In 2015, mergers and acquisitions fuelled growth in the Canadian hotel industry, resulting in a strong year for many of the major brands. However, midway into 2016, hoteliers are taking an increasingly cautious approach to growth predictions. Geopolitical factors, the falling price of oil and a weak Canadian dollar were cause for unease entering the first quarter of 2016. Despite these concerns, panelists at last month’s Hotelier Investment Roundtable were cautiously optimistic about the coming year.
Hotelier: What type of year was 2015 for your company and the hotel industry in Canada?
David Larone: In the past year we sold our practice to CBRE. It was a busy year from a work perspective in Canada but also a lot of work in the Caribbean and Latin American. I’m generally optimistic about the Canadian industry. We have some areas that are struggling, but if we look at the West and Central Canada, it’s a pretty positive outlook — some interesting dichotomy in the industry, but generally positive.
Steve Gupta: For us, last year was steady. We launched the Gupta Group and we were the fastest-selling condominium developer in the GTA with two large multi-use projects — one in York Mills and one downtown on Bloor St. at Rogers Way. This year we will be building two more hotels — a Starwood Element and a Residence Inn in Mississauga. Four more hotels are in development now.
Tony Cohen: Last year, we bought the Hotel Pur in Quebec City and signed an agreement with Starwood to become the first Tribute in Canada. As Crescent Hotels, we grew the company by 25 hotels across North America last year — specifically in Canada we grew by eight hotels. We now have more than 14 in Canada — we are in six provinces and 28 states.
Allison Reid: Last year was a very good year for Starwood. We signed 220 deals, which is a high watermark for Starwood — roughly half are managed, half are franchised globally. A lot of our growth is in Element and Aloft — Select Service. Globally, the regions are performing as you would expect. Oil-based regions are having difficulty, just like in Canada, while most of the other markets are having really good years. Our concerns in 2015 were the same concerns we all have about our own investments due to political risk. Geopolitical risk, the impact of oil prices on the market and what happens with oil will determine what happens market-by-market.
Curtis Gallagher: We went through a merger last year and were acquired by new owners. We went from the fifth-largest real-estate service company in the world to the second or third. That will help us in terms of broader reach because what we are seeing in the market, particularly in Canada, is a lot of foreign investments… The last three or four deals I completed in Canada have been either new capital to the hotel business or new investments in the country and that’s encouraging. For us, 2015 was strong and 2016 will be as well. There will be more product out there and probably a landscape change in terms of the ownership profile.
Edward Khediguian: In April of last year, GE announced it was exiting completely out of its capital businesses and refocusing the company into primarily an industrial-based, technology-based company. A Canadian institution will be buying the Canadian platform built over the years. It’s an institution that wants to build its presence in the hotel and restaurant industries in Canada, so it’s a good thing. [Editor’s Note: A few days after the investment roundtable, it was announced that Canadian Western Bank had acquired GE Capital’s Canadian Financial Franchise business].
Hotelier: What kind of year do you think 2016 will be?
Larone: Notwithstanding what’s taking place in the resource sector in the country, we’re still looking at RevPAR growth nationally in the range of 2.6 per cent for the year. In Western Canada, we’re down about a half a point — that’s Alberta and Saskatchewan weighing on B.C. —but RevPAR growth is in the seven per cent range for Metro Vancouver and six per cent for Central Canada (Ontario and Quebec). We’re probably going to be looking at GDP growth in the first quarter in Canada for sure — better than they are forecasting. The dollar is helpful for exports… Our hotels are full — we’re basically at functional capacity in the major markets. Montreal, Ottawa, Toronto and Vancouver are running above 70 per cent occupancy. In a lot of the markets, there’s good opportunity.
Scott Duff: Even though a number of franchisees in Western Canada have reported seeing a decline, they’re coming off such a high basis that for some of these hotels a bad day is still not too bad. It’s certainly not apocalyptic for them and the change in the mix is certainly very pronounced, especially in the city centres.
Reid: We’re going to have a really good quarter. Aloft and Element specifically been very strong brands for us. No matter how much supply we put in, it’s generally been, at least for us, 46 per cent in the Select-Service space in the markets that our customers are drawn to. Our new brand, Tribute, has shown a lot of growth with the truly independent guys who are now looking to jump in and get the support of someone like Starwood. The dynamics, for us, from the development standpoint, are very strong.
There’s still a lot of money out there to do deals. A lot of money is flowing out of places such as China and the U.S. I think [growth] will be in the Select-Service space. It’s hard to predict at the beginning of the year where capital is going to flow to, but there’s plenty of capital out there and the fundamentals of the hotel space are still very solid.
Drew Coles: We’re seeing a change in customer segmentation, especially in the city centres in Western Canada. From 2010 and beyond, you had mid-week business, transient customers in that sector paying high rates. Now, lower-rated groups, associations and so on are all of a sudden interested in Calgary and Edmonton. So you shift your demand pattern and shift your customer segmentation, but the average rate profile has taken a hit. Vancouver had a terrific year in 2015 and that strength will continue. Across Ontario, whether in the city centres or in some of the more tertiary manufacturing sectors, there seems to be some pretty good strength. City centres will still perform and, Calgary and Edmonton aside, the economic outlook across the country looks pretty good.
Khediguian: There hasn’t been a better time in terms of liquidity for the hotel market. In terms of cycles, volumes are up significantly. There is a lot of supply starting to hit the market. The capital markets are starting to tighten quite a bit in the in the U.S., but that it isn’t necessarily the case in Canada. There’s a lot of liquidity, especially for smaller transactions up to a single asset — $10 to $12 million. There’s also been a lot of liquidity in the $35 to $40-million plus. You’re probably going to see a lot of tightening on the larger transactions as the U.S. influences capital markets in the real-estate space and a bit of tightening in the mid-market.
Hotelier: Looking at the rest of this year and into next, where do you think the most growth will happen in terms of both location and segments?
Duff: I think [growth will be] on the development side. Products are coming out of the pipeline in Alberta in a pretty meaningful fashion — we’ve been fortunate [development] is continuing onward with no interruption. You are going to have meaningful supply growth in places such as the Calgary Airport area and Edmonton, as well as in some of the secondary markets and we’ll see this through the end of this year and early next. [Select Service] is certainly still going to continue to be strong. In many instances, you sort of get a full-service type experience without necessarily the price — guests don’t need all those bells and whistles that you may have in a full-service hotel. You’re still getting the benefit of a great loyalty program, quality service and a very efficient program. The Select-Service hotels today are not your father’s Oldsmobile; they are very different — a lot more interesting.
Khediguian: You’ve got to find markets where it makes sense, such as the Hilton Garden Inn in Montreal, which is taking a Select-Service model and tweaking the content and operations.
Hotelier: Are we, then, seeing the demise of larger, full-service hotels?
Gallagher: In and around Toronto, real-estate owners are looking at how to maximize value. Do we build a parking structure and add more retail? Do we build a parking structure and add a hotel? [Operators are looking for] ways to generate greater value in their properties because they understand that land and good locations are scarce.
Khediguian: It goes back to components and content — whether it’s full-service or Select-Service, you have to figure out those components.
Gupta: The smaller full-service will work. That’s what we are trying to do. Cut down on meeting space and cut down on F&B.
Lin Saplys: In the last nine months we have seen an exponential increase in renovations of existing product and of throwing up a second hotel [on the same property]. We’re doing a lot of master plans with hotel components — the hotel may not go up immediately, but it’s there for the pro-forma and the financial model that some of these developers are putting together — a lot of first timers. What’s driving [these trends] is diversification. Portfolios are changing for a lot of these real-estate companies — not necessarily REITs — who are looking to expand their base and get into the hotel market. The hotel market is sexy. It’s about community.
Reid: Dual-branding happens because it caters to specific needs and wants. You don’t need 1,000 rooms — that’s one point of view. For example, in our case we have an Element, which is Select-Service and serene, and Aloft, which is a more upbeat kind of hang-out — [combining] those two products will ensure that a developer gets pretty good returns on both individual products.
Coles: In city centres, economically it’s difficult to build full city-centre assets; the barriers to entry are high. But those assets will still be of value to an investor to trade because of their very nature… If you own those hotels, you’d better make the space meaningful — that’s the key. We look at the Royal York Hotel as an asset owner and manager…they like the hotel because of the real estate. Should it be a 1,300 room hotel, these days…it might be chunky. It’s location driven, but I agree, you have to make the space meaningful, no matter what the brand, and you have to respond to consumer needs.
Cohen: Looking at it through a traditional lens, [full-service] is ineffective in this day and age… [If] you have a big old building and there’s a lot of dead space, that’s not generating anything. The Thompson, for example, has 100 rooms and does over $15 million in food and beverage because we’ve been able to activate spaces in a meaningful way and continuously evolve them. We’ve been very successful, with 90 per cent occupancy, because we drive a lot of weekend business and that’s directly related to F&B.
Hotelier: How have food-and-beverage offerings changed?
Gupta: At our hotel in Markham, the huge restaurant area was losing big bucks. So we converted the property to two hotels with one generic reception in the former restaurant in the front. We have the bistro, the courtyard and a breakfast room on the top floor and it works like a charm.
Cohen: We’ve got to stick to our brand and our brand’s standards.But, that said, we have to be a little more creative and realize [food-and-beverage] in the traditional way just isn’t going to cut it. About five years ago at Crescent, we knew the importance of food-and-beverage. We started our own division called Crescent Culinary to deal with the ongoing challenges. Too often, culinary or food-and-beverage is overlooked. When you look at our portfolio of 100 hotels and 19,000 guestrooms, we have in excess of 1.5 million sq.-ft. of meeting facilities and 40 to 50 per cent of our revenue is food-and-beverage. To not focus on a critical component is opportunity lost. So, we created a vision to help ourselves and our clients focus on missed [F&B] opportunities.
Gallagher: It’s looking at it as a whole. [Operators] need to look at food-and-beverage as an investment, rather than just a service. The investment that’s going into restaurants [in Toronto] is exceptional, the service is exceptional and food quality is exceptional.
We need to change the mindset of a hotel investor or owner to looking at [F&B] as an investment rather than just a break-even, at best, service provision.
Reid: Not every location can support a restaurant. When you have the right location, as the hotel owner, you can almost always lease it out [to a restaurant]… We have multiple relationships with restaurant partners and it’s not one-size-fits-all. Grab-and-go is popular because four nights out of five, guests will go to their room or sit in the lobby and do e-mails.
Hotelier: How important are soft brands in today’s market and what type of development should we expect?
Reid: What’s really driving this [trend] is a ton of entrepreneurial people entering the hotel space and creating really cool, unique brands. There is the influence of distribution systems. Every real-estate owner cares about how to get the most customers for the cheapest cost. That’s why the brands come in and say ‘Well, you created this really cool product but we can get you distribution at a lower cost.’ We went out and we talked to a lot of those independent hotel owners and said ‘What are you looking for?’ Those entrepreneurs said ‘We want your distribution but we don’t really want you telling us what to do on brand standards’… Our tagline is ‘Stay independent. Stay doing what you do.’
Cohen: We’ve done six Autograph Collection conversions over the last two or three years and many of the other soft brands. You get the benefit of the distribution, the reservation system and the loyalty [program] without their stringent brand restrictions. It’s a great way to plug into a network that you wouldn’t otherwise have access to as an independent… It’s a win-win.
Reid: But there’s room for both soft and hard brands — it just depends on what that real-estate owner wants to spend their time and money on. Sometimes it’s just easier to take it off the shelf because the main business is yield for their investors, not creating entrepreneurial-type products.
Saplys: Hard brands are also getting softer — we’re using the brand standards as a guideline, not necessarily a Bible anymore and I’m finding a lot of the owners are asking us to push that standard a little bit more.
Hotelier: What is your company’s primary investment intention in the next 24 months?
Gupta: Early next year we will have two hotels open and by 2018 we’ll have all four hotels in development open. We are also looking into acquisitions — whether it’s a conversion or a dual-brand — that will continue. It’s hard for me to say I’m going to do 10 more or 50 more hotels. Our company believes in quality not quantity. We are very strategic so our growth pattern is to find opportunity and move quickly.
Cohen: We’re very strategic, very opportunistic. But we don’t grow for the sake of growth. We’re the third-largest management company in North America and we have absolutely no desire to be number 1. For us, it’s about finding the right assets with the right ownership groups where we feel we can make a difference. Right now, we’ve got three hotels under development in Canada and another eight in the U.S. — all of which will be opened by the end of 2017. In terms of either new acquisitions or new management contracts, there’s a pretty good pipeline there. We’ll probably be 100 to 125 hotels, but again, it’s strategic. We like geographical diversity. The more geographical, brand and asset-class diversity we have, the more ability we have to sell to different companies and groups, which drives more business in the hotels and ultimately benefits our ownership.
Coles: For the next few years, we are buyers and we are sellers. So, as we have been doing for the last year-and-a-half, we will be trading out of our ownership in low-entry markets — smaller markets where we can’t get rate growth because it wouldn’t make sense to renovate. We will refurbish and we will continue to invest. We believe in city-centre assets…we have two listed for sale right now. We will deploy that capital in both refurbishing and acquisitions. We believe in the Canadian landscape.
Hotelier: What does the next year look like from a financing point of view? Is there still a lot of good growth for Canada?
Khediguian: Yes, but there is probably going to be a tightening on the larger transactions. Most of the market is either small transactions or mid-market. I feel positive, from a financial perspective, about how things will shake out.
Gallagher: We’ll continue to see capital come into the hotel space. You’ve got professional operators, you’ve got great transparency and you’ve got driven-down Cap rates that are almost ridiculous… If you look at the U.S., all of the major real-estate investors have hotels as an asset class they invest in but it’s not quite there yet in Canada. If you are a pure hotel investor, typically you also look at other real-estate investments to diversify yourself, not just geographically, but for profits. So it’s encouraging. We’ll continue to see that over the next couple of years. It’s new money into the industry, maybe new money into Canada.
Saplys: The hotel market is going to be strong because we’re seeing a huge influx in a client base that is doing repositioning of product. Those rooms are the same rooms that have always been in the market, so that sense of growth is going to stay. There’s a lot of good buildings with good bones out there that are being repositioned. What hasn’t been touched on is the fact that there’s a huge repositioning of older product that’s going to retirement homes and student housing — that’s a big push in Montreal, Toronto and some secondary markets like Hamilton — where hotels are going out of the market. The mentality out there is Canada is in good shape, financially. We’re comfortable, we’re not busting. People are looking at two to three years to get development up and running… That means that the mentality out there is for sustained growth — it’s not going to be crazy, it’s going to be consistent.
Hotelier: What are rates like these days?
Larone: Look at the major markets — Montreal, Ottawa, Niagara Falls, Toronto and Vancouver; Niagara Falls is at 70 per cent occupancy; RevPAR growth in Niagara Falls was 16 per cent and will be probably be at least 10 per cent this year. We are looking at RevPAR growth of six per cent in Montreal, Ottawa is five or six per cent, Toronto is six and a half per cent and Vancouver is seven per cent. That’s all driven by ADR. There’s tremendous opportunity. Downtown Vancouver is going to run at 77-per-cent occupancy — that’s seven per cent RevPAR growth — and they can do better than that. In those major markets, the upper-upscale assets are going to take the leadership position and we are looking at ADR growth in some of the luxury assets of $40 to $45. It’s product, but it’s service levels and customer experience. We’re awash in capital. What we need is more growth in the economy.
Hotelier: How do global factors influence the Canadian market? Are we insulated to some degree?
Khediguian: Our biggest risk is probably ourselves — our current deficit. We’re going to see an increasing tax environment for upper-middle class plus increased spend — government is not always the best spender of capital. So depending on that impact, plus where the U.S. is in terms of its economic cycle, it will have an impact on our capital markets and cost of capital or a combination of deficits.
Cohen: The higher dollar/weaker dollar on our side is actually better — certainly in the bigger markets for travel and tourism. But we don’t promote ourselves enough and we just haven’t had that perfect storm of pushing rates, telling people how great we are as a country, what great product we have. Now it’s a good a deal. So people are coming, but when the deals dry up, they don’t come — but then business comes back, so it’s a little bit of give-and-take and hopefully we can figure a way to package it all together.
Editor’s Note: While mergers and acquisitions came into the roundtable discussion, because the Starwood and Marriott deal had not been consummated at the time of the Investment Roundtable, the representatives from Starwood Hotels & Resorts didn’t wish to comment heavily on the deal. A few days later, news hit that the Starwood and Marriott merger had been finalized. Similarly, a few days after our discussion, GE Capital’s Canadian Franchise Finance business was sold to Canadian Western Bank.
Volume 28, Number 3
