Hunter conference 2012 Now is the time to buy, raise rate, panelists say Atlanta – If ever there was a time to acquire existing hotels, now is that time. That was just one of the themes of the 2012 Hunter Hotel Investment Conference. With a dearth of new supply in the market—and construction starts at all-time lows—and operating fundamentals only getting better—February saw record gains in average daily rate—conference attendees were bullish on buying. “It’s a great time to build your portfolio,” said Jim Merkel, president and CEO of RockBridge Capital. “Hotels need to be recapitalized. You should be investing in hotels today if you believe in the U.S.” While U.S. gross domestic product is only growing at a sub-three-percent rate and gas prices continue to soar, the hotel industry is now in full recovery mode. “We are selling more rooms than ever before,” said Jan Freitag, SVP of STR, which forecasts that room supply will grow 1.4 percent in 2013, while ADR will climb 4.4 percent year-over-year. “The smart money is on building [hotels] right now,” he said. “But it’s tough to get money.” Lending issues He’s correct. “Construction lending is tough,” said Jim Luchars, director of AEW Capital Management in Boston. “You have to have the best sponsorship and a lot of equity.” Lenders also are more cautious now than they were before the housing crash, often requiring full recourse, debt yields above 12 percent and loan-to-value ratios in the neighborhood of 65 percent equity. The one place where construction financing is still prevalent: the New York City area. “It depends where you build,” said Ed Kobel, president and COO of Tampa, Fla.-based DeBartolo Development, which has financing in place for an unspecified hotel development in Brooklyn. “Construction debt is easier there than for a resort somewhere in Florida,” he said. For other builders and franchisees priced out of New York, it’s still an uphill climb. “When will lending come back [in full]?” asked Steve Joyce, president and CEO of Choice Hotels International. “It’s still slow, particularly construction financing, and bankers are requesting significant levels of guarantees.” But if industry fundamentals are any indication, lenders should begin to relax. After all, “it makes sense it will get better,” said Mit Shah, senior managing principal and CEO of Noble Investment Group. “Banks are in the business to lend money.” As such, banks look for the best deals, and branded hotels often make a better case than independent ones. “Brands are risk mitigators,” said Adam Valente, a SVP at RockBridge Capital. Sam Kupersmith, managing director of Atlanta-based Cantor Commercial Real Estate, said it’s hard to get a deal done that’s not branded. “The flag is important—a reservations system is everything,” he said. There is hope for independents, said Naveen Kakarla, president and CEO of Hersha Hospitality Management. “Take advantage of location,” he advised. In March, Hersha Hospitality Trust acquired the Rittenhouse Hotel in Philadelphia for $42 million with Hersha Hospitality Management assuming management. Where to buy “The right market is everything,” said Russ Urban, SVP of acquisitions and development for HEI Hotels & Resorts. HEI’s most recent acquisition was the Hotel Palomar in Arlington, Va., a suburb of Washington, D.C. It plans to reflag the hotel as a Le Meridien. Market matters also to Dan Hansen, president and CEO of Summit Hotel Properties. The real estate investment trust went public in 2011 to raise capital for further acquisitions. “We are more yield-focused,” Hansen said. “Low cap rates don’t fit our model.” While most of the panelists during a session on buying and selling hotels, led by Teague Hunter, president of Hunter Realty Associates, concentrated on acquisitions in the top 50 markets, D.J. Rama, president of JHM Hotels, said his company is focused on deals in secondary and tertiary markets. “If you find opportunity, buy it,” he said—“and sell it young.” When to buy ... or hold On the flip side, Hansen submitted that asset owners would be wise to hold. “If you don’t have to sell, don’t,” he said. “There is potential for a better price if you can wait.” One of the more salient points made during the session was the notion of exit strategy. “You have to understand it from the beginning,” said Sam Reynolds, SVP of acquisitions for Apple REIT Companies. As an owner, you can’t renovate a property forever, so you have to know “when to exit at the right time,” said JHM’s Rama. Until then, drive rate. “The focus should be on rate because demand is so strong,” said RockBridge’s Merkel. PKF Hospitality forecasts that for full-year 2012, demand will increase 2.2 percent. The message: While the going is good, now is the time to profit. You never know when it can turn. Jim Abrahamson, president and CEO of Interstate Hotels and Resorts, said it best: “The economy will do well up until it doesn’t.” Asian investors look for prestige, solid returns in European deals International Report–It’s an indicator of improving economic health in Europe if Asia-based investors are looking to make hotel deals in EU countries. While Asian investment into Europe carries its own challenges—most notably the strength of the euro and the pros and cons of branding—its pros outweigh the cons, at least for now, according to speakers at the International Hotel Investment Forum in Berlin. Ong Chih Ching, group CEO of the Singapore-based KOP Group, and Ricco DeBlank, CEO of the hotel division of the Hong Kong-based Sun Hung Kai Properties, both emphasized that while investment in Europe is top of mind, each of their first priorities is delivering solid returns to their Asian investors. KOP Group’s portfolio includes The Ritz-Carlton Residences in Singapore, Franklyn Hotels and Resorts, Montigo Resorts and luxury yacht company Aqua Voyage. SHKP’s hotel portfolio includes the Four Seasons Hotel Hong Kong, The Ritz-Carlton, Hong Kong and the W Hong Kong at Kowloon Station. DeBlank said SHKP’s sights in Europe are set on deals in Western gateway cities, purchased all-cash, courtesy of the company’s private-equity majority owner. Ong said KOP’s goal with European investment is partly to grow its reputation back home in Asia, and partly for the prestige. “We’re relatively new in Asia, so we want to go outside of Asia, make a name for ourselves, then come back,” she said. “If we can show the Asian market that we’ve gone out of our comfort zone and done something else in a sophisticated market, like Europe or the U.S., when we go back, the results we reap are tremendous. We’ll be five years ahead of any other company on a parallel platform.” KOP is developing the 10 Trinity Square property in London, which it acquired in 2010. The mixed-use development will include a 120-room hotel, set to open within the next two years. “As a brand-building company, we have to be associated with prestige,” Ong said. “It’s like how every woman wants an Hermès Birkin bag: When the market is good for Asia, when they have enough money, they go out and get what they want—London properties, U.S. properties. That lends prestige.” Beyond that, Ong said developing properties outside of Asia “provides supply to the demand back in Asia.” euro weakness? Both Ong and DeBlank agreed that most Asian investors are confident they can improve hotel performance once they acquire properties, making yield on investment—particularly in a weak euro environment—not too troublesome. “We do look at currency, and I don’t think the euro will disappear,” DeBlank said. Ong said she was personally “extremely cautious” as far as the euro is concerned, but she agreed with DeBlank that Asian investors are more concerned with making performance improvements to boost yield. “I have a lot of joint venture partners and they’re not worrying about yield when they acquire,” she said. Brands: pros and cons If Asian investors are concerned with the prestige factor of their investments, how does branding play in? DeBlank said it’s an argument his company has debated for a long time. “I have a Ritz-Carlton in Shanghai, and a few more Marriott brands would just dilute my [employee base],” he said. “I think China has enough room to grow certain brands, but you have to be careful about it.” Ong said in Hong Kong and Singapore especially, investors are not as reliant on brands. “We’re more into the concept behind the brand,” she said. “But as a whole, in China, you still have an opportunity to expand brands.” “That’s the only place they can expand,” DeBlank said. “There’s no other room in the rest of the world.” J.D. Power recognizes Drury Inn, Hampton Hotels, among others Five hotel brands were named to J.D. Power and Associates’ “2012 Customer Service Champions” list—Drury Inn & Suites, Four Seasons Hotels & Resorts, Hampton Hotels, Hotel Indigo and Ritz-Carlton. More than 800 brands were considered for the list, which J.D. Power boiled down to 50 brands across all service-based industries. People matter The foundation of the list comes from comparing five key areas that comprise customer service: people, presentation, price, process and product. “In the last five years, we have seen major changes to what hotels are working on in terms of customer service,” said Gina Pingitore, chief research officer at J.D. Power and Associates. “The role of people has increased, while there was a decrease in the role of processes.” Pingitore said that more effective and numerous online options have made it easier for hotels to serve customers over the Internet. J.D. Power found that improvements hotel brands made to processes resulted in less-complex measures being undertaken by online systems or mobile applications. “This means when a customer has to deal with a person they might have more challenging needs or issues to address,” Pingitore said. “Because of that, the skill sets for front-line staff have been increasing.” Pingitore also said price has become more important, but not in the way most brands might think. “We expected to see larger changes in price than what we came across, and it increased about three percent over last year,” she said. “Most of the larger price changes took place between 2008 and 2011. “When it comes to price, customers don’t simply want the cheapest property, they are looking for the best value,” Pingitore said. “What the top five hotel brands did was offer value and expand the amenities they offered to help guests better evaluate the worth of their stay.” brand focus While some of the brands on the list are repeats, not all of last year’s made the cut again. “Performance scores are compared across all industries, not just within certain industries,” Pingitore said. “Since there are 50 total brands on the list, and five of them are hotels, sometimes brands get bumped.” Pingitore said the biggest improvements made by hoteliers relating to guest satisfaction dealt with consistent personalized service. “Things like free wireless internet appeal to guests, and increased amenities can buffer the impact of price, but a hotel is really being effective when it goes above and beyond with its front-line staff,” Pingitore said. Pingitore offered some management suggestions for brands looking to make the list next year: “It is important to have the right people working [for] you,” she said. “You have to watch who you hire and make sure you empower them with the ability to make the right decisions to enhance the customer experience. The role people play in customer service is so important that brands shouldn’t be so focused on internal processes and procedures.” The annual list is generated from brands J.D. Power measures and includes data from all customer touch points.