REPORT FROM THE U.S.—The owners are ready to start buying; the banks are ready to start lending; and the brands are ready to start converting.
Representatives from all three pieces of the puzzle agreed 2012 will see a large number of hotels bought, renovated and repositioned. Three panelists—representing an ownership group, a bank and a brand—discussed renovating and rebranding during a webinar Wednesday titled “Successful Hotel Repositioning Strategies.”
“It’s been a slow but—thankfully—finally steady recovery. Everyone kept waiting for the big pull, but this time it’s been a slow and steady pull,” said Greg O’Stean, newly appointed principal and CFO at Access Point Financial. “Housing prices are firming and unemployment is declining in certain markets. The overall attitude about what the future holds has improved. That leads to more vacations and more business trips.”
“It will be a very active year for repositionings,” added Bob Habeeb, president and COO of First Hospitality Group. “Everyone believes that will happen in the next 12 to 18 months.”
Habeeb said his company considers most properties transacted to be rife for repositioning. When a hotel is purchased, First Hospitality will look at what brands would be viable in that market and solicit the leading candidates “to see if they’re willing to take this hotel in their family,” he said.
Attractive hotels to reposition are properties with “good bones” where a renovation of $5,000 to $7,000 per key would do the trick, the panelists agreed.
Because many hotel owners and brands delayed renovations during the downturn, the industry is on the cusp of continued growth, O’Stean said. Brands had been pretty flexible with enforcing property-improvement-plans, he said. But that’s no longer the case.
“Now is the opportunity to be the best hotel on the block,” he said. “You don’t want to be the last one to offer a fresh product. You don’t want to miss that opportunity to grab market share.”
O’Stean said owners are realizing they have the opportunity to freshen their product before other hotels on the block. And because they’re seeing more cash flow, they have more incentive to do so.
“They can get even more growth,” he said. “For them it’s a good opportunity to spend a few more dollars to get a little more market share.”
Because markets are hungry for development, even local governments are bending more than usual, Habeeb said. He added that now might be a good time to approach zoning boards for variances.
The brand objective
On the brand side, Red Roof Inn sees opportunity in midscale hotels that have been undercapitalized to reflag into Red Roof’s system. For example, exterior-corridor properties that might no longer fit into their brand, or hotels where the brand is clamping down on PIP requirements, might be better served as a Red Roof Inn, said Robert Wallace, executive VP of brand operations and franchising.
Wallace said Red Roof is exploring the purchase of single assets at attractive prices that the company would either keep in their portfolio or flip and sell to franchisees.
Red Roof also is exploring the purchase of a small chain, which would help the company grow at a faster pace. The industry is ready for consolidation, Wallace said.
He said Red Roof’s ownership has committed $90 million to growing the brand through its new prototype, NextGen II. “It’s important, as we grow into new markets, to show what the strategy is for the brand,” Wallace said.
Red Roof’s NextGen prototype was designed to appeal to the next generation of customers as the brand hopes to draw a younger customer base. The bathrooms are more boutique in nature, with rain-flow showerheads, granite countertops and vessel sinks. There will be more outlets in the room as travelers bring more devices and guestrooms will feature wood-plank flooring.
“It has been very well received and is producing higher (average daily rates), which helps (return on investment),” Wallace said.
Financing renovations
The financing climate is slowly getting better on both the debt and equity side. While chances of getting new-construction financing are still somewhat limited, there is debt available—particularly refinancing—for existing assets that have a good brand and companies with a good track record coming out of the recession, O’Stean said.
He said Access Point has two products: one to help owners with renovation and one for new construction. During a repositioning, an average owner is looking at 50% loan-to-value, he said. However, if an owner brings in the brand as a partner or sponsor, and the brand is aggressive in wanting to bring the particular property aboard, an owner could potentially push LTV to 65% or 70%.
Panelists stressed again the property has to meet certain requirements: it must have “good bones,” be in the right market and the owner must be considering the right brand.
“Am I actually fixing something that has a structure that would work or am I just putting lipstick on a pig?” O’Stean said. “With the right amount of renovation put in at the right prices, people will come back (to the property).”
Habeeb said choosing the right brand is critical in a repositioning. He said brands during the recession separated themselves into “haves and have nots.”
“We align ourselves with the brands who have performed well (coming out of the recession),” he said. “The bigger the box, the more likely you’ll need a brand.”
However, Habeeb said, franchisors have become “very strict” and have tightened up on PIPs.
“As revenues are climbing, we certainly will enforce brand standards. We can be flexible on the timelines, but good brands have to uphold standards,” Red Roof’s Wallace said.
As a lender, O’Stean said Access Point gets comfort from certain brands, knowing this is a similar product they’ve seen or done before. Branding helps the bank determine what the project is going to cost, what it’s going to deliver and what the brand will bring to the table.