Interstate Hotels & Resorts (NYSE: IHR), a leading hotel real estate investor and the nation's largest independent operator of full and select-service hotels, today reported operating results for the second quarter ended June 30, 2008.
Highlights for the second quarter include:
-- RevPAR rose 4.0 percent for all managed hotel properties, compared to an average industry gain of 1.2 percent;
-- Added nine management contracts, representing the third consecutive quarter of higher unit count;
-- Signed a contract to manage its first property in India, an under- construction hotel in Vizag (Visakhapatnam) through India JV;
-- Opened first U.S. Starwood branded aloft Hotel, in Rancho Cucamonga, Calif., developed and co-owned with JV partner, The John Buck Company;
-- Signed contracts to manage company's first Cambria Suites, to be built near Atlanta Hartsfield Airport, to open in Q1 2009, and Crowne Plaza New Orleans, to open in Q4 2008.
"RevPAR rose 2.9 percent for the owned portfolio, excluding results at the Westin Atlanta Airport and Sheraton Columbia, Md. properties, where the hotels continue to operate under major renovations," said Thomas F. Hewitt, chief executive officer. "Hilton Houston Westchase and Hilton Concord reported the strongest results, both achieving RevPAR increases of approximately 5 percent.
Hewitt noted that renovations at the Atlanta and Columbia, Md. hotels are proceeding on budget and on schedule. "At the Sheraton Columbia in Maryland, we completed the first phase of the rooms renovation in late April, which comprised 50 percent of the 288 guest rooms. We began the second phase earlier this month, which we expect to finish by the end of the third quarter. The majority of the remaining projects in the capital plan, including all remaining public spaces, will be completed by the end of the year.
"We recently completed the rooms renovation at the Westin Atlanta Airport, and are on schedule to finish the remaining upgrades to the meeting rooms and public spaces by year end. With the completion of the Westin's $18 million renovation and the $12 million renovation at the Sheraton Columbia, these properties will be well positioned to achieve their full operating potential.
"As we entered the year, we did anticipate a certain amount of displacement from our renovations," Hewitt noted. "However, the impact of disruption associated with renovations of this magnitude coupled with a weaker economic environment will significantly affect the performance of these hotels in 2008. As a result, we are decreasing our full-year forecasted EBITDA from our wholly owned hotels by $2.5 million. The remainder of our owned hotel portfolio has performed well, with four of the five hotels exceeding our year- to-date budget.
"While our current forecast reflects a greater disruption impact from the renovations than originally anticipated, these hotels represent significant embedded growth for us in 2009 and beyond," Hewitt said. "In 2009 alone, we anticipate a $4.5 to $5 million increase in EBITDA from these two hotels."
Joint Venture Investments
During the quarter, the company opened the first aloft Hotel in the U.S., in Rancho Cucamonga, Calif., near Ontario. The 136-room, newly built hotel is owned by a joint venture in which Interstate and The John Buck Company (TJBC) of Chicago, Ill., a real estate development firm, are partners. "The aloft Ontario-Rancho Cucamonga is part of our growth strategy to develop hotels through joint ventures, which translates into significant growth potential as they ramp up," Hewitt said. "We expect this brand to quickly gain broad market acceptance and achieve strong operating margins."
Last week, the company announced a joint venture partnership with Madison W Properties, LLC, which recapitalized the existing ownership of the Lexington Downtown Hotel & Conference Center, formerly the Radisson, and an adjacent office building located in downtown Lexington, Ky. The partnership will invest $13 million in capital improvements and convert the property to the Hilton brand in 2009. Interstate managed the property for affiliates of the Blackstone Group prior to the transaction.
Leslie Ng, Interstate's chief investment officer, added that joint venture investments remain an essential part of the company's real estate growth strategy in 2008. "With the addition of the Lexington property, we currently have an equity interest in 49 properties. This will increase in the third quarter with the scheduled opening of the aloft Cool Springs, Tenn. We continue to seek joint venture opportunities both internationally and domestically that are consistent with our targeted investment profile."
Hotel Management Results
Same-store(5) RevPAR for all managed hotels in the second quarter of 2008 increased 4.0 percent to $108.65. Average daily rate (ADR) advanced 5.6 percent to $143.13, and occupancy declined 1.6 percent to 75.9 percent.
Same-store RevPAR for all full-service managed hotels rose 4.1 percent to $118.61. ADR improved 6.5 percent to $155.53, while occupancy dropped 2.2 percent to 76.3 percent.
Same-store RevPAR for all select-service managed hotels increased 3.7 percent to $83.58, led by a 3.3 percent gain in ADR to $111.42, and a 0.4 percent increase in occupancy to 75.0 percent.
"Our overall RevPAR increase of 4.0 percent for the quarter was well ahead of the industry RevPAR gain of 1.2 percent," Hewitt said. "Our RevPAR for the period was driven solely by room rate, as occupancy declined 1.6 percent. Although group business has held up relatively well, we are seeing more softness in our discretionary leisure/transient business, which is more sensitive to the difficult economic climate. This has led us to decrease our full-year RevPAR forecast to 1 to 3 percent growth, which remains ahead of overall industry expectations.
"As you would expect with lower RevPAR assumptions, we have implemented various cost containment initiatives at the majority of our hotels in order to maintain operating margins," he added. "Year to date, across the portfolio, we achieved very strong gross operating profit margins, 70 basis points higher than last year. Our sales and operations personnel have weathered numerous economic downturns and capitalize on this experience to achieve maximum operating results for our owners."
"We were particularly pleased to report our third consecutive quarter of unit growth, as we added a total of nine management contracts during the quarter," Hewitt said. After the end of the quarter, the company announced that it has taken over management of four Hyatt Place hotels for FFC Capital Corp. In addition, later this month the company will open the Hilton Garden Inn Melville, a newly constructed hotel in New York.
"Today, we have 16 management contracts for hotels under development or construction. These, together with the two properties that have opened this year, represent significant embedded growth in 2009 and beyond," Hewitt said. "Including the properties opening in 2008 and 2009, the company expects to earn approximately $3.5 million of incremental management fees in 2009." -- Interstate Hotels & Resorts
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