Investors still keen on efficiency of select service
 
Investors still keen on efficiency of select service
22 MAY 2017 7:41 AM

Speakers at the 27th annual Meet the Money conference said the lower costs associated with select-service hotels make the segment and its brands appealing for investment throughout the cycle.

LOS ANGELES—The efficiency and profitability of select-service hotels continue to drive investors to those brands, according to speakers at the recent Meet the Money conference.

Talking during the “Why select service continues to be a favorite” panel, Ron Kim, SVP of real estate for Prospera Hotels had a simple answer to that question.

“They make money,” he said.

With fears lingering about the state of the current hotel industry and overall economic cycles, panelists agreed the lower operational costs of select-service properties gives somewhat of a buffer against a possible downturn, especially when compared to the higher costs of operating a full service hotel.

Gary Gray, chief investment officer of Twenty Four Seven Hotels, said his company exclusively works with select-service and extended-stay lifestyle properties because those hotels leave his company with fewer burdens than other hotel companies.

“It’s obviously an attractive space to be in,” he said. Food and beverage “can be costly, and for many it can lose money or have a difficult time making profit. So if you only really provide the essentials for hotel guests, it makes the model simpler to the operator, and I think lenders have gotten very comfortable with that kind of model.”

Perhaps the biggest differentiator between full-service and select-service properties is the required staffing for each.

Chris Dobbins, VP of real estate and development for Hyatt Hotels Corporation, said his company’s select-service Hyatt Place and Hyatt House brands are built to keep staffing levels down and drive more profit. He said a prototypical Hyatt Place property has just 25 full-time employees while still offering 24-hour food service and a bar.

“It’s (growing to be) more and more like full service, and it’s an efficient model,” he said.

Select-service brands are also popular targets for dual branding, according to Eric Jacobs, chief development officer for select service and extended stay at Marriott International. He said his company has no shortage of ways to make their select-service brands work with other brands.

“We’ve come up with 37 different combinations, with some restrictions,” he said. “Obviously, you can’t put a Fairfield and a Ritz together. But there’s a lot of interest (in dual branding). About 10% of our select-service pipeline is somehow dual branded.”

Investor appeal
Jeff Dougan, COO of Condor Hospitality Trust, and Sam Reynolds, EVP and director of acquisitions/dispositions and portfolio management for Apple REIT companies, agreed that select service is appealing for hospitality real estate investment trusts.

“Scalability is certainly a factor for us,” Dougan said. “When times are good, you can scale up from a cost perspective, and then when things get tight, you can scale back down much better than full service.”

They agreed that the simplicity of select service is easier to explain to potential investors and therefore a much easier sell.

“You can buy ‘X’ amount of full service or three or four times that of limited service,” Reynolds said. “It gives a better story for shareholders.

“We’re out trying to find investors, and this is something they understand,” Dougan said. “They get the select-service space. Full service is a bit more complex, and in many cases can scare individual investors. They like when they understand the hotel and the model.”

The lifespan of select service
Dougan noted that select-service hotels aren’t viewed as long-term investments in the way full-service properties are. But because they’re viewed from a much more short-term perspective—and due to their relatively simplified development and construction—they’re also more liable to see sudden increases in competing supply.

“There are more buyers in the full-service space, and they typically have a longer hold period,” he said. “With select service, you’re in an out in a three- to five-year window. That’s typically not the case for full service where the horizon is wider and there is typically less inventory. From a risk perspective, on the select-service side, there’s certainly more risk from that perspective simply because the cost of construction is more reasonable.”

Moderator Karen Johnson, president of Pinnacle Advisory Group West, asked whether the perception that select-service properties have a shorter lifespan as brick-and-mortar buildings than full-service hotels is fair and accurate.

Gray said that might be a function of modern construction practices and there are fewer new build full-service hotels. It also depends on whether the hotel is more suburban or urban

“Some of the dichotomy is a function of the types of construction,” he said. “There’s a difference with the longevity of a wood building. And in urban markets, building a select-service hotel is just like a full service hotel in terms of types of construction.”

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