Given the prohibitive costs of real estate and new developments in many markets, acquiring and converting existing hotel properties to better suit market needs can be an attractive and lucrative investment opportunity.
When you look at what it costs [for] a new-build hotel today…being able to buy an asset, put some capital into it and find new value can be a good way to generate a quick return on investment (ROI) and have an immediate presence in a market,” says Brian Leon, managing director, Choice Hotels Canada. “We’ve opened 125 hotels over the last eight years; about 70 per cent of that have been conversion properties.”
Some of Choice’s most recent Canadian conversion projects include a Quality Inn & Suites in Oakville, Ont. (formerly a Country Inn); a Quality Inn & Suites in Bathurst, N.B. (formerly Lakeview); a Quality Hotel in Saint-Jean-sur-Richelieu, Que. (previously independent); and the Champlain Waterfront Hotel, an Ascend Hotel Collection in Orillia, Ont., as well as 13 other hotel conversions currently under development.
“In a lot of cases, [conversions take place] when the hotels are transacting and then we work with the new ownership on a capital plan to allow [the property] to reposition,” Leon explains. “In a lot of cases, if somebody is investing a lot of money into a hotel, to do that in conjunction with a brand change can actually make real sense from the standpoint of communicating the message to guests that something really is different and new at the hotel.”
And what brands do they choose? From the Choice portfolio, Canadian owners have been increasingly drawn to the Quality Inn and Ascend brands. “Quality has been the vast majority of our conversions over the last little while,” says Leon. “When you take a look at the reasons why people brand at all, it’s that combination of looking to drive up their revenue and get access to really good loyalty and central-reservation systems — good brands that can attract more guests and drive up both occupancy and ADR.”
However, in order to reap these benefits, there is a significant amount of planning that must take place. Toronto-based Palm Holdings has built a significant portion of its Canadian portfolio by acquiring and converting existing hotels. The company’s strategy is to try and have a new brand selected for a property prior to closing a transaction, although Rajan Taneja, director of Palm Holdings, notes “in probably 50 per cent of cases, we chose the brand after because we had a few more brand options.” In these situations, the company takes the time needed to examine all opportunities, which may mean choosing the brand after it has closed on the property.
“We choose the brand based on availability in the market, distribution from the reservation system in that market and the construction costs to ensure we’re getting the right return on our investment,” Taneja explains. The structure of the hotel, room sizes and service level of the hotel are also taken into consideration. As Taneja points out, conversion projects can still carry hefty price tags. “When we do a renovation, we’re looking at keeping these properties for a long-term hold. We go in and change everything — furniture, fixtures, equipment; we change the roof, we redo the outside and all HVAC is changed,” he says, adding that laundry, pool and other large equipment is replaced on an as-needed basis. “In some cases, we’ve actually spent more money on the renovations than we did acquiring the hotel.”
To mitigate some of this cost, Palm Holdings opts to continue operating its hotels under its original brands through the conversion process. “On every property we have ever renovated, we continue operating the hotel while doing that renovation,” says Taneja. “That can be a bit of a challenge when you don’t have a complete reception desk…But, we do that to maintain cash flow during the conversion process.”
However, even the best-laid plans don’t always go smoothly. In fact, Taneja notes that every conversion property comes with some kind of unexpected challenge or expenses. “There are always different and exciting challenges with a renovation project that you can’t anticipate prior to starting the renovation. What we generally do, as a company practice, is budget for a 15-per-cent cost contingency on our total renovation cost to mitigate this risk,” he says.
The reality is, every conversion is different and impacted by a wide range of factors, including the brand chosen and its brand standards, location, market and the extent of the renovation. Jeff Hyslop, SVP, Asset Management, InnVest Hotels also stresses the importance of considering “not just the conversion costs, but also the soft costs, such as losses during the construction and ramp-up phases. You need to have longer-term visions for the assets because it’s not going to start to perform overnight; there is going to be a ramp-up period and a lot of disruption involved.”
This was factored in during InnVest’s ongoing renovation and conversion of the former Trump International Hotel and Tower in Toronto. The property is currently operating under a white-label brand (The Adelaide Hotel), while updates are being done to convert it to the St. Regis brand.
The first phase of the hotel’s repositioning will focus on “the new lobby, lobby-bar area, porte-cochère and the restaurant level, [as well as] doing certain elements of the guestrooms, including some technology improvements,” Hyslop explains. “Once completed, the plan is to convert it to the St. Regis brand. At that point, there will be some continued improvements in the catering space and the spa and further improvements to the guestrooms over time.”
It’s worth noting that this particular hotel is something of a special case within the realm of rebranding — owing to the property’s troubled history and association with U.S. President Trump. InnVest purchased the property after its previous owner, California-based JCF Capital ULC, bought out the management contract with Trump Hotels in response to public pressure to remove the Trump name from the hotel and residence.
For InnVest’s second ongoing conversion project — the Kimpton Saint George — the company took a more traditional approach to the rebranding process. The company spent several years analyzing options for the future of its Holiday Inn Toronto Bloor Yorkville prior to making the decision to convert to the Kimpton brand.
“As a Holiday Inn, the property always did quite well…We’d monitored the asset and market trends and, ultimately, the reason to pull the trigger on it was Toronto showing there’s a strong market for that higher-end project,” says Hyslop. “Bringing in the Kimpton brand, we can take advantage of that market and move the property performance up. Given the higher-quality brand on the asset, we will have Cap-Rate compression, which will also increase the value of the asset.”
The tier change associated with this conversion ultimately led to the hotel closing while undergoing its transformation to Canada’s first Kimpton hotel, as the project required what Hyslop characterizes as a “back-to-the-studs renovation,” representing an investment of approximately $19 million. The final product, which is set to open this summer, will feature 189 guestrooms, 2,000 sq. ft. of ground-level meeting space and a Bloor Street-facing leased restaurant and bar.