Rosanna Caira: How would you characterize the past year for your company?

Kenny Gibson: For Sunray, 2017 was a growth year. We doubled the size of the company — rooms-wise — and began 19 construction/repositioning projects, mostly in Ontario. So, I’d characterize it as a phenomenal growth year and there’s more to come.

Roz Winegrad: The big headline for us is integration — combining the Starwood hotels with the Marriott legacy hotels and building community globally between the two organizations. Also, planning for 2018, which is the massive integration of systems where, later this year, on a given day, every legacy Starwood hotel will convert to Marriott systems. We’re gearing up for that and expect 100-per-cent success, because there’s no other option. And then there’s massive integration of two [loyalty] programs.

Gerry Chase: It was an exciting year for Canada. It was the 150th anniversary, and we saw a good lift in almost all of our hotels. We saw a great year from a RevPAR-growth standpoint. From investment and growth, we currently have 22 hotels on both sides of the border — eight in Canada. The majority of those we either own or have a major investment in. This last year was about getting everything prepared for 2018. We broke ground on a dual brand, which will be our second, in Dartmouth, with a Residence Inn and Courtyard. We have two others going in in the U.S. in that particular brand, with dual branding. And at The Algonquin, we made a major investment to upgrade the golf course. Renovations started in 2017 on our Hampton Inn & Suites in Dartmouth and our Westin Hotel. We started major renovations in November and should complete them by June of this year.

Sukhdev Toor: We had an excellent year in revenue and RevPAR growth. We converted two hotels to DoubleTree — one Travelodge at the [Toronto]airport and the Dartmouth Holiday Inn. We acquired five hotels last year, so it was a good growth year.

Bill Stone: It’s been an exceptionally active year. We completed a number of large-scale transactions and some small, single-asset ones. So, riding part of this big wave that we’re in the middle of, this will continue as well. We’ve got a good couple of years of runway — barring anything global and unpleasant.

Ian Ricci: It was our first full fiscal year at Canadian Western Bank since being acquired in July of 2016. We had record transactions this past year and, as a lender, it’s always good to have those numbers up, because it means people need financing. The timing has worked out really nicely, as we integrate into a new organization and recalibrate to the market. It’s been a building-block year for us and the 2018 pipeline looks really strong.

Brian Flood: It was a very active year in the market. Our practice doubled in size last year and also expanded across the country. We saw a tremendous increase in demand for our services related to valuations in connection with transactions, a refinancing or new construction and we expect that will continue into 2018.

RC: What have been the biggest factors driving growth over the last few years?

BS: The fundamentals are clear and strong right across the country. Canada is well perceived and coveted globally — it’s a good place to be. The infrastructure that’s here, the political environment, the economy — all of those things are positive. And there’s also a boatload of equity out there — lots of owners that either have equity on their own, or access to tremendous global equity. And the lenders are lending, irrespective of a hike in interest rates, so everything is going well in that context.

Ryan McRae: A lot of the success we saw out west last year on a development front — signings, construction starts, et cetera — was a lot of catch up. Western Canada, in particular B.C., always hit under its weight in terms of product quality, where you had these fantastic, world-class destinations, but the accommodation product didn’t always match the expectations of higher-value customers. Now we’re starting to see the development of new hotels in markets that historically hadn’t had any new investment of any international quality product. That’s a wave, certainly in B.C., that we’ve been riding and trying to direct capital to, as we have investors and developers that look to Canada — or Canadian developers looking to get into some new markets — who are looking into B.C. as a place that has always flown under the development-capital radar.

KG: The amount of foreign investment coming in is driving transactions and pricing on hotel transactions. Over the last few years, the low-interest-rate environment has made it attractive for people to invest in Canada.

RC: When it comes to independent versus brand-affiliated properties, what’s going on and how is it impacting your company?

RW: [It’s not] an independent versus brand discussion — it comes down to what a consumer is looking for, for that particular trip. [For example], we have business travellers who travel every day to Fairfield Inns and Courtyards, because that’s their business. But the loyalty programs and the rewards are used for their families or for their vacations at Autographs or Ritz-Carltons or St. Regis. So the notion, from a development perspective — and maybe even from a lending and a broker perspective — is where are you going to get the best return on investment? [And that’s by] plugging into a really strong distribution system. Independents plug into certain distribution systems, but they’re very costly. The rates they pay for OTA, commissions, or some of the other affiliations are very costly and may not have the depth and the reach of a strong brand.

RM: I always look at what may be left on the table relative to tapping into a base of higher-value customers. You might be running a $220 RevPAR now as an independent, [but] could be north of $300 if you were working within a system, in some cases. So, it’s a model that we always look at [in terms of] how we can mitigate your downside in a down market by helping control costs and bringing the right customers to your door. But also, on the top end, how do we bring in the really high-value travellers to help your top line?

IR: The roots of our value proposition are based on looking at branded product and we rely heavily on the brands to ensure certain standards in operations are being maintained in the properties. That’s one of the large benefits of brands. We’ll also consider some unbranded opportunities, but very focused with tier one — our number-1 borrowers and sponsors that have a lot of experience in the space.

BS: It depends on the brand, the performance of the property and the term of either the franchise or the management agreement. But, overall, our experience is that branded properties perform better than the market, [so] there might be more income. If they’re making more income, they’re worth more. Having a viable branding option is almost everybody’s go-to move. Very rarely have we seen an asset de-branded and made independent.

MM: [Soft brands have] been a real development-growth vehicle for us. What we’re looking for is not a nice hotel, but one that has a story, so the hotel becomes the brand in and of itself. From a development perspective, that is important for us and makes that hotel successful. It draws people there who are looking for an experience — that special getaway.

RC: What segments are doing well in today’s marketplace?

RM: We’ve had strong group business in Canada in our upper-upscale hotels. We do have a strong luxury footprint in Canada and we’ve been very happy with how they’ve been performing. We’ve been at the extended-stay business for some time in Canada and those products continue to drive incredibly strong ADRs. It’s consistent with some of our upper-upscale brands — combined with strong occupancy and a favourable business model; our extended-stay brands have had a banner couple of years with top-line performance and their obvious bottom-line performance pulling through.

KG: Dollar for dollar, select-service brands provide the best economics from an ROI perspective. I would put extended-stay [hotels] in that as well. They drive better economics — you can buy them less expensively. On a per-room basis, it costs less to renovate and you get better, middle-of-the-PNL performance. Who’s building full-service hotels, unless you’re in a downtown market? The bulk of the new development is in that select-service, extended-stay kind of product.

MM: Last year, we opened 12 hotels across the country and half were full-service, which was a bit of an anomaly for us. The two Vancouver properties were new builds — part of a larger, mixed-use development and that’s how you get the economics to work.

RC: Is your company involved in many conversions?

KG: We’ve got 19 conversions on the go, [including] three dual brands. We like to find hotels in suburban markets that are tired [or] don’t fit the current brand and bring them back to life. A lot of those are conversion brands or dual brands.

ST: We’ve done three conversions — a Radisson (a soft brand called Hollis), DoubleTree by Hilton and an airport Travelodge to DoubleTree. [In] the last three or four years, a lot of investors couldn’t spend the money and the independent owners came in to reposition those assets.

RM: In a lot of cases, particularly in the major [cities], these conversions are fantastic infill sites. So, as the city and metropolitan areas have grown around them, to go in and try and find a nice, flat 2 1/2-acre site for a prototype build is almost a non-starter. In North America, we’re looking at historic restorations, which take more love sometimes, but make sense and have strong business-return promises.

RC: What are the best-performing areas in the country today?

BF: Toronto and Vancouver have led the country in terms of top-line growth. Southern Ontario, overall, has also performed very well and border locations, such as Niagara and Windsor have done exceptionally well. The other sector that has performed exceedingly well is the resorts sector, surprisingly. A lot of that is in Alberta and the one saving grace in [the province] is that this segment has done so well. But even year to date, resorts are leading the pack with 12-per-cent RevPAR growth. Last year, markets such as Ottawa, Montreal and Quebec did very well based on the Canada 150 [celebrations]. We’re beginning to see recovery in Saskatchewan and Alberta — there is demand growth [but] the challenge has been the amount of supply added in the last two years.

BS: From an ROI standpoint, we’ve seen significant growth, and really, record growth, for as long as we’ve been around this business. So, B.C. is running about $26,000 a room, Ontario $17,000 and Quebec at about $16,000 a room — up measurably over prior years.

RC: Will growth come from existing hotel developers, or is new blood coming into the market from outside Canada?

IR: There’s a real depth from existing hotel developers in Canada. They’ve got a good feel and read on the market and the pipeline of opportunities. And, from a brand perspective, the brands know who to go to — who’s going to be able to execute. Like a lot of the other asset classes that exist right now, everyone is chasing deals as hard as they can and it’s really hard to find them. From a lending perspective, [there is a lot of] interest on every single transaction that comes up. It’s very aggressive. It’s a very nice position [to be in] and that creates barriers to entry for new blood. There is new blood that has come in — and they paid to get in the game in a lot of ways — but there’s some depth already existing in the market.

KG: Where we’re seeing new investors coming into our space, it’s typically people from outside the country that partner with a hotel owner/operator. We [now] have a lot of interest from equity players trying to get to the table just to invest in a hotel, or a group of hotels, but it’s an entry-level step, where they learn the market, get to understand [it] and then invest on their own at a later date.

BF: We’ve seen an increase in first-time buyers, whether they’re buying an existing asset or looking to build their first hotel and part of that is driven by where we are in the cycle. Some of these buyers are owners in other asset classes [who] look to hotels as an area where they can potentially still generate a stronger return, because returns have been compressed in all of the other categories — you’re sub-four-per-cent returns in many categories. Hotels are still relatively attractive and that’s what’s bringing a lot of these people into the market.

BS: We’re also seeing the first-timers going into secondary/tertiary markets and building a 60-room something. And that’s enough, in some cases, to decimate a market. That’s actually prompting a number of sales. Owners are saying ‘alright, enough already,’ because the view is these groups are uninformed, [they] just want to get something up and running and don’t realize the impact. There are a number of markets where that’s going to have a dampening effect down the road.

RC: Where do you see the next wave of growth coming from?

RM: From Marriott’s perspective, the two key trends I would say are, number-1, a lot more penetration of our select-service and extended-stay brands into major metro areas. Those projects tend to have a bit longer gestation period. [Also], within our portfolio there’s a lot of white space still left on the map in Canada for our brands so we look at that as a huge opportunity — getting into the secondary and tertiary markets.

BS: [Toronto can still handle] a lot more [hotels]. We’re going to see a lot more — likely 100 to 150 rooms [properties]. But, by and large, we see Toronto, Montreal and Halifax. Winnipeg was a bright spot last year and overlooked by most. From a transaction and growth standpoint, this year will be the year of Alberta and, somewhat, Saskatchewan. [In Toronto], the suburban growth will be latent and it’s going to be downtown. It’s going to be select service — maybe extended stay and boutique. If there are, and just picking a number, 750 or 1,000 rooms added over the next three or four years, nobody is going to feel it. It will have no impact and expands the offering that we have as a city.

RC: What’s driving hotel design and technology trends and are they impacting the industry?

RM: It’s something we spend a lot of time and effort on — how do we innovate and make sure each one of our brands is relevant? We bench test a lot of innovative ideas early on — internally within Marriott — before we roll them out to select owners, to make sure there’s a viable business case for them, and then roll those out more broadly across the portfolio. One of my favourite lines from our CEO Arne Sorenson, is ‘just fail fast. Just do it and if it’s not going to work, get onto the next one.’ We have a distinct innovation group at Marriott constantly on the prowl for new ideas — testing and vetting them, getting them worked out in the market and then rolled out.

RW: We’re focused on innovating the business. Technology-based innovation is going to be key to what we, and many other businesses, are doing. This is the era of big data, so how can we use that data, and the data that we own from our guest stays, to create experiences personalized to that particular customer? In order to do that, you have to have good technology systems in place, which we are in process of doing. For example, in the coming year, people will be able to choose rooms like you do on airlines. That’s helping people to personalize their stay, but that’s only the really easy front running. With Alexa and all these different technologies in your home, people are going to want these to be located in the hotel. It becomes table stakes, so in certain things, we have to be ahead of the curve to create these residential experiences — to create distribution in a commercial way that makes sense.

KG: [Our] brands are introducing new technology standards on a renovation-by-renovation basis — the technology part is really hard to keep up with, particularly in a smaller company. On the design front, we’re seeing more people not necessarily wanting to have material things, [but rather] they want to have experiences. So, the design we’re seeing now, across the board — both architecture and interior design — is more around creating an experience for the guest. For example, slimmed-down case pieces and more efficient use of space. Big, bulky desks [are being replaced with] slim, for lack of a better term — more modern furniture.

RC: Lobbies have become increasingly important. Do you see that trend continuing?

RM: I see it continuing and it’s a return to the roots of the hotels as the living room of the city. Across the board with our brands — whether it’s luxury, full-service or select-service — a huge focus is put on that public space; making sure it’s not a breakfast room over in the corner that’s curtained off at the end of the breakfast service. How do you pull that forward, make it multi-functional space, so as soon as that breakfast service is over, it still is a very activated space with high-top tables where groups are working together — a place where people actually want to be? As hoteliers, we’re guilty, historically, of creating spaces that people did not want to be in, or they became irrelevant and dated to what a guest’s expectations were.

RC: How is the boutique segment performing these days?

RM: That it is a space [where] we’ll see quite a lot of growth in Canada in the next 10 years. The first wave will be in the major metro markets, but now that we have lifestyle boutique brands that are more cost effective to develop and operate, we’ll still see them in secondary markets.

BF: Boutique hotels are a niche play and very location-specific. A lot of the ones we’ve seen that are successful relate well to the neighbourhoods where they’re located. We’ve seen a number of these developed, particularly in Toronto. Montreal had a long history of very successful boutique hotels — a lot of them in and around Old Montreal — but in some of the areas around Toronto, for example Queen E., Queen W., we’re also seeing successful operations. A lot of the time, they’ll be combined with a very strong F&B presence — in fact, more F&B than rooms — and the room count is typically small.

RC: From an economic point of view, how do you feel the Federal Budget will impact the hotel space over the next year or two?

IR: My gut tells me Canada, as a whole, will continue to have a similar velocity to what it’s had over the last year. Speaking directly to hotel owners and getting their sense of what the booking rates and opportunities are, I get a really strong sense we’re going to continue to grow. Canada still offers a really great opportunity, with consistent and stable results — that’s always been the case. Canada is stable and diligent in growing and that offers a lot of security for investors and owners going forward.

KG: We’ve seen more foreign investment outside the U.S. in the last couple of years come into Canada. We’re seeing more overseas capital come in, so I’m not sure it’s a real factor.

RM: [Canada is] seen as a safe haven, a stable market, and people like it. They see it as a land of opportunity.

RC: What’s the primary source of financing these days for most of the operators in Canada?

IR: There’s a lot of liquidity in the market right now. Certainly, in the limited-service and select-service brands, there are a lot of lenders out there — a lot of interest in the space — and that’s driven by a variety of factors. One, the stability of the hotel market as a whole; there’s been comfort built up around that for lenders, who typically hadn’t been in the hotel space and are now spending a little bit more resources towards that. And they need to place capital as well. They need to look for opportunities. It’s driven some interest in the space. There are layers of financing, depending on the projects and how leveraged people are. Valuations are quite high and require a lot more equity if you just stay with a stable first mortgage. Now, saying that, a lot of owners have a lot of capital and can afford to keep leverages relatively low — even with the exceeding valuations. But some of these projects are a little trickier and require unique financing approaches — the bandwidth of financing that exists is quite large in Canada.

GC: Most of our select-service projects are done on a local basis, with institutions in that region, and the larger projects will go to a national financing source. But in some cases, even in the U.S., we’ve found that a regional bank sometimes offers the best rates and opportunity. Hotels are very popular — it’s a real-estate investment and can be underwritten a lot easier because there’s a lot of history — so even regional banks are more interested in doing lending on these projects than they have been in the past.

RC: What will the market look like in three to five years?

KG: Technology is going to drive a lot of what happens, trend-wise. We’re seeing technology change. The fundamentals are strong. There are barriers to entry in a lot of markets, where we’re not seeing the supply we saw in the 1990s. And, as you know, demand continued to grow in the early ’90s. It was supply that really affected our industry and there’s going to be a correction. A lot of it is going to be tied to what happens with interest rates. I’ve never seen the market, real-estate prices in hotels, so frothy. At what point does the carousel stop and there’s a little bit of a correction? Crystal-ball-wise, I couldn’t tell you, but what we’re seeing in our business, and we really like the suburban and secondary markets, is continued growth over the next several years.

RM: The big will continue to get bigger — probably huge. But from an ownership perspective, you’re going to continue to see consolidation, especially with the level of private ownership in this country and succession issues, and more private groups.

BS: The focus on service will continue — not diminish. Ultimately, there will be a pushback from all the technology and the distance between people.

MM: There’s still that element of the human touch, being able to do a face-to-face — which the technology will facilitate but will not replace, and that’s still going to be an essential part of it.

RC: Will the industry have to change further to attract more labour, given the ongoing issue with shortages and the recent minimum-wage increase?

KG: I’m not sure we’re seeing labour shortages. Maybe it’s coming down the pipe, but there’s still plenty of labour available for us.

RW:There are different markets. [For example], we have some markets that are particularly seasonal. I look at our service scores every day because, as much as we’re talking about everything else, it does come down to service. Mr. Marriott talks about this all the time. He says it’s not a complicated business; it’s about smiles at the front desk, clean rooms and great service. As much as we want to deliver that, in some markets, you just can’t get enough housekeepers to clean a room and welcome the guest in the appropriate ways. So, it’s a challenge that we have to think about over the next several years, particularly in Canada — how to really make sure that we have ample talent and workforce availability in all markets and all sectors.

GC: We’ll change the way we’re doing business with personnel. About a year-and-a-half ago, we identified that housekeeping was a core and if you didn’t staff you didn’t get the rooms cleaned and you didn’t get the rooms ready in time for the guests to check in — it went throughout the property, things broke down. I assigned one of our corporate officers, as his primary job for the entire year, to change the way we do business in housekeeping — attracting, retaining and training. We took a business approach, as we would for sales and marketing. We developed a business plan for the housekeeping department and looked at it as stealing and keeping share of the best employees. Now, our productivity has gone up about 20 per cent. Our retention has been improved about 30 per cent and some of the problem properties, we no longer have a problem with. But it was a major initiative and as we find labour challenges, we’re going to continue to look at it differently.

RM: We talked about guest-facing items, but regarding a service culture, [the question is] how do we create that; how do we innovate and leverage technology in terms of training associates? How do you ramp up, get your associates engaged and well trained in a way that they’re ready to receive it? It may not be in a classroom setting; it might be something else. So how do we innovate on that front? As much as I think labour is something on an ongoing operational basis, we always need to keep our finger on the pulse, with a development-and-investment hat on. Labour on the capital deployment side in new construction, is something high on the radar screen of a lot of our investors and owners, given we’re competing for talent with other asset classes. It’s driving development costs up, finding the right skilled talent. How do we mitigate those labour risks from a development standpoint, have easy-to-execute prototypes and help our owners have viable investment cases?

RC: Is there more consolidation coming in the industry?

RM: If I were to stand back and look at the hotel industry as a case study, and within business as a whole, it’s been a very interesting couple of years — definitely more to come. When you look at foreign investment in some brands, you have very strong international players. I’d say there’s at least another 36 months of fun and games ahead of us.

RC: How does Airbnb impact the hotel industry?

IR: There’s an element of consistent [personal]contact that it will never be able to deliver on. As a traveller who travels all the time, knowing what you’re going to get at every corner is a real value proposition for a lot of people. That’s where hotels and brands and the consistency will always exceed expectations.

BF: Notwithstanding the growth in Airbnb, and it has been spectacular, we need to look at the hotel space. We’re coming off record-breaking years. Markets such as downtown Toronto are running in the mid-to-high 70s occupancy. So, while Airbnb has had an impact, [it hasn’t] had a huge negative impact on the hotel space. A lot of that Airbnb supply is very elastic, so will come to market in peak periods — typically when hotels are running at virtually full occupancy anyway.

GC: We have markets where Airbnb is not substantial and other markets, such as New Orleans, where they’re taking over buildings and actually converting them to Airbnb hotels. I do look at them as a competitor, as another segment we have to compete against. Because, let’s face it, Airbnb is a localized experience — you do it because you want to experience what’s happening in that community. And hotels have not ventured into that sector as much as we’d maybe like to, even though we’re localizing a lot of the services and the connections and everything else. There’s an opportunity for us to actually do better in that way. We need to compete against them.

MM: There are lessons to be learned. It’s all about the experiential — making it more local. A level playing field is certainly something that needs to be [addressed]. The hotel associations are doing the right thing in talking about the residential angle, in terms of impact on the residential market and how that impacts them. Part of the issue people have with Airbnb is it’s not a very sophisticated operator — they [advertise] their unit in the busy times, the peak times, but from a revenue management [perspective], they’re not maximizing it and it’s hurting us on that front, too. They need to be playing in a level playing field, and candidly, certain communities or municipalities have taken strong steps, and those are to be applauded, because that’s what it should be.

RW: We, as an industry, need to look at what’s attractive to the consumer about the Airbnb buy and how we can adopt those particular experiences or nuances to our industry. The takeaway is that we really have to study and understand that business model, see what makes sense for us to do and implement and then learn [from it].

To listen to the complete transcript of the Hotelier/Marriott Hotels of Canada Investment Roundtable, visit us online at hoteliermagazine.com

LEAVE A REPLY

Please enter your comment!
Please enter your name here