Interview subject: Lance Shaner, chairman and CEO, Shaner Hotels
Interviewer: Jeff Higley, editorial director, HotelNewsNow.com
Interview date: 7 June 2010
Interview site: 32nd Annual New York University International Hospitality Industry Investment Conference at the New York Marriot Marquis
Having battened down the hatches through 2009, Shaner Hotels is on the prowl to acquire select-service hotels and existing debt.
Jeff Higley: “Hi, Jeff Higley with HotelNewsNow.com. We’re at the NYU International Hospitality Investment Conference. I have the pleasure of sitting with Lance Shaner, chairman and CEO of the Shaner Group. Lance, thanks so much for taking the time to chat. First of all, let’s get your impression on the overall state of the hotel industry. How do you see it?”
Lance Shaner: “We are in unprecedented times. We’ve been through a two-year what I call ‘depression’ in the hotel industry. We had an 18-percent decline in (revenue per available room) in 2008, followed by a (6-percent decline) in ‘09. The last time we hit such depths was in the Depression. It’s been a very, very challenging environment, but the industry has really risen to the occasion. The way companies have responded, their associates have responded, to lever down their basic cost structure has been admirable. It is a positive representation of the capital structure of the industry. We have suffered tremendously, but the reality is most owners have worked through it with their banks. (Commercial mortgage-backed securities) is more problematic because with the special servicer obligations and fiduciary responsibilities, there’s less flexibility than you would find in the commercial banking sector. The industry has kept it together. Supply is now dropping. Traditionally when we get (Gross National Product) growth in the United States, we get a corresponding increase in RevPAR in subsequent years. As we lift out of this—and assuming we can get some pro-growth policies on a national level, which I’m concerned about—I think we’re going to see a good run in the hotel industry in profitability.”
Higley: “How has your company come through the Depression, as you call it? Were you relatively unscathed, or did you feel some of the pinch?”
Shaner: “We felt the pain. Unfortunately, our associates, employees and partners felt the pain. We had to do everything we could. Senior executives took substantial cuts in pay. We had to freeze wages of our hourly associates. We had to cut back on some benefit plans, 401K. You were forced to be in a position where you had to marshal all of your cash flow to pay the banks to keep them current, to meet your debt covenants, to spend what capital you had to spend, and just keep your head above water. Our commitment was we were going to be here as a company, we’re going to make it through this and come out the other end stronger and better than ever.”
Higley: “Do you believe that some of the cuts you made will be sustainable after the recovery starts and we get full motion again?”
Shaner: “Not the cuts to pay and benefits to our associates. That is the first thing we will reinstate. We didn’t want to do it, but we had to do it. When we get back to a more normal RevPAR growth and profitability, we’re going to take care of those people first. We have some deferred capital that we’re going to need to address. Most of the franchisors were quite understanding that maybe there was a renovation or a (property improvement plan) planned for a certain hotel, but we had to push it off a year. We’re going to see some more capital going into refurbishments and keeping our hotels fresh. We came out of it in pretty good shape. Our balance sheet is very acceptable. As an ownership, we did put some more equity into the company. You’re either committed, or you’re not committed. The people that were not committed, they’re gone. They’ve sold out or merged. Most of the better-managed companies are fine.”
Higley: “Tell me a little bit about your company.”
Shaner: “We have 30 hotels owned or managed. The majority (27) are owned. We have a high percentage that are Marriott-branded properties. We have about 2,500 employees. We have operated in the business since 1983, as a family-owned, private company. We have a partnership with Five Arrows, formally known as Rothschild Investment Fund. They are very good partners, very good people who are long-term players committed to the industry. You find out how good your partners are when you have a problem and have to work together. They have been great. Together we have addressed whatever capital issues we had over the past year, year and a half. We’re set to grow the company substantially, and that was the objective coming out of a difficult time. We think there are going to be opportunities accelerating into 2011. We are under active negotiations right now for approximately a (US)$500 million acquisition. We hope we’re successful concluding those negotiations, and shoot for closing by year end. That’s the good news, to come out of the dark clouds and move into the sun.”
Higley: “Let’s talk about the acquisitions. What types of acquisitions are you looking for? Select-service? Full-service? A combination? And you’ll be owner-operator of those hotels, correct?”
Shaner: “We are looking to acquire in the select-service area. We like to manage our hotels and think we do a very good job. Depending on how we proceed with the acquisition, be it private we would manage, but if we do it in a public venue, under the REIT requirements, you have to have an independent management company. We would enact that with a host of management companies. We can do it either way, but we’re going to see when we finalize the negotiations what is the best capital source.”
Higley: “If the acquisition is finalized, how big will your portfolio be at that point?”
Shaner: “We’ll be around (US)$800 million or (US)$900 million in hotel assets.”
Higley: “And as far as the number of properties?”
Shaner: “We would go to 70-80 hotels from the 30 we have now.”
Higley: “Presuming that the acquisition closes, you have some infrastructure issues—I would guess—to get everything folded into your current portfolio without missing a beat. How do you address that?”
Shaner: “We are fortunate to have numerous contacts in the industry. Unfortunately, because of the stress that has occurred the last two years, there are a lot of really good people out of work. We’ve been able to upgrade some of our skill sets over the past year, year and a half, because we have continued to fill in some new positions, create some sales and marketing positions, some e-commerce positions; and we’re finding the quality of the applicants is outstanding. Many very good people were downsized. If we can close (the negotiation) out this year, we will need to hire more talented people in the regional, sales and marketing, senior property engineers. I’m confident we’ll be able to do that in a fashion that will be very helpful to the company.”
Higley: “In addition to the potential acquisition, at this conference you’re also talking about a growth fund you’re creating through your REIT. Can you share a little bit of information about that?”
Shaner: “We formed another partnership with Five Arrows called Shaner Growth Fund II. It is a mortgage REIT. With a prior fund that was established earlier, we have acquired (US)$164 million face value of mortgages. We are not a loan-to-own fund. We are actually interested in working with borrowers when we acquire their debt. We have been flexible. We’ve given forbearance on principal payments. We’ve helped out on escrow requirements in the original loan documents to give some additional cash flow to our borrowers. We’ve been very clear and said: ‘We want you to be successful. We want to work with you so you can stay current on your obligations. And for us, at the end of the day—in three to five years—we’d like to get paid.’ From that perspective we really differentiate ourselves from many of the other funds that are buying debt. I’m not criticizing them, this is a free enterprise society, but they’re buying debt to end up with the asset. We’re a little different. We’re buying to be a banker.”
Higley: “Is that something new for you?”
Shaner: “No. I have been active in buying debt for many years on different properties. This is a much bigger expansion of that. By the time we’re finished with our investments, we hope to have about (US)$250 million face value, which is a pretty substantial portfolio for a private REIT. We think we’ll get there. Deal flow has slowed in 2010, as far as available debt, but it’s my opinion with the CMBS large rollovers coming in 2011-12, there will be an opportunity for us to invest the rest of those funds.”
Higley: “Would you be looking for select service on those properties, too?”
Shaner: “Actually, with this fund we’re looking at the full universe. Thus far, one is a major golf resort. Another is a large Las Vegas hotel. Another is a select service in Orlando.”
Higley: “Geographically, you’re pretty diverse. Do you want to continue that diversity?”
Shaner: “Yes, we’re looking to acquire debt of reputable companies, who are straight shooters, good management and have a good affiliation on the franchise side.”
Higley: “Turning back to your current portfolio of hotels, how geographically diversified are they?”
Shaner: “East Coast from New England down to Florida, with a heavy concentration (8 properties) in Florida.”
Higley: “Does the oil spill worry you?”
Shaner: “Yes, it does. It’s going to hurt the hotel industry at a time when we really are in a poor position to deal with it. It’s just another challenge to get through. The shutdown in drilling—the President has announced a moratorium for six months—there’s a tremendous amount of demand from people who work in the energy industry in hotels throughout the panhandle of Florida and Louisiana. That may be more problematic than the oil spill. We’re just going to have to manage through the process.”
Higley: “In terms of cancellations at your Florida properties, have you seen any of that? Or is that media hype at this point?”
Shaner: “We haven’t really seen that yet because the oil hasn’t arrived up the coast. There’s no doubt that when tar balls start washing up on the beaches … We have a hotel in Jacksonville Beach that is doing fantastic—it had the highest sales last month we’ve had in the history of the property. If you have oil wash up through there, it’s going to cut our revenue dramatically.”
Higley: “As a company, in this case you really have to pray for the best and prepare yourself for the worst.”
Shaner: “Absolutely. We have to be ready.”
Higley: “The biggest challenges beyond that for your company? Are there any challenges you look at and say ‘If we can just get over this hump then we’re in full recovery mode’?”
Shaner: “I think we’re well-positioned for recovery. We’ve done everything we can to strengthen our company from a personnel perspective, a financial perspective. My biggest concern is what’s going on at the national level. We need to get back to pro-growth economic policies. We have to focus on not penalizing people that take risks and are successful. Creating an atmosphere where small business is willing to invest again and hire people, spend money. I think there is a real sense in the business community, we really don’t know as an industry what’s coming next. Washington is talking about more tax increases, more mandates, more regulation. I think we need a turn where people really know what the rules are that we’re going to have to play by in the next three to four years. Investing in the hotel industry is a long-term investment. You have to have confidence that you understand the economics on which you’re basing your capital investments. I view that as the biggest concern that we have right now. Hopefully we’ll get some intelligent decision on tax and growth.”
Higley: “What advice do you have for your fellow hotel owners-operators? How do you get through 2011-12?”
Shaner: “Once you batten down the hatches and you’ve done everything you can to run efficiently and control costs and put the necessary capital in to make sure you can protect your assets, take care of your associates, I think you have to step up and look at a plan for the future. You have to say, ‘This is where we are now and this is where we want to be in three years.’ Articulate that to your senior management team, your associates. Maintain the relationships with your bankers and equity investors, that they will keep the confidence you can professionally invest the money and create a return for all concerned. At Shaner, we are definitely committed to a growth trajectory over the next three years. We will have significant new investment. We will continue to hire the best. In the next six months, we’re going to harvest many years of work that got us to where we are now so we’re in a position to take this step.”
Higley: “I do want to backtrack to talk about PIPs and CapEx. In terms of capital expenditures, do you believe in the 4-percent rule, more than 4 percent? What’s your philosophy long-term?”
Shaner: “It’s a difficult issue for the industry, but it’s essential to get it right. The real cost is more like 7 percent. You’re going to have some years where it’s 2 percent and some when it’s 10 percent. To be competitive, you have to maintain your assets and you have to be able to refresh your properties every six to seven years. To do that, you need to carefully plan your cash flows, project out your five-year CapEx and figure out where the money is going to come from. A hotel asset that isn’t being refreshed and staying up with technology is a hotel that is going into decline. Your competition is too good for you not to keep up with what you need to do to stay competitive. It’s probably one of the toughest issues in the industry, but one that is essential to manage it professionally if you want to be a RevPAR leader in your market.”
Higley: “Lance Shaner, chairman and CEO of the Shaner Group. Thanks so much for joining us. I appreciate it.”
Shaner: “Jeff, it’s my pleasure. Thank you.”