A handful of hotel owner and operators with varying portions of their portfolios represented by independent properties convened for a panel during the recent ILES (Independent Lodging Executive Summit) in Las Vegas and assessed the current market for non-branded assets.
Held at the Hard Rock Las Vegas, the event was co-produced by Hotel Interactive® and blended BITAC®’s one-on-one meetings format with the more traditional ILES trade show experience. In a panel entitled “Managing To Increase Asset Value,” the executives weighed in on everything from financing to best practices among independents.
In the case of the former, the group acknowledged securing it can be challenging, particularly in light of the current climate among lenders.
“In the past it’s been historically difficult because branded assets seemed to be the norm. It became a lot more possible over the past couple of years to raise debt for independent properties. I would say where we are right now though in the cycle it’s becoming more difficult again to raise money period,” said Mary Beth Cutshall, SVP, acquisitions & business development, Hospitality Ventures Management Group.
Chris Green, COO, Chesapeake Hospitality, LLC, offered some advice for independent hoteliers. “It’s not going to be easy to get done, you’re going to have to work harder…Have a smart presentation that explains where you’re going for every piece of business and how you’re going to get it done,” he said.
Justin Jabara, VP, development, Meyer Jabara Hotels, noted the company is working on a number of ground-up projects in various stages of development. “It really comes down to the local bank and having that relationship. They want to know who we do business with, who is the operator, and then ‘sell me the story.’ The groups that really go to the banks with the best story and have the best track record, those deals get done,” he said.
Jabara further commented, “times are changing. We used to get a lot of term sheets, now we get a couple.”
Jayson Seidman, founder/principal, Sandstone Hospitality Developments—whose portfolio is made up of completely independent properties—emphasized the importance of getting creative on the financing side for benefits such as tax credits. “I really chase after historic properties in historic landmark districts,” he said.
Seidman added, “Lenders will lend on some level of pro forma, which is nice…But when it comes to leverage it’s still a very conservative game. Independent hotels are scary and the way to make lenders comfortable is generally by affiliation.”
The executives discussed profitability for independent properties as compared to their branded counterparts.
“Traditionally branded hotels have been a great backstop in case the economy does turn. There’s been a lot of evidence that when we are in a downturn sometimes the branded properties slip less, but now I’m wondering if that’s going to happen this time around…The Internet is such a compelling conduit now for business in general and marketing. Independent properties have really come into their own, so everybody’s looking for a boutique kind of experience. I think the consumer is that much more apt to go in that direction,” said Cutshall, who also cited the potential impact of Airbnb and other disruptors.
Green, however, offered a word of caution. “In simple terms, there’s no free rides. If you think you can take a flag off a Hilton and save 13.5 percent [in fees] it’s not going to happen. Because you’re going to spend money on sales and marketing, you’re going to have increased labor, increased soft costs, as well as marketing and social media.”
Seidman pointed out some other considerations as well. “One thing that’s important to realize here is we really need to focus on key count. If you’re at the 100-key count level that’s kind of my maximum threshold. If you start pushing into the 150’s or 250’s, even in the major cities, you have to start to getting pretty aggressive on the sales and marketing, as well as with bookings and the OTAs,” he said.
Cutshall further added that anyone who opts to go independent needs to exercise patience. “We have seen the independent properties ramp up a little bit slower so make sure you’re putting that in your projections. Don’t be too aggressive out of the gate, especially when talking to a lender. Be conservative in projections and it might take an extra 6, 8 or 10 months to get to that cruising altitude. With a brand you’re flipping a switch,” she said.
But how does being independent impact asset values?
“We’re seeing more and more evidence that independent properties trade at a lower cap rate. We’re seeing that being unencumbered, especially now that there are so many soft brands, can really make a big difference,” noted Cutshall.
Harper Stephens, business development, Charlestowne Hotels, commented, “We see a lot of deal flow. There are people that are trying to get away from the brands and have something unique for their investors when they go try and raise capital. Independents help them differentiate themselves and diversify their portfolio,” he said.
Green, meanwhile, pointed out that the company has seen many opportunities with independents primarily as the result of mismanagement. “In the independent space you’ve got to apply corporate management behind the scenes. It may be fun and super hip, but you’ve got to manage the asset in the back. That’s what I see really not happening. There are so many mismanaged independents that could be making a ton more money and creating more value for their owners if they would just apply good hotel principals to their day-to-day operations,” he concluded.