PHOENIX—Play to your strengths, and don’t go beyond your company’s capabilities. These are key ingredients for a successful hotel repositioning project, said panelists during the 20th annual Lodging Conference.
“We ask ourselves what expertise we have and what expertise does the asset need, so we only bid on projects where there is alignment between the two,” said Navin Dimond, president and CEO of Stonebridge Companies, during a panel discussion titled “A clear path to property repositioning.”
“When people take on things for which they don’t have the skill sets you’re likely to see people fail,” he said.
Playing to his company’s strengths is also a strategy for David McCaslin, president of Northwood Hospitality.
“We’re not particularly efficient buyers of standard branded, 300-room full-service hotels. We let those projects go to other people,” McCaslin said. “Rather, we go after more complicated properties because we look more at what’s within the real estate than just a hotel.”
While that’s his company’s sweet spot, McCaslin said it’s also not the best idea to repeat scenarios too often.
“Nobody is good at everything, so that should be a major part of your decision making,” he said. “But when you do the same thing over and over you might get worse at it because you can’t stay fresh. So ideally a little stretch is good once in awhile.”
One factor in a decision on how to reposition a hotel is the optimal hold period by the owner. For owners who rely on private equity capital, a sale or other exit is often defined at the time of purchase.
“The owners of our properties are traditionally private equity with five- to seven-year holds,” said David Capps, VP of development for Aimbridge Hospitality. “We need to buy right and need to fit the cycle correctly.”
Dimond said Stonebridge relies on its own sources of capital, which affects its decisions on how long before selling assets.
“We’ve held some assets for 20 years, and some we’ve held for one year and one day,” he said. “We design any acquisition or development to be long-term. For us, that’s the nature of real estate. Of course, if opportunity comes along for an early exit we’ll take it.”
For David Storm, president and CEO of Providence Hospitality Partners, his company’s ability to turn around a distressed hotel sometimes determines the hold period.
“Sometimes, it might be a six-month time frame,” he said. “You have to determine the opportunities and the thresholds.”
Going independent
The panelists said a repositioning project might involve rebranding a hotel or converting it from a branded property to an independent.
“We’re analysis-driven,” McCaslin said. “We look at the location, what are the hotel’s drivers (of business) and what’s coming from the brand versus what we could generate if the property was an independent.”
Northwood’s hotel portfolio includes a number of independent hotels, including the Naples Grande Beach Resort, which earlier this year the company converted from the Waldorf Astoria brand.
“In making that decision, we looked at three different brands and the assessed fees and brand requirements and how much that would cost,” he said. “And it wasn’t just the (property improvement plan); it was also things like the linen program and everything that’s a brand requirement, down to the trash baskets.
“We concluded the cost basis would be substantially less as an independent than any other options we had,” McCaslin said. “The hotel pro forma showed less rate, less occupancy and less (revenue per available room) as an independent, but it came out with a higher incremental (return on investment).”
Capps of Aimbridge said repositioning a hotel as an independent depends on the profile of the property, its market and its location within the market.
“We don’t like to do it, but in certain locations it makes sense to do so,” he said. “Sometimes a property needs a lot of (capital expenditures) to retain its brand, but the market doesn’t need that kind of product.”
PIP negotiations
Acquiring branded properties nearly always involves a PIP, which is often the source of tense negotiations between owners and brand companies.
“We embrace what we believe should be a collaborative and cooperative effort between the brand and the owner, but still a PIP is the most negotiated item in a franchise agreement, particularly if it is a conversion,” said Phil Silberstein, executive VP of development for Carlson Rezidor Hotel Group.
The owners and operators on the panel conceded that many elements in brand PIPs are important to embrace even though they can be costly.
“A battle is the wrong way to look at it,” McCaslin said. “The negotiations shouldn’t be about getting the number down, but about how do I as an owner make sure what I’m doing makes sense to our customers.”
Dimond said the Stonebridge philosophy is to break down the PIP into two types of expenditures.
“Those things that are signature brand items are typically not negotiated, and we wouldn’t want to negotiate away those things,” he said. “Next are the guest-facing items, and we stack them in order of ROI on an incremental basis.
“When we get to a point (with these items) of minimal return or no return we push back, and if you can demonstrate your case most brands will listen to you,” Dimond said.