Denihan Looks in All Directions for Expansion

LOS ANGELES—David Duncan knows Denihan Hospitality Group’s quest to place its Affinia and James hotel brands in gateway cities across the United States isn’t going to be easy—or cheap. But despite the challenges, Denihan’s new president is planning to double the size of the New York-based company’s portfolio during the next five years.

The company is examining  two to four properties a year in trying to find deals that make the most sense, Duncan said during a break at last week’s Americas Lodging Investment Summit.

David Duncan

“We recognize we are operating in most competitive markets in terms of investing,” Duncan said. “To imagine you’re going to find something at a stupid cheap price is unlikely.”

Denihan, an owner-operator of 13 hotels comprising approximately 3,500 guestrooms, has more than US$100 million in capital to spend on properties. “Our preference is to acquire existing buildings with our capital and a capital partner,” Duncan said. “We’re aligning ourselves with institutional partners to get the deals done.”

The company last year sold a 49% interest in six New York hotels to real-estate investment trust Pebblebrook Hotel Trust to free up capital for its expansion plans. Duncan said he knows challenges lie ahead.

“It’s a good time to be a hotel owner on the fundamental side—the underlying fundamentals in our business are pretty positive,” Duncan said. “The ability for the capital markets to finance that is in a very different place.”

Development plans
One alternative the company will employ is to not close on an all-equity deal until a property reaches a stable cash flow before refinancing.

“Development or zero cash flow deals are hard to finance,” he said.

Duncan said Denihan’s platform includes redeveloping properties to control the delivery of the rooms and the application of the brand—in this case it will be Denihan’s Affinia or James brand.

“We don’t want to build something and turn it over to someone else to run,” he said.

Denihan has eight New York properties, two in Chicago, one in Washington and one in Miami. The company is searching for more properties in each of those markets as well as Boston, Los Angeles, San Francisco and other gateway cities. It plans to add a West Coast development office in the near future, according to Duncan.

“Our preference is to build a cluster in these regions,” he said.

One of the most lucrative opportunities lies in LA. Duncan said because Denihan’s portfolio attracts a number of production crews and other large contingents of guests in the arts industry in other markets, meaning it has name recognition in southern California even though it doesn’t have any existing hotels there.

“Expansion is driven by our customers,” he said. “We have 300,000 roomnights in demand waiting in LA.”

Change in title
Duncan has been with Denihan as its chief financial and risk officer since the end of 2003. He said his transition into the president’s role is not a complex one because he has been involved in the consolidation of the company’s ownership interests in 2006 and the acquisition of the James Hotel Group in 2007.

Dunca

“Changing my title is symbolic, but it’s not monumental in that I will not do much different,” he said. “More than anything it aligns the company to have one voice.”

That voice includes spreading the word about the Affinia and James brands. He said the company will increase the visibility of each of the brands based on the location of the opportunities presented to Denihan.

“We built these brands to add value to real estate,” he said. “It depends on the real estate we find in terms of what brand we deploy.”
 
Duncan defined the James brands as a modern design that is forward thinking based on art. Affinia is more of a collection of hotels that provides a common thread for properties that have their own distinct presence.

The company also owns and manages independent luxury hotels, including the 191-room Surrey and the 209-unit Benjamin, both in New York. Duncan wouldn’t rule out adding other hotels with similar qualities.

“We may repeat the Benjamin, or we might find something similarly in another market,” he said.
 
Two things Denihan won’t do is become a third-party management company or have national brands in its portfolio.

“We’re not running other people’s brand—that’s not something we want to do,” Duncan said. “We’ve run major branded hotels before … the difference between what the brand wants and the owner wants is too much to overcome.”

The Denihan portfolio: