Hotels Renew With Change Of Flag and Attitude

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With new development challenged, conversions are today’s growth vehicle. Four case studies offer
different approaches to striking deals.

For the foreseeable future, conversions will be the predominant development vehicle for
franchisors, management companies and owner-operators. As credit remains tight, brand developers
are spending much more of their time chasing lenders who are reclaiming suffering assets, as well
as debt and equity players taking advantage of discounted acquisition opportunities. In each
case, the new landlord needs to quickly maximize revenue by competing more effectively and
attracting new sources, usually via the benefit of a more robust reservation system. Nine times
out of 10, that means flying a new flag.

Brands competing for the best opportunities are cutting deals left and right by being more
flexible with property improvement plans (PIPs) to aid owner ROI, offering ramp-up time with some
fees until cash flows improve and providing key money to help reposition properties in serious
disrepair. For owners, choosing a new brand is largely market-driven, says Steve Rushmore,
founder of HVS International, the Mineola, New York-based consulting giant. “The question is:
What is the best brand currently not in the market that will bring in the highest RevPAR?”
Non-chain operators have also identified this opportunity, preferring to “white-label” their
management expertise and let the asset speak for itself under a new, improved direction. “In
many cases, this is, perhaps, neither a conversion nor reinvention—simply a rather late
acceptance of what should have been done some time ago to maintain market share,” says Philip
Bacon, managing director of HVS Madrid. “It is likely that in some cases, things were going OK
and there appeared to be no need to fix anything until it was too late.”

In either case, conversions offer realistic ways to reinvent hotels struggling during this
downturn. In this report, HOTELS looks at recent conversions completed by Hyatt Hotels Corp.,
Accor, Starwood Hotels & Resorts and Hilton Worldwide. Brand leaders talk about deal structures
and their outlooks for further conversions going forward. We also talk to property owners about
the challenges of completing these specific deals, as well as their expected ROIs.

Hyatt Regency St. Louis at The Arch

The 910-room Hyatt Regency St. Louis at The Arch had its grand reopening in July after a US$62
million, top-to-bottom renovation by owner The Chartres Lodging Group, San Francisco. This former
Adam’s Mark property was acquired in February 2008 as part of a portfolio deal, and Chartres
chose Hyatt because it was willing to de-flag another Hyatt in St. Louis and bring that existing
customer base to the new hotel, according to Maki Bara, managing partner and a co-founder at
Chartres. “Hyatt had presence in the market, which was the most important reason we chose them,
” she says.

It also helped, Bara says, that Hyatt was willing to provide key money to help with the costs of
the renovation and was more flexible on its brand standards. But what made a big difference, she
says, is that “Hyatt married its buttoned-up corporate culture with an entrepreneurial spirit
that resonated with our nimble platform.”

Bara was swayed by what she calls Hyatt’s cutting-edge cost-savings initiatives. “All brands
are looking at making things more efficient while maintaining standards, but Hyatt was on the
cutting edge with things like housekeeping standards that didn’t require a full clean everyday,
” she says. “They looked at everything and didn’t say they had to do things the way they are
always done.”

Throughout the renovation, both the owner and manager focused primarily on ROI more than cost
savings, in some cases adding scope to the project while looking to save elsewhere. For example,
they used US$750,000 to turn an underutilized rooftop pool and racquetball court space that
targeted cheaper weekend business into and indoor/outdoor meeting and social banquet space. “We
got a great write-up on weddings and are seeing great ROI,” Bara says. “Elsewhere, Hyatt gave
us a waiver on the wall-covering PIP, and our designers found a cheaper way to make the wall
coverings pop.”

Some challenges of the conversion cited by Bara were the result of being a bit hasty during the
design process and the economic timing of leasing out some of the F&B space. At the end of the
day, however, “We came up with great product that pleased all and everyone felt they had their
stamp on,” she says

Measuring the results of the conversion has been tough, especially considering market conditions.
“Compared to our pro forma, we are way off,” Bara admits. “But compared to pre-renovation, we
are definitely higher, and bookings are what we have to look at. We have been completely
renovated for less than a year and groups want to see final product. When we look into the
future, booking pace rates are much higher than the pre-renovation pace, which is promising.”
Bara adds that the hotel is trading 10% to 15% higher in rate and 15% to 20% higher in RevPAR
post renovation. “We are still below target, but if you look at booking pace, you can double
these numbers looking at future bookings,” she adds.

From Hyatt’s perspective, its strong group base had to be attractive to the new owner of a large
hotel with significant meeting space. “The way you have to fill those rooms is by ensuring you
have a strong group mix, and Hyatt brings that to the table. That was appealing to ownership,”
says Gary Dollens, Hyatt’s global head of franchise and select brands. It also did not hurt
Hyatt’s case that it had already proved its group prowess to Chartres in a previous Adam’s Mark
conversion in Jacksonville, Florida.

Looking ahead, Dollens says Hyatt has good opportunity to compete for conversions, especially
because it just got into the franchise business on the full-service side of the business. “We
don’t want to convert just any hotel and put a Hyatt name on it. It is important that any hotel
represents the brand the way we believe it should,” he says.

That being said, Hyatt recently converted the independent Ivy Hotel in San Diego to its new
upscale Andaz brand. “We have a specific operating model in the public space, so to do a
conversion we must be sure the model works,” Dollens says. “PIP dollars will need to go against
that, and the same applies to our other brands.”

Hyatt is upfront about its ability to provide key money and mezzanine loans to offset some
capital needs of the PIPs. Hyatt also tries to be sensitive to time factors and needs to ensure
owners more immediately focus on things that impact guests, Dollens says. “We try to be
considerate of the capital outlay and allow it to come in overtime, letting the owner use cash
flow from property as part of the renovation,” he says. “We can also look at ramping fees in
the first year or two until a property is fully renovated, knowing the first few years can be a
struggle until the economy recovers.”

What might help Hyatt in the near term is its lack of global distribution. “We have fewer hotels
than the other big brands, which creates a lot of opportunity for growth,” says Michael
Coolidge, vice president of real estate and development. “We can focus on the best assets that
fit our requirements.”

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Hyatt Hotels Corp.,St. Louis
4-7-2010 22:35

Hyatt Hotels Corp.
was willing and able to de-flag another hotel in St. Louis to win the contract
for a big trophy hotel acquired by Chartres Lodging Group.

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Hilton Dunblane Hydro
4-7-2010 22:53

Dating back to 1878, Doubletree by Hilton Dunblane Hydro is located on 10 acres (4 ha) of
landscaped grounds.

Following a £12 million refurbishment, a property dating back to 1878 was re-branded in September
as Doubletree by Hilton Dunblane Hydro in Dunblane, Scotland. In concert with Hilton’s
development team in the UK, property owner The Ability Group transformed all aspects of the
hotel, including guestrooms, public areas, bars, restaurants, meeting rooms and conference
facilities.

“The owner thought he spotted great value in Dunblane and was determined to bring the property
back to its former glory,” says Ian Carter, Hilton’s president of global operations and interim
head of development. “It is a great spa location with 100 years of history. We went through the
PIP with every room and agreed together (with the owner) what should happen. Hilton’s tech
services came up with joint report with Ability, and the conversion took 18 months from start to
finish. We had to operate through the conversion, which was tricky with rooms out of action. But
everyone was aligned on the vision and willing to go through the hassle.”

Physically, the hotel was taken back to the wiring, which certainly creates a disruption. “We
overcame that by allowing sufficient time and by the quality of tech services and the owner’s
team,” Carter says.

When asked what sort of incentives Hilton offered to finalize the deal, Andreas Panayiotou,
chairman of The Ability Group, one of the UK’s largest private residential landlords, says:
“Obviously this is confidential, but what I can say is that this is not solely financially
driven; it is more about long-term relationships, professionalism and brand recognition.” He
adds that Hilton’s global distribution and marketing programs also helped seal the deal.

This hotel marks Hilton’s sixth Doubletree development in the UK, but even having had a history
working with The Ability Group, Carter says Hilton was far from the only brand represented at the
deal table. However, having advised The Ability Group on its first hotel acquisition in
Cambridge, which is now outperforming the market by 50%, according to Carter, might have swung
the Dunblane deal in Hilton’s direction. “The Cambridge hotel (a former Queen’s Moat House)
was already running strong when we came in, which really proved we could add value,” Carter
says. In fact, the Cambridge hotel has traded so well that Panayiotou is looking at adding a 53-
key extension.

Whether or not the Dunblane conversion is as successful as Cambridge remains to be seen, says
Nick Smart, vice president of development for Hilton in the UK. “We are establishing a new
business mix in a tough environment. We have to do it, and the owner believes we are capable. A
lot of time and money was focused on conference and banquet facilities, which is a part of the
business that has a longer lead time. It will be about a year before we see the proof in the
pudding.”

Not unlike its competition, Hilton sees conversions as the way forward in the near term and will
try to be as flexible as possible to compete for deals. “There are brand standards that are core
to our brands—some physical and some service delivery,” Carter says. “That being said,
Dunblane was not a standard Doubletree, and what we try to do is be flexible in context of the
country we are converting in.”

Doubletree sits well as a conversion model due to it flexibility, as Carter says Hilton does not
insist on any certain amount of meeting space. “Capital expenditure costs can be lower and
returns higher for owners,” he adds.

Conversion opportunities started to become more plentiful starting in the middle of last year,
Carter reports. “We converted more full-service hotels last year than previous years despite the
softening. We expect that to increase again this year,” he says. “Of the 200 expected openings
this year, a higher percentage will be conversions, largely driven by deals outside the United
States.”

Carter also sees strong conversion opportunities in the UK, as well as some in Italy and Eastern
Europe. In the UK, Hilton has done 24 deals in last 25 months, with about half being conversions,
Smart says. “Now we are seeing even more acceleration to conversions based on market conditions,
” Smart says. “There is a flight to quality and brands, which is driven by banks and funders
who are encouraging owners to adopt brands.”

In Asia, Carter points to China, Thailand and Malaysia—and, to a lesser extent, Australia.
“Even in the Middle East, opportunities are emerging, and we will see more as distressed assets
come to market,” he says.

Lastly, Smart says he is looking at office schemes that have run into trouble, particularly in
London. “It is a sign of where we are in cycle when we get a chance to look at office
conversions to economy hotels, as normally we don’t get a look,” Smart says. “We are looking
at four or five office conversions that are secondary office markets but prime for hotels.”

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Le Méridien Chambers Hotel
4-7-2010 22:58

Le Méridien Chambers renovation was a natural fit for the stylish brand and owner.

In February after six months of discussions, the independent, 60-guestroom Chambers hotel in
Minneapolis was converted to Le Méridien Chambers, increasing the Starwood Hotels & Resorts brand
’s footprint to 10 hotels in North America.

Hotel owner Ralph Burnet, who also owns W Minneapolis–The Foshay, located two blocks away from
what was the independently operated Chambers, recognized the potential synergies of using
Starwood to manage both hotels, making it an easy decision to convert to the Le Méridien brand.

Starwood looked at the style, art, architecture, design and cuisine—all focal points of the
David Rockwell-designed Chambers, recognizing the potential for it to become a North America
flagship for a brand trying to position itself as a creative hub in vibrant cities around the
world.

For Burnet, the cost of the conversion was about US$400,000, with the biggest expense coming from
having to change the locks. At the end of the day, Burnet expects to save “seven figures”
annually by having Starwood take over management, not to mention the already noticeable
difference its reservation engine is bringing to the bottom line. Within the first three weeks of
the conversion, rates were up at least 10%, and reservations were picking up with the Starwood
loyalty program making a big difference, according to Burnet.

There was no huge punch list of change orders to make it brand-specific, and Burnet was even able
to keep some existing inventory with the Chambers logo, such as robes. “We had to add the
hardware for the brand’s signature scent at the entrance and changed the feel of the art in the
lobby a bit,” says Burnet, who has more than 200 original pieces of art in the hotel. “Other
than that, the signage changed, and we had to change from hard keys to magnetic keys for security
and brand standard, which was fine with me.

“We had two management companies within two blocks,” Burnet says. “There was two of everything
—sales, accounting, etc. That was a big motivator to make the change.”

Starwood did not offer any incentives to make the deal, and Burnet now has a contract similar to
what he has at the W. “I was comfortable with that and didn’t consider anyone else. I am
thrilled with Starwood, and the GM has been outstanding, now overseeing both properties.”

For Starwood, the development and conversion mantra is “right partner, right property and right
places,” says Paul Sacco, senior vice president of development, North America. “We have that in
spades with Ralph. He understands and appreciates branding, particularly our brands, which is a
crucial component for any conversion.”

Moving forward, Starwood has a similar point of view to the other big players—be quick and
flexible in response to potential opportunities, and focus on ROI for owner-developers with
realistic PIP expectations. “We are proactive not with just owners, but with lenders,
consultants and brokers telling the story for all of our brands so everyone understands the
messaging behind them,” Sacco says.

While the Chambers conversion provided a management opportunity, Sacco sees a mix of managed and
franchise deals with the same ingredients applying for both. “There is a large, growing base of
franchise owners in the U.S., but we still see a lot of activity similar to The Chambers. We own,
franchise and operate hotels and want to have a healthy mix of all components—largely franchised
and managed. You will see us do both in 2010.”

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Grand Mercure Hadleys Hotel
4-7-2010 23:07

Grand Mercure Hadleys will have 200 guestrooms when its new tower opens.

Michael Doherty, owner of the historic Hadleys Hotel in Hobart, Tasmania, has gone to great
lengths to commence work on a A$30 million expansion, which includes a new hotel apartment tower
with 128 luxury suites and several new food and beverage outlets. It took six years to get this
proposal through all approval stages because of the original hotel’s heritage status and Hobart
’s very strict requirements when it comes to new developments. With such an investment of time
and resources and at such a scale, Doherty decided he had to convert from a small Australia brand
and take on a global brand. He chose Accor’s Grand Mercure, its specialist apartment brand in
Asia Pacific, which took over management some two years ago.

Previously branded a Doherty hotel, the upscale Grand Mercure expansion is one of the largest
private developments undertaken in Australia’s state of Tasmania. The project is scheduled for
completion by the end of 2010 and will feature a grand ballroom, which will increase the meeting
capacity of the hotel from 250 delegates to 600.

The work is taking place on an adjacent site to the existing hotel and will remain faithful to
the historic style of the hotel. The addition will complement an earlier renovation of the
existing building, which saw the exterior fully restored and refurbishment of all rooms and
public areas, undertaken by Doherty Hotel Group. Doherty purchased the hotel in 1999 after the
circa-1830s landmark fell into disrepair in the 1980s.

“We had run the hotel for 10 years, and that was fine when it was a boutique hotel with limited
facilities, but we are going from a 70-room hotel to a 200-room hotel with nine F&B outlets, so
it will be a substantially different operation,” says Doherty, managing director of Doherty
Hotels. “The new hotel will target a global corporate market, and, therefore, it was important
to get a company with widespread brand recognition and the professional skills to attract and
build that market.”

Doherty had established a relationship with Accor at another property in Ballarat, Australia, so
it was the first option. “They have considerable experience with the development of such
projects, and while we are fully experienced in the building and construction aspects of the
property, Accor is able to provide all the requisite support for fit-out and interior design and
then the operation of the hotel.”

Putting a big brand’s name on the project also helped with the financing, according to Doherty.
“Financiers were looking for us to engage a professional management company who could take the
project to the next level. It certainly made the financiers more comfortable, which was an
essential ingredient in the development,” he says.

According to Simon McGrath, vice president of Accor Australia, conversions are a key growth
avenue for its brands. “Our extensive portfolio of brands enables us to target many properties
across all market segments, thus we can often successfully pitch both a value-add proposition and
a strong brand fit to a wide range of properties,” McGrath says. “The final assessment criteria
are potentially barriers to entry, and expenditure that is required to ensure brand compliance.
We look for partners who believe in reinvesting back into their properties.”

McGrath says franchise opportunities on the Australian continent outnumber potential management
deals 5-to-1, adding the costs involved for either agreement in Australia are among the lowest
fees in the world, due to the intense competition within the market and the market’s desire to
achieve maximum returns. “The market here is extremely attuned to securing the best possible
commercial outcome in a tight and restricted market,” McGrath says. “Hence, an enticing
commercial package must always be carefully considered with our desire to increase market share
and maintain performance.”

While it is not generally looking to inject capital into new deals, McGrath says Accor is
generally flexible when it comes to the commercial structure of its agreements. “The key
criteria is whether or not we can add value,” he says. “If we feel that we can, then Accor is
happy to negotiate a commercial structure that reflects the owners’ concerns, so long as we
secure such things as tenure and capital expenditure back into the property.”

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