Rosanna Caira: How would you best characterize 2018 for your company?
Don Cleary: For Marriott, 2018 was the year we unified and consolidated our merger with Starwood. We also merged our loyalty programs into one combined loyalty program [Bonvoy] that’s now 125-million members strong — 5.7 million in Canada. And then, more significantly, we put all the Starwood Hotels onto the Marriott platforms and reservations. In Canada, we continued to see good results in the hotels and, for us, the economy remained good. The hotel performance in Canada saw another strong year. And, I’m proud of our teams — that they managed through all of the integration and still put good numbers on the boards. So, it was, overall, an excellent year for us.
Reetu Gupta: [As] franchisees of Marriott, we felt that aggressive changeover, but it was good for us, because we completed two renovations last year — the Westin and the Four Points — and also had to dovetail that into changing over all of the systems, as well as the rewards. But it worked out well for us and for our guests, because it was information that was constant, as opposed to a really long year, or three years, or a four-year process. It was very successful on our side as well. In terms of the economy, Easton’s had a very good year. The national occupancy for Canada last year was about 67 per cent and we were above that. We were also just above the national ADR. So we had a good year.
Melissa French: Yes, 2018 was another good year, softening up a little bit from what we were seeing in ’16 and ’17. Throughout the year, we had a lot of renovation projects ongoing, as well as property improvements, and the demand was still there. We saw a little bit of softening of demand in Vancouver and Toronto in the last couple of months of 2018, which opened up some concern for risk in 2019. But, overall, 2018 was still good.
Joe Reardon: We had about 25-per-cent growth in our overall portfolio last year from a hotel perspective. We’ve engaged more in an ownership role and did a strategic alliance with a private-equity group on the West Coast, called Virtual Partners, which allowed us to have an infusion of capital for purchasing assets. We’re looking to infuse capital into Canada this year specifically, as we’re building our regional office. Overall, from a top-line perspective, as a portfolio, we outgrew our competitors at 5.5 per cent last year in markets as an aggregate and we continue to be focused on making sure we’re putting our dollars into the right markets.
Alam Pirani: [Last year] was an interesting year. When you look back two years prior, we had some massive strategic transactions. Overall transaction volume [in 2018] was about $1.5 billion — not insignificant, but not as significant as the prior two years. But the thing that’s become evident is that you’ve got a very strong domestic-investment component in this market and that continues to have an appetite to invest in markets. In primary markets, you don’t see a lot of product trading — there were about 120 transactions last year across the country and very few that were in primary markets such as Toronto, Vancouver and Montreal. But there was a tremendous amount of activity in the secondary/tertiary markets. For our firm, it was great, because with our offices across the country, we were able to transact 33 hotels across the country and were involved with the recapitalization of the portfolios of 10 hotels. So, overall, 2018 was a great year. From an operating perspective, I don’t think we’ve seen a more profitable period in the last 25 or 30 years.
Ed Khediguian: [Last year] was [GE Canadian Franchise Financing’s] second full fiscal period under [CWB] and we surpassed our peak year of originations that we had at GE in 2007. So, you get concerned about that, to a certain extent, because we’re also in a dramatically different environment — at least from a liquidity perspective in the hotel space. I haven’t seen as much liquidity in all my years, so there’s a ton of capital entering the hotel space, effectively going from other traditional real-estate sectors of multi-res and industrial and office that have much lower yields. They’re chasing higher hotel yields. And, with the stability in the performance of the industry over a fairly protracted period, some of these investors have not necessarily lost perspective of what potential downside might be in that risk premium, so they drive that premium down. But we had a terrific year last year and we’re set to surpass last year’s originations in a very competitive and liquid environment, with actually half the size of the team. So, there’s hopefully some room to grow.
Monique Rosszell: HVS saw about a 25-per-cent increase in our fee volume and that’s mainly in Eastern Canada. It shifted because of the oil crisis and the less-strong performance, particularly in Alberta. The volume of transactions three or four years ago was more centred on Western Canada. [Now] it’s come to Eastern Canada and, as a result, there’s been a lot more action — from an appraisal standpoint — in Eastern Canada. But because hotel performance is so strong, there isn’t a lot for sale, so we’re seeing a tremendous amount of development. If you can’t buy something, everybody is building.
Jon McGinn: We have so many projects coming in the door — from limited-service up to full-service — across Canada and into the U.S. that our biggest challenges are trying to find people to do the work, more than anything. Even from a construction point of view, we’re building and drawing more than we have in the last 10 years. We’ve got a few really good clients out of the U.S. and we’re doing three and four hotels at a time for them. It’s a different saturation there.
RC: What does 2019 look like from your perspective?
AP: I’m an eternal optimist — always cautiously optimistic. But I look back at the cycles we’ve been through and, when you look at the fundamentals in the market today, economic growth and debt…yes, there’s a lot of liquidity in the market, but it’s nowhere close to the type of leverage we saw in the late ’80s. And the sophistication of the capital that’s investing in the market is totally different — it’s smart money, not that tax-driven, limited-partnership structure that fuelled a lot of activity in the late ’80s. In the early ’90s, we couldn’t give away hotels. Today, there’s such a significant amount of appetite. You’re dealing with a much more sophisticated investor base and, barring any major macro event, fundamentals are strong. Look at Toronto today — we’re finally a world-class city. We’re finally seeing rates where they should be, comparable to major markets in the U.S.
Paul Loehr: We’re off to a good start from a development perspective. From a growth perspective, we try to be strategic about how we think about growing and participate in four segments — luxury, upper-upscale, upscale and upper-midscale. The opportunities for us are in the upper-midscale space and a lot of secondary and tertiary markets have great opportunity for our brands. For us, from a growth perspective, we find when things tighten, we see less new-build construction and conversions become more appealing to investors that want to move into our brand. That’s a shift that takes place over time.
RC: What are some of the factors fuelling this growth?
MR: With the more strict policies in the U.S., in terms of nationalities and visas, et cetera, Canada has benefited from [increased] conference demand. Year to date, in 2019, numbers are up again. One thing we haven’t really touched on, which is driving a lot of this, is the cost of land and the fact that there’s no more land available in the major cities. It’s a huge barrier to entry and it’s pushing rates up, which is great for the industry.
DC: In the hotel business in Canada, I see good runway ahead still, because demand still exceeds supply growth — that’s the measure for us in terms of the health of a market. The reason supply hasn’t been as great in Canada is the cost of land. You were competing with a very hot real-estate market. So, looking forward, I see that continuing. And Canada, as a brand and as a destination, is also hot, with more than 21-million visitors — an all-time high — in 2018. It’s an attractive leisure destination and it’s very inclusive and inviting. So, that’s what’s fuelling [growth] and as long as that supply-demand balance stays in check, you’re going to continue to see healthy RevPAR numbers for the foreseeable future.
RC: Do the actions of U.S. president Donald Trump — the so-called Trump factor — impact the Canadian market?
RG: I’m seeing that a lot. My brother and I also have a private venture-capital firm, so we work with a lot of start-ups and a lot of them, although they have an American background, are starting their base in Canada for so many reasons — political, cultural, et cetera. We’re seeing that Canada is a place for thriving businesses, for entrepreneurs, for start-ups. We finally got to this place where we’re a world-class city, so I don’t see a decline, hopefully, anytime soon.
MF: When you talk about the Trump factor, as well, with immigration and visas, we’re seeing the travellers coming internationally are choosing Canada. So, you’re seeing [travellers from] Mexico, as well as emerging markets, such as China and India, coming to Canada instead of the U.S.
JM: On the flipside, because of some of the uncertainty [in the U.S.], we’re seeing a lot of clients looking at the Canadian market from the U.S. side that are thinking about coming north for two reasons: some of the political uncertainty and, also, the dollar. When they start looking at the fees and the cost of construction and then understand they’re going to get a 20-per-cent or 30-per-cent bump on that, it’s interesting. We’ve had a few [clients] come up and tour the Toronto area [recently], particularly out of the Nashville and Georgia areas.
JR: Demand is up almost two times on the supply. [As a result of] the high barrier to entry in some of the major markets, we’re seeing a lot of growth in the secondary markets. We see the group-convention [market] coming back again this year and being strong. GDP is up almost two per cent. To everyone’s point, there’s a good runway ahead of us here.
RC: What are are the biggest challenges facing the industry today?
MF: It’s always about the people and finding good labour — right from our frontline, struggling with housekeeping particularly, but all the way up to our top executives — attracting good people to those key roles [is a huge challenge]. With emerging markets [where we have] boutique hotels, there aren’t people in the market who have the training and the expertise to run some of these properties, so we’re looking at other options. Labour shortages will continue to challenge us if we are, as an industry, not looking for new ways to attract good people.
RG: Going back to the international travellers, we’re finding a lot of people want to use things such as Alipay, so hotels really have to be ahead of that technology — to make sure they can accept all visitors and all types of payment. Last year, we had an issue with Expedia and Booking.com fraud bookings coming through from overseas because no one is updating their technology. When we looked into it, Expedia said it was happening across North America. Since hotels are [lagging] in terms of technology, a lot of companies are thinking of tech that hotels should be thinking of on their own.
JR: It’s still about the people — that’s the business we’re in. It’s important to tap into universities, understand our next-generational leaders and pour our training programs into them. They can come in and really make an impact on Canada — from the hourly positions all the way up to the managerial or regional positions. We have to continue to showcase career paths for people in the hospitality industry. Watching the wages is important, but right now, [the challenge is] workforce development for us, in the U.S., as well as in Canada — it’s getting people interested in the hospitality business again.
DC: The biggest challenge we have is employees. We’re still fairly successful in Canada when it comes to attracting hourly workers, as we have a strong employer brand. And there’s Prince’s Trust, which is a charity that gives at-risk kids the chance to train for hospitality careers. The Hotel Association of Canada has partnered with Destination HR to match refugees with job opportunities. We’ve also partnered with high schools in Calgary to get students into a culinary program in high school and get them interested in that area. Similar to restaurants, our hotels struggle to find culinary talent. But we also struggle to find senior leaders and that’s a function of the great growth that’s gone on in Canada — there’s a limited number of those experienced people. We have a lot of Canadians working in our hotels in the U.S., and I’m trying to get them interested in coming back, but unfortunately, too many of them get used to the sun and the tax rates in the U.S. But that’s the area with the greatest opportunity and we have a lot of work streams to begin to attract experienced, talented people to come to Canada, in addition to developing the Canadian talent we have. If we’re going to meet our growth targets, we’re going to need to attract more people to the Canadian hospitality industry to deliver the level of service and sophistication that everyone around this table wants to [provide] in our industry.
RC: What does the hotel industry have to do differently to appeal to millennials?
DC: We’ve piloted [a program] in the U.S. — and are beginning to do it in Canada — for young people out of school. Instead of giving them a housekeeping job, where they work every day in housekeeping, we’re training them in multiple areas of the hotel. So, they’ll work in housekeeping, but they can also work at the front desk or in banquets and they learn more that way. It’s a more interesting job and it leads to quicker progression into the management ranks.
RG: I’m on the Ryerson University board for the [Ted Rogers School of Business Management] and they have a great hospitality program. The one thing they’re noticing is that a lot of millennials don’t even understand the hotel business. One of the programs we’ve launched this year is in sales, because a lot of the hotel experts said these people come in and they don’t know how to sell anything. And, in the hotel industry, it doesn’t matter what department you’re in, you’re selling yourself, the property — you’re selling something. In terms of addressing their needs — their needs are constantly changing and I find that generation [doesn’t] have a lot of longevity when it comes to work. They’ll work one place for a year and a half, get bored, leave, try something else. So, at Easton’s, we’re trying to make sure we grow from within.
JM: We’re obviously coming from a little different segment, but we get interesting questions about benefits. They want to talk about using benefits towards yoga classes or lifestyle fitness [programs]. It’s a different thought process on the traditional dental, healthcare-type benefits, being able to add some of those things, or daycare-type benefits.
RC: With so many new brands, is there a trend toward brand fatigue in the marketplace?
MF: We have to be cautious, because the swim lanes, if you will, are starting to blur and our people in the field are often saying guests are confused. They’re not always seeing the differences between the brands and what they have to offer and, in all the segments, there are so many different options that have very similar characteristics, so as a brand, they’re not really sure what the differences are or where their loyalty should be.
EK: You can only have so many core brands in particular markets. But, if it’s a strong-performing market where there’s some creativity, a stronger owner-operator who wants to position in there can leverage off the infrastructure of a brand, but be creative on the execution and the content because, at the end of the day, the consumer is confused. We’re confused, as industry professionals, on the brands, segmentations and positioning. The consumer is super-confused. It all comes back to execution at the property level, from a content perspective. So, the brand is bringing in discipline and infrastructure to execution, while the operator on the ground is driving content. That’s why the off-brands, the soft brands, are doing more business.
RC: Which segments are working the best for you?
PL: As far as picking the strongest, we have the greatest concentration in the upper-upscale. Luxury is an opportunity, while our upper-midscale brands, such as Fairfield Inn and Suites and Towneplace, are growing as well.
AP: From an investment perspective, if you look at the growth, what’s driving a lot of that is, frankly, the brands. Everyone wants to own a Marriott and that’s what’s driving it. Segmentation is another issue — 10 years ago, we didn’t have that, but today, as our market matures, you’re going to see a lot more of it. A prime example is extended-stay in Canada; it’s relatively new in our business in Canada but huge in the U.S. So, when we started seeing extended-stay in Canada, it was driven towards that upper end. Today, [the segment has] significantly more growth potential, because it’s at that lower level where you can justify a lot of development.
RC: Do you see growth in soft brands?
PL: We see tremendous growth, but it has to be unique, it has to be independent and it has to be different. We do see great opportunity for it across Canada.
RG: There’s room in the market for all of this. The demographics of Canada are changing so quickly — everybody has a different need — so the benefit of having these [soft] brands is to addres who wants what. I understand guests are confused, but they need to educate themselves.
RC: Is select service still a growing segment?
MR: The greatest amount of new development is in select service — and that’s in the secondary and tertiary markets, where full service is just not feasible from a cost perspective. There’s no question, the operating model for select service is also much more profitable in terms of overhead, so it will continue.
EK: Not necessarily. We’ve done a ton of them and they make sense, to your point, relative to markets where it doesn’t make sense to build a full-service hotel. It also makes sense in urban cores in mixed-use developments, where you don’t need a full-service hotel because the ancillary mixed-use brings in most services that alternatively would be within the full-service hotel. In the suburbs, the biggest issue is barriers to entry. So, you have to differentiate yourself within that segment and the whole select-service segment is getting more and more sophisticated. The ability to build creates a lot more competitiveness and more creativity in that segment and that’s what we’re going to see going forward.
JM: All these select-service products, five years ago, were on the side of the highway — five-storey, block and plank, real quick and fast. Now, we’re starting to see add-ons — such as a restaurant or a banquet facility — to a traditional brand that wouldn’t see that type of feature. [For example,] we’re [working on] a combo hotel — an oceanfront Residence Inn and Courtyard. You didn’t see projects like that before. We’re doing a lot of projects across Canada and the U.S. with those types of mixtures.
JR: We’re actually working on a dual-branded project right now in Langley, B.C. The uniqueness of the select service is that it’s no longer just a highway hotel or a bricks-and-mortar situation. We’re doing some unique, dual-branded projects right now that have a rooftop-bar concept or a restaurant and retail on the bottom. We’re also going into urban markets and creating that whole experiential-travel opportunity for guests to be able to stay in a select-service hotel, but when you walk into the hotel, it’s not the traditional one that you would have seen five years ago — it’s changed a lot.
AP: From an investment perspective, it’s clearly a segment that has the far-superior returns. When you look at Canada and the relative newness of this product, I always compare it to the U.S., which has larger owners of focused-service/select-service hotels. Why? Because it’s the most profitable and the most liquid when you want to get out. From that perspective, that’s why you’re seeing a lot of growth in the Canadian market and, in terms of that investment size, it’s the ideal size for groups that have the capacity to build on their own. That’s the segment [in which] we’re going to see significantly more development.
RC: Where is growth currently happening in the country?
RG: We’re in Ontario and Quebec right now and are always looking at other opportunities. We do want to get into the U.S. eventually, but because of the ‘T’ word, we’re waiting on that for now. In Toronto and the whole Greater Toronto Area (GTA), there’s so much growth. The Markham area is built up, Scarborough is getting there, Woodbridge, Mississauga — everything on the outskirts of downtown Toronto is being built up. There’s a lot of opportunity in our own city.
PL: In the GTA, there are great opportunities for us to grow. There are also opportunities for us to grow our brands in Vancouver, Richmond, Victoria, Montreal and Halifax. But, if you simply look at the GTA and Vancouver, there are a lot of opportunities to grow in those areas.
DC: Our signed pipeline is 60 additional hotels that are in various stages of construction, planning or development. There’s still healthy growth, the majority of which is in the select-service area, but I would add that in the three major cities — Montreal, Toronto and Vancouver — the opportunity would be in the luxury segment and the gestation period for one of those hotels is quite long. That said, there is certainly interest in adding to those markets and we’re finally at a point where, with a slight cooling-off of real estate, hotels can compete for the land. But it’s got to really be a luxury [property] to get the rates to justify it and, fortunately, you’re seeing rates that have grown in Canada, in major metropolitan areas, such that it can support more luxury growth.
AP: Markets such as Toronto, Vancouver and Montreal have a lot of room for more luxury product — the markets are maturing.
RC: Are there more conversions in the marketplace as real estate becomes harder to acquire?
AP: We’re not seeing a lot of conversions. The difficulty is that everyone is looking at major markets for a Class-B building, but the office market is so strong — and residential is so strong — it’s difficult to see a lot of conversions. You’re starting to see some small conversions in the market, such as Montreal, but it’s not significant because you’re competing with other asset classes.
EK: In weaker markets, you’re seeing more conversions. In Edmonton and Calgary, you’re seeing the conversion of Class-B office space, where even Class-A vacancies are high. In Toronto, it’s tougher to find that product.
RC: Do you see rate momentum continuing?
DC: There’s been good rate growth for the last five to 10 years in Toronto. But, as more global travellers come to Canada — frankly, luxury rates in Toronto are cheap, compared to [comparable] cities — we’ve got more rate growth to do in the gateway cities. [Rates] can go higher. Obviously, if there’s an economic slowdown, every segment loses the ability to drive rates. But, [barring] some significant economic crisis, the demand/supply dynamics are positive in Canada; we’re relatively inexpensive compared to other markets around the world and, therefore, when people come here, there’s no pushback on rate — there’s more opportunity. The challenge is finding land in these cities because of the health of the overall economy, but as land becomes available, those projects will come forth.
MR: It really does come down to land. As long as land is limited — and it is in all our major cities — the barriers to entry are there and, therefore, there’s no limit on where you can push rates when there’s an excess of demand over supply. I see Toronto becoming a mini-New York in 15 or 20 years, because of the lack of land.
RC: How important is design to what you’re trying to achieve in your hotels?
RG: A lot of our design elements come from the brand itself and we’re seeing more open spaces — the open-space, public-space concept — which are a lot more modern than what spaces used to look like. If we do have a lot of open space, we also try to use it for something. It’s a good way to merge both worlds — you have the open concept while still trying to make money off of that space.
MF: Open space in the lobbies is one of [the biggest trends]. But we’re seeing that across the brands in different ways, so now it’s about how to differentiate that space. The offerings millennials, or any travellers, are looking for are different. We’re seeing barbershops, coffee shops and coffee concepts, but in a very unique, different way. The restaurants are becoming not just an area off the lobby — they’re becoming the lobby. And it’s interesting to see how millennials are using the guestroom, [in terms of] what the next wave of design is and what we need to be looking at, because they even use the guestroom a little differently than other travellers. [Millennials] don’t mind the smaller room and don’t need a desk because they want to work on their lap or on their devices. So, all of the areas of the hotel are changing a little.
JM: Outside of the guestroom, design is completely custom now, even for some of the limited-service brands, right through the select and higher-end brands. It gives us — and the client — an opportunity to do something interesting and add uniqueness to those properties, where we maybe haven’t seen it in the past. It’s also giving us the opportunity to grow on the design side, pulling in some of the local context but still capturing that brand recognition and uniqueness. The one disadvantage I see is that, with all of the different brands, they’re starting to get a little similar. Even when you do get to the custom point, a lot of the owners are gravitating to that same kind of look.
AP: As you see the focus more on common areas, the important element of that, from an owner’s perspective and from an investment perspective, is revenue per square foot. For example, in the morning, you have the space that’s used for breakfast, so there’s an element of making some money there; then you have the lunch crowd; and then, in the evening, it’s the cocktail crowd. Having that space, everyone wants to gravitate there, but it’s always about dollars per square foot, which is an important element.
RC: We don’t see a lot of women in upper management and the C-suite. What are your companies doing to change that reality?
RG: In our company, about 65 per cent of our executives are women. However, we’re not only focusing on women, but on our staff and our team as a whole. We want to make sure everyone has equal opportunity — both men and women. But, naturally, because we do have a lot of women in leadership, I do hear that a lot of women feel inspired and feel that, at least in this company, they’re able to move up the way that they’d like to.
MF: It’s about finding the best person for the job and, again, we have a high number of females already within our group. We listen to them and we listen to new talent that is coming up within the company about what the challenges and the obstacles are for them coming into the industry, as well as developing within it. We also look for ways to provide mentorship for them — getting our senior leaders to help develop new talent. And it’s having that presence outside the industry — within the universities and colleges — where there’s opportunity to bring in and attract women into the industry early, for them to see there are a lot of great women within who are doing very well and then connecting them so they can see the opportunities.
JR: If you look at our overall 2,000-plus associates, we’re probably at 60-per-cent women; in managerial roles, right at 50 per cent. We took a step back a couple of years ago and created an inclusion group made up of people from various roles — from housekeepers to corporate — and listened to what the challenges were and how we were going to continue to grow our associates while creating unique opportunities. That’s helped us create a career path for people within our organization. I’m all about the right person in the right position, but making sure everyone has equal opportunities is very important for us.
RC: What are the top-three influencers for a company to make a decision to invest in Canada?
JR: It’s either lack of, or price of, land. We always start off with that when we do our underwriting. It’s important to understand where your land basis is coming in at and that’s key. The right metrics have to be there in the market. It starts with your land basis, your demand generators in the market and it’s also about what the right brand, how does that underwrite and how is that going to be profitable. It’s all down to returns.
DC: We’ve seen interest from U.S. partners in Canada simply because RevPAR has been stronger than in the U.S. There’s an enormously sophisticated group of hotel operators and owners in the U.S. and when they look at three-per-cent to four-per-cent growth in RevPAR in the U.S. and they continue to see five to eight per cent in Canada, they’re going to come up here.
RC: How will the next two years shape up for the hotel industry?
MR: The next two years will probably see RevPAR growth around four per cent, which will be significantly slower, but still a robust rate. And that’s because demand will continue to outpace supply. The cost of construction is also causing a barrier to entry, as are tariffs — steel tariffs — that have impacted the cost of construction. So, for those that have hotels, it’s all good, but for anybody trying to get in, it’s just one more hurdle to get over.
JM: From a construction perspective, we’re certainly seeing challenges. We’re seeing hotels in the $130 to $140 range per square foot to build; for limited-service properties, it’s into the $150 to $160 range. It’s really creeped up over the last couple of years and there’s been a huge push to get these jobs completed, as some of these numbers go up.
RC: What’s the biggest challenge for the industry, and for your own company, in the next while?
RG: There’s not just one, but technology for sure, as well as construction costs — they’re ridiculous and it’s impacting every single trade you’re working with. Demographics are changing as well. So, there are a lot of challenges, but nothing is impossible — it’s not doom looming over you — you have to keep yourself educated and knowledgeable and know how to be ahead of the eight ball.
MF: When we talk about RevPAR growth slowing down, but our costs are still continuing to go up, we’re going to see those bottom lines shrink, so we have to be creative and look for ways to improve that. There’s also Airbnb and other disruptors, trying to compete [more within] meetings, shorter-term stays and last-minute bookings — we have to be concerned about them.
DC: I would reiterate labour is the biggest challenge confronting us. The biggest potential threat out there is a significant economic slowdown that lowers demand and therefore inhibits our ability to grow rate. But the biggest opportunity challenge is technology — that’s an opportunity for us to differentiate ourselves and to enhance the level of service we could provide. But, again, you’ve got to win in that space with millennials who are a
lot more comfortable and familiar with digital communication. That doesn’t mean you lose the high-touch part, you just have to use it to facilitate that.