In a video interview at the 2017 Hunter Hotel Conference, the president and CEO of Vision Hospitality Group said his company is comfortable developing hotels through challenging times by taking a long-term approach to ownership.
ATLANTA—Vision Hospitality Group has a history of being long-term holders of assets and developers, President and CEO Mitch Patel said. The company developed during challenging times—in 2001, 2009 and through the difficult recovery years. Being a long-term holder requires having a different kind of philosophy than those who are looking for short-term investments, he said.
“If you are a long-term holder, then you buy Apple or you buy these blue-chip stocks,” he said. “You buy it in 2013; you may buy it in ’15; you may buy it in ’16; you may buy it now. Hopefully, over 10 to 15 years, it’s only going to go up.”
For short-term holders, this is probably not a good time to develop because the industry is likely in the tail end of the cycle, he said. But taking the long-term view will help his company weather the impending downturn.
“We do know the storm is coming,” Patel said. “What we don’t know is when and how bad it’s going to be. We always say this: We have a very strong brick house.”
Developing ahead of a downturn
Chattanooga, Tennessee-based Vision Hospitality has 18 hotels in its development pipeline, Patel said, with nine or 10 under construction. Every one of its 18 projects will be completed, he said. The company might decide to push one or two back a bit, he said, but it will have the ability to move all of them to completion.
The company has great brands and a great culture and operates in great markets, he said. It has low leverage and debt coverage ratio of over 2.3 for the portfolio, he said, so the company has a strong balance sheet and liquidity that should help when the downturn hits.
There are always opportunities to develop in good times, Patel said, but there can be more opportunities in tough times. Vision Hospitality, he said, will always look for good opportunities, but at the moment is slowing down new development. Three to four years ago, he said, his company was aggressively looking at 20 to 40 deals to narrow them down to 10.
“We’re passing on a lot more deals right now,” he said.
Beyond what’s already in the pipeline, Vision Hospitality is avoiding tertiary markets, he said, and a strong case must be made for any potential deals in secondary markets. A project in an urban or dense suburban market must have a story behind it, he said, with a great site that’s part of a mixed-use development with strong long-term potential.
Historically, the company hasn’t been an active buyer, Patel said. While development brings more risks, it also brings more rewards.
“When you build a hotel for $12 million, and then it values at $22 million six months after opening, that’s difficult to do in acquisitions unless you buy something, you reposition it and then create value that way,” he said.
There are great opportunities for acquisitions, he said, and Vision Hospitality will look at these opportunities more than it has before but will wait until things soften up a little.
Spend now to save later
A big challenge in the industry is capital cost, Patel said. The development community worked with the big brands to form committees, which created capital improvement plans for owners, he said. That led to adoption of the six-year soft renovation, he said, which can be extended if guest-service scores are high enough.
“You can go to any of my hotels that are even nine to 10 years old, even 11 years old, and have not been renovated, and they still look outstanding,” he said.
How? The company didn’t pursue inexpensive, overly trendy designs, Patel said, which helped it to avoid inventory that would wear out quickly and go out of style within a few years.
“Go nuts with the pillows,” he said. “Go with pink, purple or whatever. (With) those things you’re going to replace often, (like) certain fabrics, you can get a little trendy. But in terms of certain materials, like tile, like certain millwork, like the exterior of building, we want to be very careful and be more timeless.”
The company looks at how products wear out, Patel said. It has started using carpet tiles, because in the past, a bad stain on the hallway carpet meant replacing the whole hallway, he said, but it could be difficult to find an exact match and would be inconsistent with carpeting elsewhere in the hotel.
“With carpet tile, your own maintenance person can do this,” he said. “You can pop that tile out and put another tile in, and now you’re done. And it has a longer life cycle.”
A hallway with nice LED lights, gray tones and carpet tiles will have a longer lifespan than one with colorful carpet, wallpaper and wall sconces, he said.
Having a routine maintenance program and purchasing (and then maintaining) quality case goods will extend their life, Patel said. Hoteliers too often try to go the less expensive route to save $10,000 to $20,000, he said, but then the case goods need replacement in three to four years. Vision Hospitality spends a little more for quality case goods, he said, and after 15 years of being well maintained, those case goods still look good.
Exploring the boutique segment
As a consumer, Patel said he likes to find independent boutique hotels that tell a local story and allow him to immerse himself in the community.
“There’s this human feeling of the sense of belonging,” he said.
His company will continue to develop branded hotels, he said, but not in every market. There are some markets with a void of independent hotels amidst select- and full-service hotels and Airbnb rentals.
Vision Hospitality’s first foray into the boutique segment is the Edwin Hotel in Chattanooga, Tennessee. The building was built in the late 1800s and is named after Edwin Thacher, the engineer of the nearby Walnut Street Bridge.
The experience with the Edwin gave Vision Hospitality the confidence to look at other boutique opportunities, Patel said. The company has acquired a former apothecary built 1883 in downtown Louisville, Kentucky, and is converting it into The Wilder, an upper-upscale independent boutique hotel, named after the builder, J.B. Wilder.
Vision is also developing a boutique hotel in an emerging area in Cincinnati, Ohio. The market isn’t as established as Louisville or Chattanooga, Patel said, so his company has partnered with a celebrity chef who fuses Southern and Korean food and wants to open a restaurant in Cincinnati.
Overall, the company is working on five to six more independent boutique hotels, Patel said. Vision has a concept it’s considering duplicating to create a brand, he said, similar to Ace Hotel, 21c Museum Hotels and Graduate Hotels.
“We’ve got some ideas of creating this brand in markets where it’s missing,” he said. “Not in New York Cities, not Miamis, but markets where there’s a definite need for this kind of product.”