White Lodging Builds Development Momentum

NEW YORK—White Lodging is one of the few hotel companies looking to use construction to expand in the aftermath of the Great Recession. Its plans include announcing soon where it will be constructing a convention hotel similar to the 1,000-room JW Marriott property it opened in January in Indianapolis. It also plans to have four select-service hotels in the construction cycle by the end of the year.

The Merrillville, Indiana-based company is predominantly a third-party management company after selling the majority of its owned properties to RLJ Hotels and Apple REIT during the last upcycle; however, it retained management of most of those hotels and has its sights set on building upon its existing 155-property portfolio. Included in that lineup are eight owned hotels.

“We’d like to double in size over the next five years,” said Dave Sibley, president and CEO of White’s management division. Speaking during an interview held during a break at the recent New York University International Hospitality Industry Investment Conference, Sibley said two-thirds of the growth will come from management contracts and one third will come through the company’s investment-and-development division and through development by the White family, which owns White Lodging.

“We’re looking for a few owners that can go narrow and deep with us,” Sibley said. “If we perform well, they have the ability to grow to five or more hotels over five years with us. … 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.”

Deno Yiankes (pronounced “Yankees”), president and CEO of White’s investment and development division, said action for his group has been heating up during the past 90 days.

“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,” he said. “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 in 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 the projects have construction mini-perm financing in place, Yiankes said. White Lodging is shifting its traditional development philosophy to fewer larger-scale projects as the recovery takes shape.

“Historically, we might have had one urban project for every eight to 10 suburban projects we developed,” Yiankes said. “Today, we’ve kind of flipped that and probably 80% of our pipeline is urban, 300- to 500-room-a-pop type developments. 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.”

Bigger payback for bigger projects
The larger projects are riskier, take longer to entitle, take longer to build and have less favorable financing terms because of the amount of money involved, but they result in more of a presence in the long run, he said.

“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,” Yiankes said. “While we’re not building with the idea that we’re going to exit, you always have to have your eye on that.”

White Lodging is in the early stages of developing one major-scale project with up to 1,000 hotel rooms. Yiankes declined to name the location but said it is “in a city that we feel very much needs a large-scale hotel of this size to take it to the next level.”

Population trends, travel trends, airlift and the dynamics of the local market are major drivers of such a development project, according to Yiankes.

“Indianapolis, in our opinion, was one of the classic examples of just figuring out how important that convention business is to their  downtown market,” he said. “We’re early, but we will likely be announcing that here in the next 30 to 60 days.”

White’s Indianapolis project includes the 1,000-room JW Marriott and 600 select-service rooms on the same pod. Yiankes said the company views it as a 1,600-room development from an equity standpoint.

“We are comfortable in the convention space, we have a good track record there, and we saw an opportunity with a strong market,” Sibley said. “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.”

The project had 500,000 group room nights booked before it opened, and Sibley projects that the JW Marriott will run at 68% occupancy during the first 11 months it is open.

A different structure for the company
Sibley said the philosophy to build larger-scale projects fits into the management division’s sweet spot and was a big reason for White Lodging’s management-team realignment earlier this year. The restructuring included Yiankes and Sibley moving into their current roles.

“Over the last 10 years, we’ve significantly increased the number of full-service (hotels) under our management,” he said. “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 (Hotels Corporation), where he was running the Summerfield Suites and the Hyatt Place brands (to run the select-service side). It’s a good platform for us to grow and still keep layers without adding additional layers.”

Yiankes said White Lodging will look at acquisitions as a means to grow, “but we’re not a good buyer.”

“… Acquisitions are averaging somewhere in the 5 to 7% cap range on trailing 12- (month) (net operating income),” he said. “… 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.”

Beyond larger development, White Lodging will look at building premium-branded, select-service hotels in urban markets such as: Chicago; Austin, Texas; Salt Lake City; and Nashville, Tennessee. Yiankes said the company has a financing quote that covers about 75% of the cost to develop.

“We haven’t seen those numbers in three-plus years, and that’s literally within the last two to three weeks here,” he said. “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.”