Photography by Margaret Mulligan

Rosanna Caira: How would you summarize 2016 in terms of high points for your company and for the industry as a whole?

Eric Jacobs: This year is about integration for us and making sure we move things quickly for our owners and our investors as well as our consumers. I know a lot of people thought, when we closed on the deal at the end of fourth quarter of last year, we had everything figured out. The one great surprise for our consumers and our owners was the immediate day-one connection and being able to trade points between SPG and Marriott rewards programs — that was a day-one big win for us. There’s a lot of work to do and I know that Arne [Sorenson] and the leadership team are pushing us, not only to integrate the teams but to integrate the systems and the processes as quickly as we possibly can. He’s got some real mandated dates for us to achieve.

Deepak Rupparell: It was a great year, probably the best year we’ve had since I’ve been in the hotel business. That leads me to think we’re at a peak right now. We have repositioned ourselves and sold a number of assets. We’ve also acquired, strategically, [and now] have 22 hotels in Canada and five in the U.S. We’re at the top of the market [but are] concerned about the global challenges ahead of us and are keeping an eye on the Starwood-Marriott merger to see where that lands — especially the Delta brand in Vancouver.

Kenny Gibson: In 2016, Sunray acquired nine hotels and one development site and we’re doing a number of dual brands as well. In addition to that, we’ve got 14 other brand conversions underway in the company, where we’re actually taking other brands and converting those — many to Four Points, some to IHG products and some Choice products as well. The anticipated growth over the next couple of years is pretty stellar for Sunray.

Monique Rosszell: There’s no question that in 2016, the stars were aligned in terms of the hotel industry. But at the same time, in Canada, it really is a market of contrasts. For example, RevPAR growth in Toronto was about 16 or 16.5 per cent, but RevPAR growth in Calgary was [down] 15 per cent. So, overall for the country, it was very good at five per cent. The resource markets were hit the hardest. Now, because of the low dollar, performance is strong overall in the country and there were bright spots, for example in Alberta, where there is strong RevPAR growth in the tourist markets such as Banff. On the lending side, the liquidity of capital out there is very good. We’ve been looking at the possibility of interest rates going up and it hasn’t happened so from investors’ point of view, they’ve got strong performance and, on the lending parameters, it’s very much in their favour.

Mark Kay: [Last year] was very active in two segments. The first was on the acquisition side; a lot of the acquisition we have been supporting is on the repositioning. We’ve seen a fair [number] of hoteliers buying assets at a lower per-key [price] and spending a fair amount of dollars in either the PIP or rebranding. The other segment is construction financing. Because of liquidity in the market, we are supporting a fair amount of construction financing in the GTA, as well as secondary markets in Ontario and parts of B.C. There are a lot of new hoteliers that want to come into the market, as well as foreign buyers, and the market is supporting them by giving a bit more leverage than it used to. Roz Winegrad: We were just getting to the one-year mark of the Delta acquisition, which really put the Marriott regional team in Canada on the map and gave us enough scale to establish ourselves in Canada. Shortly thereafter, we acquired Starwood. A couple of years ago, we could have [all] our owners around a small table — we didn’t really have enough size or scale to build process around structure. Now we have 215 hotels and are the third-largest fee producer for Marriott. In the last few months, we’ve seen an increase in transaction volume in our portfolio of hotels. Nearly 10 per cent of the franchise hotels right now are in play and being sold with very quick transactions, which has been really surprising given everything that’s going on. Sukhi Rai: In B.C. we had a great year, one of our best years ever. We had some benefits in 2016 in Alberta because we’re developing almost 1,500 rooms at this time and our cost of building is a little bit cheaper, but we look forward to 2017.

Alam Pirani: If you look at 2016, it’s the second-highest on record over the past 25 years. Transaction volume reached $4.1 billion. You’ve got to strip a couple of pretty significant transactions out of that to look at the traditional volume, but if you look at the $4.1 billion, there were three significant, and strategic, transactions. The acquisition of the Four Seasons’ hotel by a private investor out of the U.S.; the acquisition by APA Hotels of Coast; and the most significant was the privatization of InnVest REIT by Bluesky Hotels and Resorts. If you look at that volume relative to the total $4.1 billion, it represented two-thirds — pretty significant and, interestingly enough, we classify those three transactions as foreign capital. But if you then look at the traditional volume relative to prior years, we also saw a significant increase. One of the metrics we measure is the price-per-room hurdle. Averages can be deceiving, but it’s a telling point that number reached close to $100,000 a room. For owners around the table, that’s good news, because valuations are going up.

RC: What is driving that kind of volume in the market?

AP: If you dig down deep at the investment capital that is coming out of China, that’s a significant factor. It’s a global phenomenon. When we analyzed real capital analytics data and looked at the volume in 2016, the number is close to $35 billion. [Interestingly], of that $35 billion, 10 per cent was capital that came into Canada. Historically, it was an insignificant percentage [but it’s] an interesting factor. If you look at the motivations behind Chinese capital investing in global markets, there are a couple of things that emerge. One, they’ve invested in mature markets in the U.S. historically, and Europe, and the second is they’ve invested in hotel brands. If you look at the devaluation of the yuan relative to the U.S. dollar, it’s declined 10 per cent.

We can’t lose sight that there is a significant amount of Canadian investment being made. These are owners who have owned hotels and continue to own hotels. There is a tremendous amount of domestic capital that is reinvesting in the business [because] yield premiums relative to other asset classes are significant — close to 200 basis points, relative to an investment in an office or a retail or multi-res. Where we see a lot of investment is clearly in the full-service and the select-service. There’s a significant amount of capital that is going into that sector [but] the challenge is lack of product.

RC: What are the major trends impacting today’s hotel brands?

Adrian Mauro: One of the things we’ve seen is the co-branding in hotels. It’s been a big part of our work in the last year — from an architectural, construction and brand sense — trying to make sense of where this is going and find the smarter mousetrap. From the first one we did in 2008 — the Toronto Airport Hampton and Homewood combo that was two buildings joined at the hip — it’s evolved to a whole different level.

EJ: Five to seven years ago, we weren’t ready to say [co-branding] was a trend, but today at Marriott, and this is just in North America, [we have] about 180 projects open or in the pipeline that are in some level of either dual-branding or tri-branding. The LA Live project, which is a JW, a Ritz-Carlton and then a Ritz Residences, is really a tri-branded hotel, but we’re under construction in Nashville with an AC and a Springhill and Residence Inn all in one development. We prefer our brands in the same development. There have been some co-branded with some competitive brands, but those are very few and far between. We’ve just completed a study [of] consumers — how are they viewing the brands and are they finding confusion in that? And, quite honestly, it was really good to see that they don’t.They see the value, they like the shared spaces. We’ve seen a lot of synergies, a lot of cost savings, but most importantly, the consumers are the ones seeing the benefit.

RC: Barring any unforeseen circumstances, 2017 is expected to be a strong year. Based on what you see in your company, do you agree? And if so, what global/domestic factors will impact that?

RW: There is a TBD in terms of the impact of what the new U.S. president and his policies will have on travel globally, and in particular in Canada. We’re hearing anecdotally that travellers are not as eager to go to the U.S. from Canada, with fears of not being able to get back, or in. However, Canada is still a top destination and we’re not even seeing the tip of the iceberg of what it could be in terms of travellers coming to Canada versus the U.S. Given the dynamics, we’re going to see a lot more travel from Europe, Asia and the U.S. into Canada. We have an opportunity to reap the rewards of the global and neighbourly political climates and I’m very optimistic we’re going to start seeing that. AP: If you look back over the last few years and analyze inbound capital from the U.S., what’s interesting is, besides the Four Seasons acquisition last year, and prior to that the acquisition of Fortis by Westmont and the Capital Partner of the U.S., the U.S. capital coming into Canada has been insignificant. There are a number of factors there. The first is, if you look at the yield premiums relative to what you can get in Canada, that’s why it’s kept U.S. capital in the U.S. Also, the currency risk, as well as the cost of hedging, has been a huge factor. But the most important factor is that, when you look at Canada relative to the size of the U.S., we’re still a relatively small market. And unless there is a significant acquisition opportunity, you never see U.S. capital focus on Canada — that’s going to continue. Relative to where the dollar is today, that’s [not] going to be the only factor that motivates U.S. capital coming into Canada.

RC: Where do you see most of the growth happening on the hotel side in this country? Where is most of the development happening?

MR: Most of the development happening going forward is going to be in Ontario. There are about 60 hotels in the pipeline for Ontario, 45 for Alberta and about 15 in Quebec. On a hotel unit, it’s in Ontario, but on a percentage basis, it’s still only four per cent. So, although Alberta has fallen behind for the first time in quite some time, it is still at eight per cent in terms of growth over the next three years because it has a much smaller base. The overall growth is going to be in terms of types of hotels and the greatest percentage is going to be in the upper-midscale — more than two-thirds of the new supply are in select-service. The next category would be the luxury segment — there’s about two per cent coming in. In the economy and the midscale, there’s very little new supply coming in, so it’s the select-service and the extended-stay [where] we’re seeing tremendous growth, because typically Canada has not had nearly the same proportion of extended-stay supply as the U.S. and we’re catching up.

MR: It [comes from] a mixture [of existing owners and new people in the market]. The repositioning that we were talking about, or the co-branding that we’re seeing, those are a lot of existing owners. The new owners are new builds coming in. A lot of the luxury development, again, are new owners into the market, often not ever having been in the hotel space before. MK: We’re seeing a flurry of activity in the construction, financing side. In Ontario alone, we have around 20 projects on the go this year. We have a few in the Maritimes as well, and a couple out West. We are looking at some select to full-service and about 30 per cent of it is from foreign [investors] and first-time hoteliers getting into the space. We are seeing a movement on the retail developers, because they are in a transition right now and are looking at ways to increase their niche in the market by partnering with hoteliers. For foreign developers, they’re coming into the midscale market [and don’t] necessarily have any assets here. From a finance perspective, it’s quite unique because we have to look at it as a non-recourse basis. And they’re coming in with a fair amount of capital that they could put down — 40 to 50 per cent at any given time.

SR: Right now, we’re still heavily based in Alberta. When we look at the numbers out East, development costs are still very high. We are looking at asset classes in Vancouver or smaller urban centres such as Burnaby these days, where the numbers did not work a few years ago. Now in a mixed-use, we’re trying to make them work. We’re trying to grow in that segment in smaller urban markets. RC: Where are you looking to expand in the coming year? What are some of the challenges in those areas? SR: We have a big portfolio in the Okanagan [and] we’re planning to put more brands in that area then come back to Burnaby, New Westminster. Downtown, the land cost is way too high. I’m [in Eastern Canada] twice a month looking at different locations, but we’re still just getting our head around it, how those development costs are coming in. When you’re paying $25,000 to $40,000 a key for just DCCs, I don’t know how the numbers are working. AM: In Ontario, the challenge is that the development charges are stifling development. We’re seeing a very active construction industry and a hot development market here, so construction prices are starting to rise. With the province looking to urbanize cities, there are less and less new lands being developed, so redevelopment into existing cores is a big part. It’s a whole different way of looking at development there today — you’ve got to look outside of the box and find [solutions] that may seem obscure. You’ve got to find those markets that are not obvious, because the obvious ones are gone.

EJ: This year [we’re opening] roughly 30 hotels here. About one-third of those are Starwood legacy brands, versus the Marriott brands. You’re going to see our first Tribute here in the country and our first AC will open in downtown Montreal. We’re excited about the pace that we’ve gone [but projects] are taking longer to get through the development process and, again, owners are having to be more creative about partnering on sites, mixed-use, co-branded —maximizing the value of that real estate when you have those heavier costs.

MR: [Although] it sounds like there’s all this new supply coming into the market, because there are a lot of projects under construction, there are a lot of major markets that have actually seen negative supply growth over the last few years — that don’t get recognized in the pipeline until they actually happen. For example, in Toronto, we’ve got about seven hotels in the pipeline, 1,100 rooms, but we’ve got two or three major hotels in Toronto that may see demolition or repurposing that will completely wipe out that new supply, and we’ll probably be in a negative supply position again. We’ve seen the same thing in Ottawa and Halifax. Overall, in 2016, there was about one-per-cent supply growth. This year, we’re looking at 1.5 per cent.

[The market is] not saturated. What’s difficult for urban areas is land costs, and it just doesn’t make sense for standalone hotels to be built in Vancouver or Toronto. It’s starting in Montreal as well, and probably will move forward to Halifax. So, that has caused barriers to entry, and we’re seeing a lot of new supply in secondary and tertiary markets, because the land costs make more sense.

RC: Are we going to see less actual new builds, as opposed to conversions?

MR: Or developers have to be become more creative in terms of the co-branding, where you’re able to maximize your efficiencies, building condos as well as hotels, so that the condo helps subsidize.

DR: Our company, traditionally, does not develop — we have been acquiring and repurposing. But we did build the first Aloft in the Montreal Airport, followed by one in Vaughan, and what we found was that, by the time we finished building, the valuation … it cost $17 million to build in Montreal. But last year, the valuation was $12.5 million, a negative valuation, because of the supply issue. The challenge in Canada is that development is very difficult. Costs are very high, and the income is not there to support it right now. We are finding that we are doing more deals in the U.S. We’ve developed five hotels in the U.S. in the last two years. The fundamentals are still pretty good in some markets, and we’ll continue to develop there. Here, we will look at selective developments, but it’s very difficult. Development charges are $25,000 a unit and construction costs are approaching $175,000 a room, all in.

RC: There’s been a great deal of talk about select service in recent years. Is that a continuing trend? Is that still where the money is in terms of building hotels?

AP: If you look at the U.S., that’s been a market where there’s been a significant amount of institutional capital that is invested in that sector and recent investment by Blackstone in its very significant way, as well as Starwood capital, has legitimized that asset class, because historically, the perception was institutional capital is focused more on full service. But, those are very interesting trends there because, if you look at the resiliency of that sector through downturns as well, most of the decline you see in NOI is in full-service hotels during a decline. If you step back and look at institutional capital investment in Canada, bringing it back to our backyard, with the exception of Concord, who were probably the first guys in the market doing the focused-service Marriott product with their capital partner, there really has been an absence of institutional capital in that sector. If you look at the extended-stay segment, we’re so underserviced in Canada, so that that is where the majority of the growth is going to come and hopefully there will be larger players that will participate in that segment.

EJ: I think the labour issues we’re having across North America drive some of this decision-making for institutional investors today. They realize they can have a 300-room hotel with a third of the associates. And particularly with this last real-estate cycle, although we’ve seen it in the last two or three, the trend is NextGen, millennials — they don’t want to live in the suburbs anymore. They want to live, work and play downtown. That’s driving some of the real-estate trends we’ve seen across North America and the hotels are no different.

RW: [Select-service is also being driven by] the operating costs, and from an operator’s perspective, once it’s built it’s a lot more lucrative to run, generally, unless it’s a unique full-service asset in a very strong market. The overhead is less, the NOI is generally more and it’s less complicated to operate and easier to scale.

EJ: In [some] markets, where the barriers to entry are high, to develop the most cost-effective labour model on an ongoing basis, many times we see our select-service hotels drive the same ADRs that a full-service hotel would. It’s really a supply-and-demand opportunity — we’ve been able to drive incrementally higher ADRs than we’ve traditionally been. Our average-size hotel that will open in Canada is about 20 per cent larger than we see in the U.S., on an average basis, on a select-service.

MK: We’ve been supporting a fair amount in the secondary markets for select service. We’ve found, over the last few years, the performance has been quite stellar compared to even the cost to build. We’re seeing ADR is $140 to $150, occupancies are 75 to 80 per cent and they’re grabbing the market share. RC: What would you identify as the top trends driving the industry?

AM: We’re in a sustainable environment and sustainability is not just [about] getting eco-carpets or eco-paints — it’s actually using our space and our land effectively. We’re going to be challenged with room sizes moving forward and we’re going to move into the European model. I see room sizes and the whole spatial expectation of hotels being challenged.

AP: [Another] trend we’re going to start seeing is [growth in] communal space. We talked about millennials, and I think their desire to have more communal space in hotels is certainly something we’re going to see more of. EJ: That trend is here to stay, at least within the millennial world. You’ve got to think about how we all travel today — we work all the time, everywhere we want to go, even when we’re 35,000 feet in the air. I can land at night and not have 100 emails to have to go through. I’ve got more free time, so I don’t need to spend it in my guestroom and I want to spend it in a public space — places for people to work, have a cup of coffee, a drink, socialize, watch TV, be on Facebook and do it all. It has changed the way we are approaching hotels and brands. When you think about the NextGen millennial traveller, when you check in at a Moxy, you check in at the bar. You have a drink in your hand before you have a key in your hand.

RW: The notion of experience is something we’re going to start hearing about more. It’s an extension of this community design that we have in many hotels. We are talking a lot about how to increase the types and level of offerings of experiences that transcend what you would expect at a hotel RC: Are you a concerned that millennials will choose an independent hotel over a chain or an affiliated-brand hotel?

EJ: Millennials like brands just like every other generation does, but it’s also the experience — they have an expectation around it but it doesn’t all have to be the same. We’ve been very deliberate over the last eight to 10 years that, while you’re developing a Courtyard, it should feel local. So, while we have the brand pillars and the brand promise of what we need to deliver on, does all of the public space need to be green and red? Absolutely no. I’d say two-thirds of our select-service pipeline today is, in some way, custom done to meet that kind of local look and feel.

RC: Are the hotel operators on the panel worried at all about Airbnb?

DR: The concept of Airbnb is not an issue at all — it’s a welcome addition, from a hotel point of view. But it’s the unfair playing field — they don’t pay property taxes, they don’t have to abide by fire code, disability laws, safety, security. We have a hotel downtown, the Pantages Hotel, where there’s a lot of Airbnb going on. We have no control of the customer and the condominium residents actually got upset. Although they’re welcome and they’re in the space they were originally intended to, if they want to become a hotel company, then declare it and pay the property taxes. We’re more than happy with that.

RC: In terms of the hotels being developed, where is financing coming from these days?

MK: It’s a wide range, but each lender has their own bucket. What the hotelier’s investment horizon is going to be and what economic stage the hotel is at, really depends on what kind of lender you end up choosing. For the hotelier that has a stabilized asset, a large portfolio, well experienced and they want to be de-levered, then we have institutional type of lenders that can come in with rates in the mid-three per cent. For the hotelier that is on a hyper-growth, where they don’t mind paying a bit more on yield to take advantage of leverage, you can achieve 70 to 75 per cent of leverage, paying a bit of a premium on the yield.

SR: Financing has become tough in some markets throughout Canada, especially in Alberta. Lenders are not lending to new operators. If you’ve got a relationship with them, they will lend, but I know a lot of projects in the pipeline that are not moving because they’re not getting financing, and the majority of those owners are one-offs, or they’re just trying to get into that game. So, those owners are partnering with groups like us or other developers that have a large portfolio to bring the financing to the table and becoming 50/50 partners.

KG: We’re finding financing plentiful, at attractive rates. We’re currently talking to a couple of [owners] that are new to the business and need a partner in order to obtain their financing. But generally, we’re able to, just depending on the project, achieve 70 per cent financing fairly readily, at attractive rates.

RC: What are the most important factors that shape your investment decisions?

KG: We tend to look at acquiring hotel projects that are under-managed, under-branded and under-renovated. Obviously, the debt is an important factor, and we’re not necessarily fussed as it relates to what kind of brand is on the hotel, because we really think there’s opportunity in the market to find hotels under-branded and bring those to a different level.

MK: From the lending perspective, we rely on the reservation system, the loyalty system — that helps get the leverage. On the boutique, you’re relying, again, on the feasibility study side that helps how it’s going to penetrate the market. So, it will be between 15 and 20 per cent differential on leverage, for your average party that wants to penetrate the independent market. RC: What do you see as the long-term economic outlook in the next three to five years for your company and for the industry?

RW: From a Marriott perspective, I am excited and optimistic about what’s going to happen in the next three to five years. We really can’t even imagine, barring any global change or risk, what the business will be like. I think about where we are from a technology perspective and a customer shift perspective. We’re not going to be talking about millennials because in three to five years, they will be our core customer. It’s really exciting to think about the innovations and the developments that will happen. For Canada, we are untapped, whether in our primary markets or the secondary markets, and the opportunities are phenomenal in terms of unit growth and ADR growth.

AP: While we’re optimistic about the market, we have to be cautious about certain factors. If you look at the fundamentals, from a growth perspective in major markets, such as Toronto, Vancouver and Montreal, and at demand growth in’17, ’18 being strong — the one thing we have to think about is supply. We looked at the 17 major markets across Canada and in the last 10 years, average growth in supply has been no more than 0.5 per cent. That’s taking into account the closure of hotels, because that’s a metric that you really have to look at. If you look at ’17 growth it’s one per cent, ’18, it’s going to be 1.5 per cent. Relative to major markets in the U.S., it’s insignificant. So, we are optimistic from that front.

We have to be cautious about some of the sources of capital coming into the business. These are first-time developers that want to be in the business because friends are in the business.

The other factor that we have to continue to look at is ongoing consolidation. Marriott has set the stage with the acquisition of Starwood. If you think about the market cap of Priceline Group, it’s double the combined Marriott-Starwood market cap. If you take the three largest hotel companies, Marriott, Hilton and Hyatt, the numbers work out to $60 billion. Priceline is closer to $85 billion. Constant consolidation in the industry is something to look for.

KG: I’m bullish on what’s happening in Canada, for a number of different reasons. First, as long as supply is constrained, it bodes well for the operating business. And, if you go back historically, even in the worst of times in the hotel business in Canada, demand continued to grow. It was supply that affected the performance of the hotels. As long as interest rates continue to stay where they are, it’s good for us. And the low Canadian dollar does a lot for our business today — it keeps Canadians at home and gets Americans coming here. One thing that is concerning is if you think about where hotel values are going on a per-room basis, it’s getting pretty lofty and a lot of that has to do with money coming in from China. We’ve seen a lot of Chinese investment and it makes it a bit more difficult for us to grow.

EJ: For us, the outlook is strong. Debt is still available at good rates, whether it be Canada or the lower 48; supply growth has still been below the long-term average in the U.S. in terms of, although demand is starting to wane a bit. It’s fairly concentrated within three brand companies. They have about 75 per cent of what’s under construction in North America today. Marriott has one-third of that; so we’re excited about the next three years. DR: The next two or three years look stable, but we worry about the disruptions in the geopolitical arena globally. We worry about the discussions of giving up our real estate into the digital world out there, the OTAs — we’re giving up almost 10 to 15 per cent of our revenues to them. How do we contain that? I also worry that we need to have a rate increase in all our markets, minimum 10 per cent, just to keep up with costs. Labour costs are three to four per cent, with benefits rising, property taxes rising. Utilities are a big one in Ontario — we’re seeing utilities jump 20 to 25 per cent.

MR: We’re anticipating [Asian travel] will have an impact in the next three to five years. As long as lending fundamentals stay where they are, or not become too conservative … certainly on the performance end, the globe is becoming much smaller, and the need for hotels is growing. So it looks very positive. MK: From a lending perspective, the variable rate, the floating rate, is expected to be fairly flat over the next 12 to 24 months, which supports the construction development side of the industry. We have seen a slight movement in bond rates. The five-year money has been increased about 50 basis points over the last eight months and 10-year bonds have increased about 80 basis points in the last eight months. It’s difficult to speculate three to five years from now. If rates remain fairly flat, or long-term rates remain fairly flat, then it’s pretty robust. If rates increase a couple of percentage points, there may be a bit of adjustment period for the hoteliers.

SR: [Last year] was one of the worst years for Alberta [but] we’re looking forward. In Alberta, there are some big announcements that our Federal Government has given with regard to pipelines. The next three years look pretty strong for us to grow more into those areas where it’s under-served or the product is old.


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