Owner observations: What’s happening in the indie space
 
Owner observations: What’s happening in the indie space
26 JUNE 2019 12:36 PM

Owners of independent properties share what they’re seeing in the independent hotel segment and how they’re adapting to any changes.

REPORT FROM THE U.S.—As guest demand for unique hotel stays continues to grow, the comfort level among hotel owners for taking on independent properties is growing, too.

Those who tested the waters years ago are seeing their experience paying off now as they are better prepared to handle the challenges associated with owning an independent property because they know how to make them profitable.

Hospitality Ventures Management Group made a conscious decision years ago to develop its talent and internal infrastructure to handle both branded and independent properties because it saw where the hotel industry was headed, said SVP and Chief Business Development Officer Mary Beth Cutshall.

“With that being part of our DNA, we knew the independent segment would continue to grow, as would the lifestyle segment evolve and become more relevant,” she said.

Having that experience allowed HVMG to attract new opportunities and see potential where others didn’t and took risks where others wouldn’t, she said.

Prior to working at Hersha Hospitality Management, EVP of Acquisitions and Development David McCaslin said he worked for a company in the 1990s that would buy independent hotels and brand them as a way of gaining traction, he said. About five years ago, he worked for a private equity firm that would look for hotels to take de-flag them and make them independent, he said.

The industry’s approach to independent hotels has changed, and investors are trying to do different things now, he said. Over the past five years, HHM has gotten more experience in the independent hotel world and become increasingly comfortable with that as an investment front, he said.

Transaction environment
There aren’t many indie properties on the market right now, Cutshall said. Transactions overall have slowed down compared to a year ago, she said. Indie hotels are typically a smaller percentage of all properties available in general, so the current environment means fewer indie hotels available.

“People are interested in pursuing them, so it can be a bit competitive,” she said. “I think part of the reason is that their being unencumbered makes them desirable. Some are in higher-rate markets, and there’s significant profitability there.”

When HVMG identifies an indie on the market that has merit, it absolutely will go after it as an acquisition target, she said.

There are two types of companies with an appetite to acquire independent hotels, McCaslin said: Those who want to keep it independent, and those who think they know the right choice in branding it.

There’s no unanimity of what the right execution is, as owners consider each on a case-by-case basis, he said. Sometimes it’s the property’s location that drives it, he said. Other times the property has heavy non-room revenue components, or it might be design-driven in its execution, he said.

Vesta Hospitality, which owns the Riverhouse on the Deschutes Bend in Bend, Oregon, underwrites an independent property similar to how it would a branded hotel, Chairman and CEO Rick Takach Jr. said. It looks into the market conditions, decides whether it believes in the location, considers the demand generators and measures exposure to competition, he said.

There doesn’t appear to be any difference in how buyers and sellers are behaving at the moment, he said. There’s abundant capital in the market place, but both buyers and sellers are being careful about the deals they’re making.

“From our vantage point, the influx of capital and the current hefty asking prices for hotels is making it much more difficult to find the value-add opportunities that we prefer,” he said.

Development
Because there aren’t as many options for acquisitions, HVMG has been focusing on developing its own independent properties, Cutshall said. Indie properties make up about 80% of its development pipeline right now, she said. It’s been a dramatic shift over the past seven years, she said.

“We’re seeing more opportunities come to us that are outside of the box,” she said.

By developing its own independent properties, the company is finding itself more comfortable taking on smaller key counts than it would with more traditional branded properties, she said. Typically HVMG would pursue properties with 100 to 120 keys for operational efficiencies, she added.

“We feel like it could maximize higher average daily rate and be a unique boutique hotel where the smaller key count isn’t something that stops us anymore,” she said. “We can find value in that project in other ways of driving revenue, not just guestroom revenue.”

The advent of soft branding has created a valuable strategic tool for ownership, Takach said. If someone wants more flexibility with a property, such as the physical configuration to amenities and service levels, soft branding allows them retain the unique character of a property, while still tapping into a brand company’s reservation, management or marketing systems.

Many independent hotel developers are borrowing ideas from the sharing economy by experimenting with smaller rooms while still offering the comforts of a conventional hotel product, he said.

“Potentially, these platforms can cost less to build, be less expensive to furnish and have operational savings for areas like housekeeping or maintenance,” he said.

Reinvesting in properties
The main public areas are important to invest in and activate appropriately, Cutshall said. HVMG spends a lot of time, focus and capital in making these public spaces unique experiences that create memories and repeat business by being different from the comp set, she said.

One approach her company has taken is making the public spaces feel more like a food-and-beverage venue than a traditional front-desk area, she said.

“The great thing is you have a white box,” she said. “You’re not required to follow a prototype when it comes to offering certain amenities or services. You can look from a fresh perspective”

From a guest perspective, HHM is spending more on technology, McCaslin said. In some cases, its own Wi-Fi standards are ahead of what some of the brands it works with have, he said. The company has spent time researching how people interact and communicate with its properties and following up on that through its investments on the ownership side and then with staff training on its management side, he said.

Vesta Hospitality believes in fully investing in each of its properties so it never worries about playing “catch up” and it can enhance cash returns and exit values, Takach said.

In taking this approach with the Riverhouse, the company added a spa to the hotel, which has proven to be a profit-generating attraction for both guests and the local community, he said.

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