outstanding customer service and customer engagement with the La Quinta brand.

“The first two components of that strategy drove their intended outcomes,” he says. “We could control that because we owned the assets and we were able to increase revenue per available room (RevPAR) by increasing occupancy rates, driven by service and product quality. But to unlock the full potential of our 316-hotel portfolio, we needed some type of consolidation transaction to give us scale, distribution power, loyalty, and reach.”

A handful of REITs own select-service hotels, such as Apple Hospitality REIT (NYSE: APLE), Hospitality Trust (NASDAQ: HPT), Summit Hotel Properties (NYSE: INN), and RLJ Lodging Trust (NYSE: RLJ), so there’s some precedent for owning some of the more premium select-service properties, says Simon Yarmak, a managing director with Stifel. However, he says, CorePoint’s properties are lower down the economic scale with comparable rates below those at the properties owned by other REITs.

“The size of this market is impressive—through the end of 2017, midscale and upper-midscale hotels are almost a $34 billion segment in our industry and yet it has a highly fragmented ownership structure,” Cline says. “We’ve strategically chosen to focus on these assets because we know them, they’re an attractive part of our industry, and because a lot of other public players are not competing for this segment.”

Strategic Repositioning

CorePoint’s initial strategy includes completing the renovation of a group of 54 hotels that were previously identified as ripe for repositioning, as well as reopening 500 hotel rooms that were impacted by hurricanes Harvey and Irma in 2017. All the hurricane-affected hotels are expected to be fully operational by peak travel season in 2019, Cline says.

“There’s definitely traction in the midscale market segment because consumers want an affordable, clean place to stay with some amenities when they’re on vacation near the beaches of the Gulf of Mexico or on a road trip,” says David Guarino, a senior associate with Green Street Advisors. “And midscale hotels tend to have longer visits. CorePoint’s renovation strategy is a good value proposition because we’re seeing a healthy leisure market.”

Brand-name hotels with good amenities in the midscale to upper-midscale segment are putting pressure on higher-priced hotels, Guarino says. A family visiting Manhattan is more likely to choose a less expensive suburban location than an upscale hotel that charges $400 to $500 per night.

CorePoint’s moves are meant to drive both leisure travelers and price-sensitive business travelers to their hotels.

“The renovations are more than just putting lipstick on the rooms,” Cline says. “We’re transforming these properties internally and externally, completely reskinning the outside, putting in new lobbies, new fitness centers, and adding hot breakfasts. We’ve got a director of sales working on corporate accounts for these newly reopened hotels to change the guest profile and drive both occupancy and higher rates.”

More than three quarters of the 54 hotels in the initial repositioning package have reopened.

“These essentially were midscale hotels that were sitting on street corners in upper-midscale markets,” Cline says. “When you compare RevPAR for those hotels with 2016—skipping over last year’s renovation disruptions—RevPAR was up nearly 20 percent, driven primarily by rate but also by market share.”

More Dots on the Map

Following this year’s integration with the Wyndham platform, Cline says the benefits of the alliance will become apparent in the first quarter of 2019.

“Wyndham is the largest owner of midscale and economy hotel brands with [more than] 9,000 hotels, and they have a much larger loyalty program than La Quinta,” he says. “We believe incremental revenue increases will come from our integration into their distribution platform.”

In addition, Cline anticipates future cost benefits from the efficiencies of scale.

“From the customer perspective, affiliation with Wyndham means more dots on the map when they’re looking for a hotel,” Bellisario says. “The bigger brand means more price points and more offerings in the loyalty program.”

CorePoint anticipates growing RevPAR this year because of its newly renovated hotels, the reopening of hurricane-damaged hotels, and its Wyndham association.

“Our RevPAR is up three percent for the first half of 2018,” Cline says. “We’re in a unique position and we’re continuing to gain market share.”

Resilient Demand

Demand among leisure travelers has been surprisingly resilient, says Bellisario, and is being buoyed by low unemployment as well as rising incomes, stock portfolios, and consumer confidence. Individual business travel has seen more modest demand growth, he says, in part because hotel prices have been going up. He says this could benefit the La Quinta brand as well as other midscale hotels that appeal to price-sensitive travelers.

STR [formerly Smith Travel Research] is projecting hotel demand to be up 2.4 percent this year and 2 percent next year, according to Yarmak. “There’s demand for mid-scale hotels even in urban markets because there’s a segment of travelers with budget constraints. The La Quinta hotels are economical and offer free breakfast and free internet. Plus, there’s demand for these hotels when they’re located off the highways and byways from truckers, construction workers, and people who are relocating.”

The suburban market also has less supply pressure than urban markets, says Guarino, another factor in CorePoint’s favor.

CorePoint expects to add to its portfolio, which currently has about 40,500 hotel rooms across two-thirds of STR’s market tracts, with a concentration in the Sunbelt and higher growth markets. For now, CorePoint owns a single brand of hotels, but that may change.

“This is uncharted territory to have a single-branded REIT,” Yarmak says. “All the other REITs own multiple brands, such as Marriott, Hilton, or Hyatt. Even the REITs that own select-service hotels have brand diversity.”

Cline says more than 99 percent of CorePoint’s initial portfolio carries the La Quinta brand.

“As we grow our business we absolutely plan to diversify both geographically and with different brands,” he says. “Our holdings today are more than 70 percent midscale and upper-midscale, which is where we’ll mostly stay. For any new opportunities, though, we’d look at operating metrics and performance more than a specific price point. We’re focused on the quality of the assets, their location, and their performance.”

Long-term Outlook

Hotels in “everywhere USA” tend to be performing better than some of the upscale hotels in urban locations, Bellisario says. He anticipates that CorePoint will successfully be able to push their rates higher due to their hotel locations, as well as providing consistent quality for customers.

“If interest rates rise due to an improving economy, hotels should do well because more people will be traveling,” Guarino says. “Hotels are a great place to be in a good economy because they can change their pricing daily in response to market conditions.”

Now that the U.S. economy is nine years into its recovery, some economists predict the next recession to hit in 2020 or 2021. While Cline says he always anticipates how they will handle a shift in the economy, he thinks it’s hard to speculate about a recession.

“In this industry, when you look at significant impact on demand, it’s always been tied to a macro event such as a war or the dot.com bust or 9/11,” Cline says. “That’s one thing that keeps us up at night: thinking about how we can control what we can’t control. If the economy behaves, we’re expecting to experience continued RevPAR growth. If there’s an outsize economic shift, we’ll look at what to expect in terms of demand. We’ll make sure we have the right balance sheet and mentality around growth to make sure we can manage the business through those events.”

CorePoint’s balance sheet construction isn’t that dissimilar from other REITs even though the company is only months old at this point, Cline says.

“Looking at the long game, it’s always prudent to maintain a conservative capital structure,” he says. “We’re focused on preserving liquidity and minimizing short-dated securities. Certainly, we want flexibility with what we can do with our balance sheet. It’s also important for us to maintain a well-covered dividend so it’s properly sized given the needs of the business.”

The bottom line, Cline says, is that while CorePoint invests in a different market segment than other lodging REITs, just like any other REIT it’s focused on enhancing its capital investment and assets.

“This team is committed to driving profitability through effective asset management to improve cash flow, enhancing asset repositioning, and pursuing growth in diversification with an eye toward building a strong and flexible balance sheet,” Cline says.

When you walk into the Hotel Vintage Portland in Portland, Oregon, you will see a row of bicycles in the lobby available for guests to borrow to explore the neighborhood. It’s, well, vintage Portland—biking has long been a favored activity of the area’s residents.

That is exactly the message that the hotel’s owner, Pebblebrook Hotel Trust (NYSE: PEB) wants to send.

“Travelers want to collect experiences, as opposed to things. They want to experience a city on the same level as a local might,” says Pebblebrook Hotel Trust CFO Raymond Martz. “We have found that if we provide a unique experience, both business and leisure travelers will benefit from it—especially business travelers as they are on the road all the time.”

The hotel business is in a constant state of flux; owners have to remain ready to adapt quickly to the changing tastes and preferences of all kinds of different clientele. Maybe it’s bike racks in lobbies or superfast broadband internet access. As demographics shift and the pace of technological change speeds up, lodging REITs find themselves moving as nimbly as ever to offer their own answers to what choosy customers want.

Sharing-Economy Disruption

If you’re looking for the greatest game-changer in the hotel space right now, it’s Airbnb. Covering 65,000 cities in 191 countries, the accommodations-sharing service has undercut hotel room prices in major cities, purporting to offer users “unique travel experiences” by “being connected to local cultures.”

Hotel owners have pushed back, seeking to ensure that Airbnb participants are subject to the same safety standards and regulations that they are. Hotels are also taking their case directly to consumers by offering them similar features and designs in the hotel, along with an array of tech-enabled amenities that they may not have considered before.

Hotel brands are adapting their designs to reflect the popularity of the sharing economy, says Arthur Adler, JLL chairman, Americas, Hotels & Hospitality Group. Meeting rooms are being renovated to offer co-working spaces, and common areas are being designed to be more appealing and accommodating to guests, he says.

“The hotel industry is very good at breeding innovation and new thinking,” Adler says. “The industry has a great way of adapting to changes and remaining profitable.” 

Technology Driving Other Changes

Indeed, Adler says, “there’s no reason why hotels, which are already 24/7 operations, can’t take on certain characteristics of what consumers want in this sharing economy.” For instance, he says, some of the flagship brands, such as Marriott, have implemented the concept of shared living room space for guests to use to relax in public and talk with other people.

In other cases, REITs are harnessing new technology to deliver more amenities to guests—and to drive rates in hotels. For example, Ashford Inc. (NYSE: AINC), which serves as the advisor to Ashford Hospitality Trust (NYSE: AHT) and Ashford Hospitality Prime (NYSE: AHP), has rolled out two initiatives in which evolving consumer preferences and tastes have been married to a tech solution.

One is called Pure Rooms, which is a service in which a room gets a deep cleaning that includes disinfecting all surfaces, the encasement of the mattress and pillows, and the installation of an air purifier unit, which reduces pollutants and allergens by 99 percent.

“What we are finding is that guest satisfaction scores coming out of those rooms are incredibly high,” says Rob Hays, chief strategy officer of Ashford. “It costs a few thousand dollars to perform this service but the hotel gets a great payback on the investment very quickly—not to mention very high customer satisfaction.”

Ashford’s asset-managed hotels that have been included in the Pure Rooms program have experienced internal rates of return as high as 50 percent to 70 percent on this investment, Hays says.

More Changes to Come

Down the line, automation will affect how lodging REITs approach their operations, according to Dan Hansen, chairman, president and CEO of Summit Hotel Properties, Inc. (NYSE: INN).

“We haven’t gotten to the point where we have robots vacuuming rooms, but I think at some point those technology advances will make the operations and the experience much more efficient,” Hansen says.

And just wait a few years until hotel REITs will have even more advanced technology to enthrall and enthuse guests.

Last year, both Marriott International and Hilton Hotels announced initiatives in which they are experimenting with advanced technology to build the guest room of the future. Hilton Hotels opened a new 4,300-square-foot Innovation Gallery, which offers a product showcase, a food and beverage concept studio and a virtual reality stage among other features that will serve as an incubator for new guest services. Many of the products already on display have been developed through Hilton’s partnerships with such companies as IBM, LG, Amazon and Tesla.

The Innovation Gallery, according to Hilton Chief Customer Officer Jon Witter, is a “space for us to incubate, test, scale and showcase the products and processes we’re creating to enhance our guests’ experiences and redefine the future of hospitality.”

As for Marriott International, it has teamed up with Samsung and Legrand to launch an Internet of Things, or IoT, Guestroom Lab. Here will see the development of such scenarios as users asking a virtual assistant to start their showers at a certain time in the morning and at the temperature they want.

“By teaming with best-in-class partners, we are leveraging mobile and voice-enabled technology to give our guests the ability to set up the room to best meet their needs—whether that is creating the ultimate relaxation environment or one that enables productivity for business travelers,” said Stephanie Linnartz, Marriott’s global chief commercial officer, when the lab was first announced.

Mobile Key Provider

Ashford’s other initiative is a venture the company launched called OpenKey, which has quickly become the leading mobile key provider to hotels. It is an app that opens a guest’s hotel room door via a smartphone and Bluetooth technology. Assuming the hotel is participating in the program, it doesn’t matter what brand the hotel operates under. “It allows the guest to skip the entire check-in process and just go straight to their room,” Hays says.

“We anticipate that OpenKey is going to be in around 35,000 hotel rooms over the next year or so,” he adds. “We are now in eight countries on four different continents.”

This investment is a telling one for the hotel industry, Hays believes: It will bring more uniformity to the sector and benefit to the consumer.

“Consumers don’t want to have a Marriott app, a Hilton app, a Starwood app, a Hyatt app, a Choice app and so on on their phones,” he says. “They want one app to open their hotel rooms.”

Because OpenKey is still in its early stages, data on the return on investment doesn’t yet exist. Hays explains, though, that the return to hotel owners comes from reducing the use of plastic keycards, a reduction in manpower needed at the front desk, cutting other expenses related to the check-in process and growing future revenues by positively impacting customer satisfaction scores.

What do you Expect to be the Biggest Game Changer for the Lodging Industry Over the Next Five Years?

Richard Stockton

CEO, Ashford Hospitality Prime, Inc.

What has historically been a very fragmented and competitive industry may see further brand ownership consolidation. Consumers will still have the choice between the various brand offerings at different service levels and price points, but ultimately, they will be beholden to the pricing structure dictated by only a couple of major hotel management companies.  

The pace of technological evolution will also continue to deliver opportunities and challenges to our industry.  As we implement customized profiles for our guests, we will be able to provide more and better services and experiential opportunities for them.  Owners will need to refresh in-room technology more frequently to remain competitive.  Concierge services and room service will be available primarily via mobile applications.  Most guests will bypass the front desk by utilizing mobile key applications such as OpenKey, or others provided by the major brands.  In general, there will be far fewer human interactions needed to deliver the optimal guest experience.  

Jay Shah
CEO, Hersha Hospitality Trust

There has been a marked shift in spending from products to experiences and consumer spending for travel has been outpacing the demand for goods.  We believe that this shift in tastes and preferences combined with the continued democratization of travel and robust airline competition is going to be a driver for the industry in the foreseeable future.  

To best leverage this secular shift, we are focused on using technology—specifically artificial intelligence, the internet of things, voice and automation—to drive personalization of the guest experience.  Differentiation in our sector is crucial to meaningfully connect with our customers, remain relevant and to build loyalty.  In addition to enhancing the guest experience, we are going to explore opportunities to use technology to increase efficiency, affording more resources to deploy towards service delivery, while driving superior earnings before interest, taxes, depreciation and amortization (EBITDA) growth.

Colin Reed
Chairman and CEO, Ryman Hospitality Properties, Inc.

We believe the biggest game changer for lodging real estate in the next five years is the increasing demand in the large group segment that make up the core customer at our Gaylord Hotels properties. Couple that growth with the lack of new supply of large-scale, full-service hotels under development that can accommodate this demand and you have an interesting dynamic. This supply demand imbalance is coming on the heels of the Marriott - Starwood merger, which we believe will generate economies of scale for both transient and group-oriented properties.   

Jon Bortz
Chairman, President, and CEO Pebblebrook Hotels

The lodging industry moves towards the airline industry’s pricing model and approach and the potential for blockchain technology.  The current structure of the major brand redemption programs, combined with a lack of change fees, has created a disadvantageous dynamic across the lodging industry.  This has negatively affected pricing integrity.  In addition, with the lack of change fees, guests are encouraged to cancel and rebook, or make multiple reservations across multiple properties.  The airline-pricing model is much better and encourages customers to book in advance and not make multiple reservations.  Tiered pricing choices for the customer, from the lowest price with the least flexibility to the highest price with the most flexibility, but with change fees, and something in between, are in the process of being adopted in the hotel industry. The adoption of this approach would benefit the entire hotel industry, particular hotels in urban markets, as pricing integrity would improve profitability. 

 The other big game changer could be the use of blockchain technology. This could enable all hotels to make their inventory available to all guests, without third-party intermediaries.  This would reduce third-party booking costs (and channels) while also potentially making brands less relevant.