Design and renovations are becoming more important considerations for hotel investors as competition heats up and brands force the issue.
LOS ANGELES—Hotel investors are preparing for more stringent property improvement plans after acquiring assets as brands become more stratified.
Led by industry consolidation and the organic growth of brands within major hotel branding companies, PIPs will become even more targeted, according to investors speaking on the “Investors’ outlook” panel at the recent BD West conference in Los Angeles.
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David McCaslin, EVP for Philadelphia-based Hersha Hospitality Management, said companies such as Marriott International—fresh off its acquisition of Starwood Hotels & Resorts Worldwide that gives it 30 brands in its portfolio—will lead the way in executing property renovations.
“They have looked at it and said, ‘Gee, the brands that have held to a higher PIP standard over time have gained value than the ones that haven’t and been more lenient,’” McCaslin said. “I think they see it as a way to enhance their position and unit growth.”
In general, PIPs have become more aggressive during the past eight years—which in most cases has resulted in more costly projects, he added. That trend will grow as it is fueled by the stratification of hotel branding companies that own more than a handful of brands.
“The conversation if you’re an owner will now be something along the lines of, ‘If you want to be (brand) A then the PIP is $10 million, but we could offer you this B brand and the PIP is $4 million. Which one do you want?”’ McCaslin said. “That sort of conversation will become prevalent as we go forward.”
Analyzing all angles
Companies such as Bainbridge Investments analyze all potential acquisitions on traditional 10-year cash flow, and PIPs are an important consideration in the financial equation, said Nick Chini, Bainbridge’s managing partner.
“That PIP is now going up significantly in value every cycle, it seems,” Chini said. “The quality levels and the brand standards … It’s simple math, and it has a big impact.”
Recognizing the effect of a PIP is fairly simple, Chini said. That recognition can often cause a seller to decide to hold on to an asset.
“We’re looking at a hotel here just outside of downtown LA in Glendale and they just went through a PIP,” Chini said. “After that PIP, the valuation on that property increased significantly. The bookings improved. They held on instead of selling. The PIP’s going to lead to a nice bump, and it’s going to impact the value of the property. So, it’s very simple math.”
Bernie Siegel, partner with KSL Capital Partners, said his firm prefers to schedule a PIP after acquiring a hotel rather than buying an asset that recently finished a renovation—but because of the spate of PIPs performed in the aftermath of the Great Recession, they’re more difficult to find.
“We are still investing and today actually more assets are optimized and there’s less value-add fruit on the tree,” he said. “We’re happy to look at an asset that doesn’t have quite as much repositioning as long as it makes sense on an adjusted return basis.”
Panelists agreed that staying on top of renovations for existing hotels in a portfolio or assets being considered for acquisition is essential in ensuring a proper guest experience—regardless of the property’s location.
Jeff Ning, SVP for China-based Dalian Wanda Group, said the company understands that gradually renovations must occur, especially in the 10-year-old hotels in the company’s 100-property portfolio.
“We will pay attention to the trend of renovation integrated into our current and new hotel design,” Ning said through an interpreter, adding that upgrades to Wi-Fi and other technology-related items will be of major importance.
A delicate dance between finance and design
A balance must be struck between the financial and creative sides of the business when considering PIPs or any other type of renovation program, Siegel said.
“As we get into a later cycle, you have to do everything—you have to find every small incremental value component and that’s where this group of people helps us the most,” Siegel said. “There’s always that battle between creative and financial, but that is absolutely needed, and both parties need each other. The industry’s evolved in being able to produce really good return on investment for creative and capital improvement, whether you call that PIP or otherwise.”
But, when push comes to shove, dollars and cents most often win the discussion, he added.
“Financial might win the debate, but we’re not always right,” Siegel said.
Chini said it’s been important for him to learn the creative side of the business as he has become more entrenched in the industry.
“What’s been very impactful for me when I’ve sat down with an architectural team, design team, master planner, was when they started speaking our language,” Chini said. “When the creative was about getting to a financial return on the (food-and-beverage), when it was about getting to a return on the value-add to additional services, roomservice, spa, whatever it is. That’s the alignment that needs to happen.
“The challenge is you’ve got left-brained people and you’ve got right-brained people,” Chini added. “The end goal is … we want to get hit by the money truck, so that’s why we’re in business.”
Making the most of the opportunity
Thomas Prins, principal for TQP Investments, said it boils down to becoming a value engineering exercise that has become much more extreme and detailed because competition in the hotel industry has become more prevalent.
“I’m the anti-brand guy, and PIPs are not really part of my vocabulary—at least I try not to think about those because we’re lifestyle, we’re independent,” Prins said. “We analyze the market to death for each of our hotels, and we determine what needs to be done to create, to compete against the other hotels and to create that loyal customer base who is going to come back to us.”
Prins said there is some attraction to the soft brand trend that has swept the industry during the past few years, and his former company Gemstone Hotels & Resorts jumped on Marriott International’s Autograph Collection soon after it was launched.
“What we got from them is a lot of freedom as related to putting our hotel into the big red machine, their (revenue) system,” Prins said. “We did that through a series of very creative exercises, including life safety and that nature, and we had some substantial key money from them.”
Prins said he has had similar experience with Hilton’s Curio Collection.
“We’re focused on things that if we were going after a full brand we would have a very substantial PIP, but we did not have to do the full standard PIP,” Prins said.
That choice of brand options will affect the future for most hotel investors—mainly because of the industry’s consolidation, McCaslin said.
“You’re actually getting somewhat of an access to a pool of loyalty believers that are actually trained to go between the brands,” he said. “But if you looked at the (area of protection) language, you would believe that the brands are truly independent of each other. … We’re very brand-friendly in some areas and we’ve taken brands off because our valuation was that we were spending 12%-13% of our income by the time we counted all-in where we were. People will become more discerning about what their options are.”