Q&A With White Lodging's Yiankes and Sibley

Sibley: Thanks for having us.

Higley: And second is Deno Yiankes, the president and CEO of the investment and development division. Deno, pleasure to have you with us.

Yiankes: Greetings.

Higley: First of all, Dave, let's talk a little bit about the changes at White Lodging about six months ago at the beginning of the year. Can you explain the management division for our viewers? What exactly do you do?

Sibley: I run the management company. We have 155 hotels in 18 states, mostly premium brands—Starwood, Marriott, Hyatt and Hilton. For a long time, we were known mostly for our select-service hotels, but over the last 10 years, we've significantly increased the number of full-service under our management. As we were looking at the direct reports into our COO, we thought this would be a good time to create a COO of full-service and COO of select-service. So Jon Peck, who was doing both, has moved over to the full-service side, and we just recently hired Bryan Hayes from Hyatt, where he was running the Summerfield Suites and the Hyatt Place brands. He's a welcome addition to our team. I think it's a good platform for us to grow and still keep layers without adding additional layers.

Higley: Kind of perfect timing for the management division in terms of we're starting to see a recovery take place. What challenges do you have on the management side of the business as the recovery does start to take shape?

Sibley: For us, what we've seen is the commodity costs are going up. Our food and beverage, linen and so forth are putting a strain and making us go back and reevaluate where we can make some cuts there to bring more to the bottom line. We've been able to grow our RevPAR by 8.1% with slightly more ADR, so we're doing well there. The flow is great, but we're losing a little bit on the margins because of the commodity costs.

Higley: Deno, from your perspective, the whole realignment, for lack of a better word, of the company—can you explain it a little bit and how it works for you and maybe the overall view of it?

Yiankes: Sure. I think as Dave mentioned, with 155 hotels in our portfolio … we're constantly analyzing to see how we can deliver more value for the owned assets. Our mission remains to maximize the value of every asset, whether it's people, whether it's the hotels, whether it's the associates that work in the hotels, etc. So from my perspective, I'm challenged to focus on our internally owned assets, and the great thing about White Lodging is because of the stability of our management contracts, we've always been able to plan ahead. Instead of being in reactive mode and growing and adding a bunch of rooms and then sitting down and saying, "OK now how do we manage those," we tend to be, "OK here's what our pipeline is." And because of our owners' willingness to invest, we're able to, we think, stay somewhat ahead of the curve. It's very positive. When I look at my peers and some of the issues they're dealing with, I feel very fortunate that we've got the structure in place to manage, particularly, as you opened up with, the fact that we're going in the uptick now, I feel we're in a great position to take advantage of that.

Higley: Are all 155 hotels in the portfolio that are managed, are they all owned by White Lodging, or do you do third-party management?

Yiankes: As a result of our two milestone transactions, in 2006, 100 of those hotels were sold to RLJ and then approximately 33 or 34 of those are owned by Apple REIT, 16 of those of which we sold to Apple in November of 2010. Today, of those 155 hotels, internally owned hotels total nine. The remaining are a few additional groups such as Inland, LaSalle and a few local partners that we operate for.

Higley: And Dave, I would imagine from your perspective it really doesn't matter whether they're internally owned or externally owned—you still manage them the same way with the same bottom-line-oriented approach.

Sibley: We also set up our balance scorecard, which we bonus all of our managers off of, which is basically (guest satisfaction scores), (quality assurance), market share and flow through bring it to the bottom line. A Fairfield Inn that we manage for anybody else counts as much as the JW (Marriott) that Bruce White or the family might own in Indianapolis. But from my perspective, I don't make any more incentive money if JW does well or the Fairfield Inn in Key West does poorly.

Higley: So it's all about just having a consistent approach across the board?

Sibley: Yeah. We really don't look at it from an ownership standpoint—we look at is as what should each asset be capable of doing and are we maximizing the value of that. And if we are, then we're doing our job, and if we're not, then we gotta get at it.

Higley: So that's where the indices come into play … RevPAR index and all of that.

Sibley: Yes, yes.

Higley: Can you talk a little bit about the whole, as the recovery was taking shape and the way rate industry-wide didn't materialize the way everybody thought it would. 2010 was kind of a surprise in the fact that occupancy was stronger than a lot of people imagined it would be, and therefore it drove RevPAR, yet rate was still a bit of a challenge. What's your assessment of 2010 and now 2011 as rates start to climb? Do your properties follow suit there?

Sibley: In 2010, I think everybody took out some insurance and really loaded up on the special corporate business, and that came back strongly, but everybody discounted the rate significantly. In '11, we're seeing gains almost in every category from a rate standpoint. Where we're still seeing flat rate is on the group pace report. Group pace is ahead, but the rate isn't, and a lot of the bigger hotels that were booking three to four years out during that downtime of '08-'09 are now seeing '11, '12, '13, where they have flat ADR. And that's a real focus for us now, is how we're going to get ahead in '12 and '13.

Higley: How about the growth prospects for management division at White Lodging? Where do you see that going? Do you have a goal in mind to add a certain number of contracts every year?

Sibley: Our goal is we'd like to double in size over the next five years. Something that's going to be a little bit different for us is that in the past, we probably have grown two-thirds through the White family's investments and Deno's groups. This time, we're talking about growing only a third through that way and two-thirds through management contracts. Again, that's one of the reasons we separated the two divisions. A lot of the owners that we went out and talked to about taking over management contracts are either predominately in full-service or select-service, and we were talking dual language instead of the language that they were looking for.

Higley: So, going forward, what type of property are you looking for to expand the management-contract business?

Sibley: We're looking for a few owners that can go narrow and deep with us. If we perform well, they have the ability to grow to five or more hotels over five years with us. We want to have a partnership with the group. We're not looking to just run out and anybody who just wants to give us one contract and take that on. We think that adds complexity and takes us away from the focus of maximizing each and every asset. So we're looking for a few owners to go deep with, and select (service) or full (service) doesn't matter.

Higley: Deno, just like development, you've been kind of sitting here watching on the sidelines as Dave takes the conversation here.

Yiankes: That's true for the last two years.

Higley: So talk about that. I mean, White Lodging has always been a big developer, always had a lot of properties in the pipeline. What are you working on these days and how do you see the environment shaping that?

Yiankes: I would say prior to about 90 days ago, I was pretty much sitting on the sidelines. It was tough to get any traction in terms of our internal equity. You saw too many "Danger Ahead" signs that weren't going away. And while it still remains choppy, the big breakthrough for us in the last 90 days has been the debt, the banks, the regional banks and lenders coming through. While we're certainly not at the point we were 2008 and prior, the fact is we've got four projects we're going to start between now and the end of the year. Two of them we have financing in place. They're very strong construction mini-perm loans, relative to what was available in the past 24 months, so that's been a big breakthrough for us. The other thing we're seeing in our development that's different than before is, as Dave kind of alluded to, we're shifting more toward fewer larger-scale projects. Historically, we might have had one urban project for every eight to 10 suburban projects we developed. The urban project tended to be more in the 300- to 400-room range. Today, we've kind of flipped that and probably 80 percent of our pipeline is urban, 300- to 500-room a pop type developments. And we're still doing what we call our "singles and doubles”—a Hilton Garden Inn, a Courtyard, a SpringHill, a Residence Inn, what have you, in traditional locations near airports or in dense suburban office markets. But those now are more in the 25% range. Because of the financial stability our company enjoys, we're able to take on those bigger projects now, and we think our value-add there is even more significant than we can on smaller projects.

Higley: Is there more of a return on the bigger projects, the 500-room urban center big-box as opposed to the 120-room (suburban hotel)?

Yiankes: You know, it's the classic risk-adjusted reward. They're more risky, they take longer to entitle, they take longer to build, you're not going to get as strong of financing on them because of the bigger absolute dollar sizes, but at the same time, they're usually the most sought-after product. When you look at exit strategies with the (real-estate investment trusts) and private-equity funds, they tend to really gravitate toward those kinds of assets. So while we're not building with the idea that we're going to exit, you always have to have your eye on that. So the ability to know that there's going to be a demand for that type of product, in our minds, as long as we do our homework, we're comfortable taking that risk because we think the risk-adjusted returns are very strong, if not stronger, than some of the suburban deals we've done in the past.

Higley: Is it all ground-up development for you, or are you looking at acquisitions as well to grow?

Yiankes: We look at acquisitions, but we're not a good buyer. As we heard in some of these sessions today, the acquisitions are averaging somewhere in the 5-7% cap range on trailing 12 NOI, which usually equates to maybe 6 or 7 that first 12 months. I think a lot of people scratch their heads when they look at us continuing to develop in this environment, but the fact is we're underwriting at significantly higher returns for new development on those. Generally if we can't get to double digits by year two or three, we're not going to do a new development. In our minds, as we've seen in the last two down cycles, when '12, '13, '14 come back like everyone anticipates with the lack of new supply, for the most part, and the stronger demand and pricing, we love the idea of having the bulk of our product being newly constructed, fresh. It's cliché but true: New usually wins in the competitive market. And we want to be convinced we could be for sure No. 2 but arguably No. 1 in our comp set from a RevPAR competitive positioning statement-wise, to do that. So unless we're convinced we can be that No. 1, we're probably not even going to consider doing a new development.

Higley: Are there any surprises out there in terms of construction costs or the cost of commodities to build?

Yiankes: You know much like we're seeing on the operational side that Dave mentioned, the commodities relative to new construction—wood, steel, concrete right now because of a lot of the road and public work going on—are definitely seeing double-digit increases. The flip side is there's very low demand still, so on the labor side, with the exception of a couple union markets, we're seeing very aggressive pricing from the contractors. We're in the market of bidding three projects right now, and we feel there's a little white space opportunity to take advantage of it. We think it's only a matter of months before we start seeing increases. So while we're certainly not going to be reckless, we're very keen to knowing that we want to take advantage of this. Again, it's what we've done in the last two or three cycles as well, so we're going to get as much as we can under control and get on the construction while we can to take advantage of those pricing metrics.

Higley: And you're one of the few companies that are really out there developing actively. I think STR has supply growth at 0.7(%) this year, 0.5(%) next year, so that does give you an advantage in some ways because I would suspect that the contractors know you and want to work with you and there's no competition, so you come in there. So, again, you mentioned the fact that you like to be new. What kind of a timeframe is there typically for construction at this point with the type of properties you're building, which seem to be predominantly Marriott and Hilton, right?

Yiankes: Yes and Hyatt definitely is a big factor in there. In fact, two of the four projects I'm referencing are Hyatt-affiliated. We feel Hyatt Place and, to a lesser degree, some of the competitive brands also have some opportunities for us to grow with. We still very much feel that Marriott, Hilton, Starwood brands are very strong. The four I referenced are projects that were ready to go before everything came to a screeching halt in early 2009, so in some ways we were able to take those off the shelf, so to speak, and dust those off and really the only void was the financing piece. So once that started to show a little bit of an opportunity, we jumped on those and dusted off the plans and are reenergizing. So four of the first five projects are sites that we already owned or are partner-owned, and we're getting those reactivated again.

Higley: Are you at liberty to talk about any generalities in terms of the financing—any interest rate percentages or anything like that?

Yiankes: Sure. First, I guess the profile of the projects we're speaking about, they're, as Dave mentioned, generally premium-branded, select-service in urban markets. The markets I'm referencing where we'll be active here before the end of the year are in Chicago, Austin, Salt Lake City and we're looking at a couple other markets—Nashville, etc. Those projects that we will be going on range anywhere from 65 to 75% construction costs of total development costs. So we've got a quote that we're very enthused about that's 75% of the total cost to develop. We haven't seen those numbers in three-plus years, and that's literally within the last two-three weeks here. So we feel that is hopefully a watershed moment because the value of that is obviously not so much for the project itself, but for the other two or three lenders we were talking to, to be aware that now banks are starting to lend again. We view that as a very optimistic and positive indicator.

Higley: When people do start to develop again en masse to follow you, is that good for the industry? I mean, developers develop, that's what they do, keep the product fresh. Is that good?

Yiankes: I think like Dave mentioned about some of our operating learnings, you hopefully get smarter each time. I think there's a lot of developers that maybe lost their properties to the banks or this or that during the peak that maybe, much like the early '90s where you saw some of these start-up fee-management companies coming out of the woodwork, well we saw some of these fee developers coming out of the woodwork the last few years. I think the cycle itself is adjusting, the market corrects itself. I think the developers I see getting their feet in the water are all very responsible, been there, done that, and are starting to activate again. I look at is as generally positive, and hopefully demand will come along with us to support our development.

Higley: Dave, you mentioned the JW Marriott that opened in Indianapolis in January. Can either of you talk about that—how it's adapting in a market that some people thought was maybe a little over-built in preparation for the Super Bowl that, knock on wood, we hope happens, as football fans, right?

Sibley: As football fans, we would love to have the business. But obviously, I don't think Deno built a 1,000-room JW based on one event. We are comfortable in the convention space, we have a good track record there, and we saw an opportunity with a strong market. In today's terms, people are looking for good value and Indianapolis represents a good value. It's easy in, easy out—a compact downtown. It's all connected, so even in the winter, it attracts conventions. We believe that with the strong sales team we put together, we could be successful. We were able to put 500,000 group roomnights on the books before we ever opened. It looks like we could run in the first 11 months about 68% occupancy. So, you can ask him whether we're ahead of his original performance.

Yiankes: I would probably get off camera, but if I could stand up and bow to Dave and his team I would, and I've done it internally and with 100% sincerity. We were obviously very concerned. We take, whether it's a 100-room Fairfield or this 1,000-room project, and actually it's supplemented with 600 select-service rooms on the same pod, so we look at it as a 1,600-room development from an equity-investment standpoint. Needless to say, when we were doing this, we broke ground in 2008, so we were very concerned about the economy. I think to our brand and Marriott and to our sales and marketing and operations teams' credit, we were nervous till about six months ago, we're always nervous, we remain nervous, but to have those roomnights on the books and to have that business flowing the way we are, it's relieved a lot of stress for our organization. So we're able to focus on not only that hotel but other opportunities as well, and it's told us internally that we can compete with the best of them. So from an equity-investment standpoint, we're actually looking at at least one other major-scale project of that size under development right now as we speak. We feel real good about it, we've proven to ourselves. We had opened two major convention hotels prior to that in the low-600-room-count range, but 1,000 rooms we felt was a next notch up. We've proven to ourselves that we feel very comfortable being able to execute at that level. So it's another opportunity for us to diversify and have three or four different ways to grow, depending on what's happening in the financing markets.

Sibley: Plus one of the things that I think makes us so successful, not only on the sales and marketing side, is working with Deno's division on the construction side. We have a lot of confidence that when they tell us they're going to open on a certain date, they always, on any big project, have met or even opened earlier, and that allows us to book groups right up to the day we're going to open. We don't feel like we have to have this buffer because we might not open on time, and that makes us successful.

Higley: So a mutual bow, right?

Yiankes: Absolutely.

Higley: I have to ask—I think I know the answer—but where are you looking to build the big convention-center hotel?

Yiankes: In a city that we feel very much needs a large-scale hotel of this size to take it to the next level. It's a little early, Jeff, but we don't take it lightly. We don't think there's five of them across the country, but we find that we look at obviously the population trends, the travel trends, the lift service, air service, the dynamics of the local market, are there stabilizers there, is it a location that people want to go to? As Dave mentioned, Indianapolis, in our opinion, was one of the classic examples of just figuring out how important that convention business is to their downtown market. We're early, but we will likely be announcing that here in the next 30 to 60 days.

Higley: Very good. Look forward to that. Kind of wrapping up, but, Dave, looking ahead to 2011-2012, can you assess that? What's your prediction? We'll be sitting here a year from now—what's it going to be like?

Sibley: I think it's going to be very similar to what we heard today. I think it's going to be led by ADR. I think that, based on supply and demand, we're going to be in good shape. But I do think it's a market-to-market recovery; I don't think it's as broad-based. I think revenue management better be a core competency of yours and you better be good at it. I think that's going to drive a lot of success in 2012.

Higley: And, Deno, what about your side of the business? Where do you see us a year from now?

Yiankes: Well, No. 1, we'll be opening some new hotels and that will be refreshing because we haven't done that this past year at the level that we had somewhat grown accustomed to over the years, so we're going to be very actively continuing to start new projects and also look for new management opportunities and growth opportunities with the right partners as well. I agree with most of the data—a lot of the metrics are still very choppy, the classic ones being the residential market, the labor market, jobs, etc. But at the same time, I feel that our business model is as strong as it's ever been. We have what we call this four-walls theory: We have to be aware of what's happening in the outer markets—we can never stick our head in the stand—but whether it's a market that's on a steep hockey stick incline or falling off the cliff, our mantra inside to maximize the value of the assets remains the same. I'm bullish for the next 24-36 months. Interest rates are obviously a concern, but operationally, within our four walls with our industry, I think the supply and demand characteristics are very favorable. As you said, we're not going to see meaningful supply for the next 36 months. There's very few givens you can say in our industry, but that's pretty much a given, so that should give us some nice runway room to get the dynamics back up where they're profitable for our owners, and that will fuel additional growth in my opinion.

Higley: Perfect. Deno Yiankes, thank you very much, I appreciate your time. Dave Sibley, thank you.

Yiankes: Thanks you.

Sibley: Thank you.