REPORT FROM THE U.S.—John Murray doesn’t need to be told how much money a renovated property can contribute to the bottom line.
The president and COO of Hospitality Properties Trust told analysts during the company’s third-quarter earnings call that the company saw a big lift from renovated properties during the quarter. The real estate investment trust is nearing the end of a substantial renovation program but still had 16 properties under renovation in the third quarter, with plans to have another 17 under renovation during the fourth quarter.
The 61 properties that completed renovations in 2013 recorded revenue-per-available-room gains of 20.3%, which had a big impact on the business.
“We saw increased group business as a result of many of our full-service hotels having completed renovations,” he told analysts during the call.
First steps
There’s little doubt that freshly renovated properties can mean a lot to performance, sources said. But what is the best to go about the work, which could substantially interrupt operations on property?
Jim Merkel, president and CEO at Rockbridge, said that first, owners need to understand what the optimal positioning should be for the hotel and where the most value can be created for the least amount of risk.
“The hallmark of our organization and what we’ve been very effective at is really creating that vision for the property and doing significant transformations of the asset, and not leaving deferred maintenance in the property,” he said.
Merkel said Rockbridge seeks out hotels that are in need of a turnaround and then goes to work on normalizing the cash flow of the operation.
“You can sell a stabilized investment for a good, fair number,” he said. “Our job is to invest in hotels that need work, that need to be re-envisioned and better positioned to meet the changing demand in the marketplace.”
Bryan Higgins, principal and executive VP at construction firm First Finish, said it’s important to begin planning a renovation at least 12 months in advance.
“It helps you plan for things,” he said. “It helps you avoid an escalation of costs due to things that pop up out of the blue. It gives you buying power and negotiating power.” He added that materials prices do appear to be marginally increasing, although because of decreasing oil prices, materials made with crude oil are seeing prices soften.
Pre-planning also allows for more time to take care of whatever permitting, design and brand approvals need to be done. “When it is done in a rush, there is a cost,” Higgins said.
There also can be a cost in terms of lost business, he said.
“Group sales are selling rooms a year out,” he said. “If you don’t have a good construction schedule a year out, you’re trying to work the construction around sales and it doesn’t work.”
Project management
Higgins also pointed to the importance of project management and ensuring that everyone involved in the refurbishment is on the same page.
“The team is important,” he said. “A project riddled with individuals that don’t have a team approach is set up for failure.”
Higgins said deferred maintenance is a major problem in the hotel industry.
“We’re very focused on making sure we’re not buying somebody’s deferred maintenance that we’re not fixing,” Merkel said. “For example, we have to have great infrastructure, HVAC, hot water, the quality of the elevators. Those basic things that a lot of people defer end up creating challenges for you in the long run in that you have guest experiences that aren’t as good as they can be.
“And when you disappoint the guest, they’ll stay with you when they have to, but they’re not choosing to stay with you when they don’t have to. When the market goes down, and they have a choice, you want them to choose you.”
Renovation tips
Higgins also ushered forth other tips for completing a successful renovation:
- Know going in what needs to be done as far as life safety and Americans with Disabilities Act requirements;
- understand the required environmental studies;
- when ordering materials, keep in mind delivery time can take 16 to 20 weeks;
- stay true to the budget set for the renovation project;
- plan the renovation so that the property is under construction for as little time as possible; and
- ensure proper maintenance of the building after the renovation is complete.