Hotelier magazine and Starwood Hotels and Resorts host the third-annual Investment Roundtable

Rosanna Caira: The last few years have been tumultuous for the hotel industry, but the market seems to be moving in the right direction. Do you agree?

Alam Pirani: Looking at the first quarter for 2013, we’re off to a good start. Today, investment is more sustainable. It isn’t just about putting capital out, which is what drove a lot of activity in 2007.
Brian Flood: Last year was slightly above average [compared to] the past 20 years; it was similar to 2011 in terms of the number of transactions and pricing. One interesting trend we saw in 2012 was the entry of non-hotel buyers into the market; almost 40 per cent of the trade volume involved non-hotel buyers. Hotels benefited greatly from the strength in the real-estate market, and the market pushed values of well-located assets above and beyond what they were worth as operating hotels.

Stephen Giblin: We had a RevPAR growth of over six per cent last year in our portfolio. We were lucky, because we had a lot of Alberta-based assets. Everybody thinks they are going to see five to nine per cent RevPAR growth over the next two to three years. Canada is always unique. The great thing about Canada is that it’s consistent, and the last couple of years were very stable — it didn’t have the drops that the U.S. and others had. So, we see U.S. markets on fire, such as New York and San Francisco seeing 10 or 12 per cent, double-digit RevPAR growth, [but] we are not going to see that in Canada. In Canada, there is going to be good market recovery, but there is still uncertainty.

Scott T. Duff: [Last year] was our best year since 2007 in terms of the number of deals signed on a macro level; globally, we had over 130. We opened 70 hotels last year, and, speaking of RevPAR growth, we are just over five per cent in North America. In 2013, we will be even better. We are on track to open between six to eight hotels in Canada, which [will account for] about a 10-per-cent growth in footprint here; that’s almost 10 per cent of our global hotels opening in 2013.

Paige Francis: We see continued demand for Starwood’s select-service brands — the Aloft, Element and Four Points. We expect those three brands will account for 45 per cent of our hotel openings globally, this year. We see a lot of growth both in North America, in Canada as well as in emerging economies in India and China and also in new growth markets. Four Points is performing extraordinarily well. It’s our lead pipeline for the company right now, and we opened 21 hotels last year, and we will open 21 this year — four of which are in Canada. We opened seven Aloft hotels last year, and we are opening 19 this year. We see tremendous growth across those segments for these three brands. We will open our first Element in Vaughan, Ont., this summer. We are currently at 10 hotels, but we will open four in the next 12 months.


RC: This was supposed to be the year the industry got back on track after the recession. Now, 2014 is being touted as the big year. What do you think?

SG: I don’t think there’s any banner year coming in Canada — our industry is under-demolished. There’s a lot of product that is really sad, and it’s going to take a lot of recovery for those owners to make enough money to re-invest in their product. If they don’t, they’ll continue to lose share, and new product will come in and take over the market. In my own portfolio, we demolished four hotels — in downtown Halifax, downtown Vancouver, St John’s [N.L.] and Edmonton, and we’ve repurposed the real estate. In Halifax, we took an old motel downtown, demolished it and put up twin-tower hotels, conference centre, retail, and, with [Toronto’s] Great-West Life [Realty Advisors], put up an apartment building and a restaurant.

Anthony Cohen: A new foundation has been set. When we talk about this will be the year, what people forget is there’s no real new demand-generators. We always say within our portfolio, ‘don’t expect new demands, steal from the competition.’ And, that’s really all you’re doing by taking a few rooms here and there. We’re cautiously optimistic, but we don’t rest on our laurels.


RC: There seems to be a conversions trend. What areas of the country is this trend strongest?

AP: Regina and Saskatoon are markets that historically people didn’t pay attention to. With the older product that’s there, there is going to be an opportunity for those markets to see select-service types of product getting built. We’re already seeing that. Winnipeg is another very strong market. Historically there hasn’t been a lot of transaction activity, but, in those markets today, there’s a tremendous amount of capital that’s going in, because they haven’t seen the ebb and flow that major markets see through the downturn. People want to go into markets where there’s stability.

BF: Western Canada will continue to attract the most investments, so I think [growth will] predominantly [be in] resource-based markets. In Ontario, good examples of that would be Timmins, Sudbury, Thunder Bay and portions of Alberta and Saskatchewan. The Calgary airport is probably seeing more development activity than any market in the country. Eastern Canada — depending on the market — has good prospects based on the ship-building contracts.

SD: We’ve had a lot more of our growth focused on conversions over the last few years, and even with brands like Aloft, a few years ago, that was not up for discussion. We have one opening in Calgary in May; we’ve done adaptive re-uses in office buildings or warehouses. The customer is up for that — it allows you opportunities that you wouldn’t have had before. New construction dropped off dramatically over the last few years, particularly in the U.S., and that gives you a chance to get into markets that otherwise you could not make sense out of the building, and that’s driving a lot of growth for us these days.

Anil Taneja: What excites us is a lot of these brands are coming from the U.S. and driven by the U.S., and in the U.S. new builds are few and far between. Brands are opening conversions in comparison to 2006 and 2007 when they were less flexible. Four Points is doing conversions, opening to an Aloft, Courtyard, Townplace [Suites] — a lot of strong brands are now opening and saying ‘guys, let’s convert.’ We see limited-service and mid-service really growing.


RC: Is select-service the hottest segment these days?

SG: We are transitioning our company from a full-service operation [with] 20 full-service hotels to what will soon be 40 focus-service hotels. We are building a Hampton in Halifax and a Homewood, side-by-side, and, in that complex, we’ll have a restaurant such as an Earls or a Keg. If you’re an individual business traveller coming in and you want your points, and you want a clean fresh room with a view of downtown and free Wi-Fi, and an ease to get in and out, you can stay in our hotels when they’re finished, have a great workout in a beautiful health club, and then eat your dinner over at the restaurant of your choice. People want that experience.

RC: Are the terms focus-service and select-service interchangeable?

SG: ‘Select’ is too limiting. I think ‘focus’ is much more.

RC: How would you define focus-service?

SG: Giving the customer what they want.

AP: When you look at the [Greater Toronto Area], and have these select-serve hotels open, who suffers? It’s the older brands that haven’t seen a lot of money, the full-service hotels. It [shows] the demand for select-service. That’s what customers want. They don’t necessarily want to have that full-service experience, but they want a fresh room, a fun place to go. You see why people are investing in that, because the returns are there.

RC: How important is lifestyle to a focus-service hotel?

PF: It’s really important. We have nine brands in the portfolio, but what we’ve done is we’ve created personalities around the brands, lifestyle brands, knowing that people travel for different reasons. We’re not catering to that demographic as much as we are catering to that psychographic, that lifestyle and that experience that one’s seeking. We’ve created these brands where, yes, fast and free Wi-Fi is your price of entry, a great bed, a great shower and free water is expected…. We have the Four Points, Aloft and Element, three very distinct brands, all competing in the same segment but offering different things to different travellers.


RC: How important is design and technology, generally, and to these types of brands specifically?

AC: You have to have good design, interesting and unique design. By the same token that doesn’t drive everything. On the management side, we like to say we are ‘brand agnostic.’ And, what we look at is whatever brand or, if it’s independent, whatever’s going to get the most bang for your buck in returns. It’s got to be an interesting and unique design…. [Recently] in a couple of our hotels [we launched] a mobile and electronic portal that allows the hotel and the guest to communicate before, during and after the stay. So, if you’re out at a meeting, and you forgot that you had your “do-not-disturb” [sign] on, but you want your room cleaned, you can just send a note.

SD: [Guests] want an experience; they don’t necessarily want to go backward from what they have at home. It’s a massive issue these days, and you’re seeing more and more brands gravitating in that direction. The benefit is we don’t have a legacy of old hotels that we’re dragging along behind us that is going to take a decade or more to turn around and get with today’s program. Frankly, by the time you’ve done that, things have changed again. We can really set the tone of ‘this is what people want today, and this is what we’re building today’ as opposed to ‘40 per cent of our portfolio is renovated to the new standard.’

SG: The tech experience is critical. I was in a very high-end hotel recently where even the transition between changing channels was taking so long. Some of the hotels I’m looking at for acquisitions are selling TVs that are four-feet deep on the inside. But it’s deeper and broader than that; it’s not just streaming Wi-Fi, but mobile apps, too. We’re piloting

where people can reserve a table when they’re walking down the street. They want an ad-hoc meeting, and they used to go to Starbucks, but we’ve got an empty lobby all day. Why can’t they just hit a mobile app and say to our hotel, ‘reserve a table, have coffee ready, we’re prepping before our pitch.’

PF: We launched the SPG “super-app” last year; it’s our evolved version, and the app knows if you’re about to check in, if you’re in the hotel, and it gives you the information you need that’s relevant to your stay, such as directions back to the hotel, in the local language, too. How many times have you sat in a cab and you can’t speak the language? Now you can show it from your smartphone.


RC: Are your room rates rising to correspond with the increased products and services you’re providing?

SG: Rates have to go up. When you look across Canada at cities like Vancouver, and go online now and try to book a room in Chicago, San Francisco, New York, you’ll be lucky to find something on a busy night under $400. But, go to Toronto, and you see $200. It’s just stunning to me that Toronto isn’t a $400, $500 town. It’s a world-class city. We’ve always underpriced it, and Vancouver is the same way, with rates under $200. So it has to go up, but the customer experience has to go up as well.

BF: If you look at RevPAR in downtown Toronto in 2000, it’s exactly the same as 2012. But, with new product coming into the market, some old obsolete product coming out of the market — like the old Four Seasons or the Sutton Place — and new hotel product coming in — like the Delta, and the Royal York undergoing a $150-million renovation — all those things bode well for the ability to raise rates in the future.

AC: Toronto is a great example in that rates are absolutely not where they should be, next to comparable cities in North America and around the world. To a certain extent, people also talk about the negative impact of having four or five new five-star hotels. I look at the positive side and say: ‘they should be setting the rate.’ There’s really no true five-star product, arguably, outside of the Hazelton that was setting the rate high and allowing the other four- and three-star hotels to follow. If you look at comparable cities around the world — whether it’s New York, London, San Francisco, Chicago, Miami — they all had that five-star product.

RC: What’s the most important factor to consider when choosing a brand to develop?

SG: We want a brand that we see going deep into the future. We invest heavily into our product. We only build a concrete, steel-frame product. We build the top-of-the-market within the segment, so we’re looking for brands that are going to last.

AT: The thing that we look at most is the distribution potential of the brand in our 100-mile radius. The distribution is what’s creating loyalty and distinguishing the product to the customer. So, that’s our key driver — the brand has to have future distribution or existing distribution for it to be a brand.


RC: Ed, do you expect cap rates to stay the same? Where do you see the financial world in the next 12 months?

Edward Khediguian: Cap rates are being compressed. You saw it over last year, and it will continue. The indexes are very low, the government of Canada bonds are low, that’s compressed yields against investments, so money is flowing into assets and real estate and that’s brought down cap rates. We’ll see a lot more of that in the hotel sector. There’s going to be a lot more non-traditional buyers, other real estate. The REIT sector is really blowing up in Canada on the non-hotel front. I’m not saying the REITs are going to be buyers of hotels, but we will see the flow out of buyers and investors that compete against the REITs in the traditional asset classes, into hotels. So cap rates will come down, spreads are down, indexes are down.

RC: How easy is it to get funding these days?

EK: There’s been a lot less construction financing since the tail-end of ’07 or ’08, but that’s slowly coming back, because of the existing stabilized refinance money or acquisition money existing in cash-flow deals — the yield against that has come down quite hard over the last year. Values are coming down, cap rates are coming down, people are getting into construction, and there’s a time gap, or a gap of when you start a project and when it hits the market, and often there’s a disconnect; it’s a question of surviving through that cycle.

AC: On the financing side, there is money available, [with] the right team in place. You have to have the right sponsorship, management, brand, and without all those coming together in the right way, financing becomes more and more difficult.

BF: Just a comment on financing — notwithstanding the increased availability of financing — the underwriting is very vigorous and much more so than we saw in the previous cycle, so future lenders are really drilled down and stress the operation to make sure it will support the financing.


RC: How does the situation in Europe affect us in Canada and North America specifically?

EK: I don’t think it affects it directly, necessarily, but there’s general skittishness here throughout. If you talk to a risk officer in any financial institution, they are concerned about what’s going on in general, but they are not very specific about their concern.

AP: We still haven’t seen any significant capital coming to Canada. If you look at the last few years, in 2011 there were only two transactions out of the 99 or 100 deals that were sold with U.S. investors. Last year, [there were] 116 transactions, and only one [with an U.S. investor]. No other foreign capital is coming in. And, I’m not talking about the Asian money that’s here, that locally has always been here investing; I’m talking about new capital flow.


RC: What do you think the future holds?

SG: We’re big believers that there’s going to be good growth in Canada for the next five to seven years. We have $300 million of projects in the ground today; we anticipate putting $600 million or more into the ground over the next two to three years, so we’ll be close to $1 billion invested in capital building out hotels and infrastructure in Canada. It’s going to be a Darwinian feeding-frenzy among hotel operators, because I don’t think there’s going to be strong barriers to entry, because there’s multiple brand opportunities and land available. It’s going to be a very aggressive environment, and if you’re not ready to play that game, and you’re an investor in one or two hotels, you’ve got the potential to lose everything.

SD: Change over the next few years is — as it often has been, especially for the good — incremental. The industry continues to really consolidate from an ownership point of view of hotels, and the sophistication goes up. The barriers to entry are relatively high in that the brands are very selective.

AT: I’m a big believer in 2014, and I think 2015 is going to be even better with the Pan Am Games coming and the infrastructure that we’re building in Ontario for that. I see a lot more individual trades with new entries to the marketplace, more portfolio trades. If people are looking for security, Canada’s a great place to invest, but don’t expect any big jumps. 

photo by Margaret Mulligan


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