Whether driven by brand requirements or an opportunity to increase sales and create a return on investment (ROI), capital expenditures are an integral part of doing business in the hotel industry — perpetuating the old adage that you have to spend money to make money.
In 2015, Winnipeg-based Temple Hotels REIT invested in major hotel renovation programs at several properties across the country, amounting to capital expenditures (CapEx) of $18.7 million for the year. “We don’t mind spending the money,” says Arni Thorsteinson, CEO of Temple. “It’s all about ROI.”
Over the course of the last two-and-a-half years, Temple has invested approximately $12 million refreshing the Saskatoon Inn (and Conference Centre) in Saskatoon, Sask. The property now boasts refurbished common areas and guestrooms, as well as new guest elevators. The revamped guestrooms feature refinished bathrooms, contemporary furnishings and a soothing, neutral colour palette. With Temple’s portfolio up to date, Thorsteinson and his team are looking forward to a significant decrease in the company’s CapEx spending for 2016.
In many cases, CapEx is most dependent on the age of a property. However, Thorsteinson warns it’s hard to generalize, as a hotel’s occupancy levels and the clientele moving through the property also factor into how often and where money needs to be spent to keep up the property. “If you have a property with a lot of leisure business and sports teams, you get more wear and tear than a hotel catering to primarily business clientele,” he explains.
In order to prepare for the inevitable expense of hotel upkeep, it’s important to maintain a CapEx reserve fund. Setting aside approximately three per cent of annual revenue for repairs and renovations is the industry standard in Canada, while south of the border, Jeff Crowley, SVP at HVS Hotel Asset Management, recommends reserving six per cent each year in order to adequately prepare for major/hard goods renovations.
At the Nova Scotia-based Holloway Lodging, the amount set aside for restoration and renovations varies based on a property’s age. “If it’s a newer hotel, we set aside about three per cent [per year]; on an older hotel it will be closer to four per cent,” explains Michael Rapps, chairman of Holloway.
Holloway is currently in the midst of a high-Capex period as it rebrands several of its properties, including the recently reopened Holiday Inn Ottawa East, which cost more than $10 million to convert from the former Chimo Hotel.
As an older structure, brand-mandated health-and-safety upgrades factored significantly into the property’s conversion process. “There was a lot of work that needed to be done that did not impact the guest experience directly,” says Rapps. This included significant additions to the hotel’s sprinkler system. Rapps warns that aging properties may hold unforeseen challenges and expenses. “There are a lot of things you can find once you open up the walls,” he explains. “Managing that unknown when you’re working on a budget or timeline is very difficult.”
When doing renovation projects, the Holloway team prefers to shut down a property completely to expedite the process. It does, however, make exceptions when the property is too large for this strategy to be beneficial, such as the newly rebranded DoubleTree by Hilton in London, Ont. “It is a 24-storey, 325-room property; there was no way we could have done it quicker if we closed it,” says Rapps. “It was just too big of a project and it would have required too many people.” For the remainder of its recent projects, Holloway opted to close the properties for several months during its individual off-seasons to limit financial impact.
With regard to soft goods renovations, Holloway’s strategy is not quite as bold. The company tries to strike a balance between financial and guest impact. “There is always tension in our organization in doing things over time versus doing them all at once,” says Rapps. He explains that there is less impact on cash flow when replacing items such as carpet and bedding over time; but this method means improvements go largely unnoticed by guests. “The guest isn’t experiencing the fully done product and by the time you’re done your whole renovation, you have to start again,” he adds.
Capital improvement is not the only form of CapEx; a topic commonly left out of the CapEx discussion is the addition of new hotel assets. Companies such as Calgary-based Superior Lodging Corp. have been investing significant capital in the development of new properties, including a Microtel in Bonnyville, Alta. and the dual-branded Courtyard by Marriott and Residence Inn by Marriott, Calgary South, which opened in January 2016 and December 2015 respectively.
Using the Microtel brand as an example, Marc Staniloff, president and CEO of Superior Lodging Corp., estimates the cost of developing a new hotel at $110,000 to $140,000 per room, noting the cost varies based on where you build in Canada.
Superior has also taken on capital improvement projects, for which it allocates approximately three per cent of annual gross revenues. One such project was the major renovation of a 20 year-old Super 8 in Timmins, Ont., which cashed in at approximately $7,000 per room.
When tackling a major refresh, Staniloff focuses on the major guest touch points. “You sell the room in the lobby, so it’s important to spend money there,” he says. Once the room is sold, the most important features become “the bed, the shower and the TV experience — that’s what they remember.”
In a down economy, it’s increasingly important to ensure properties are up to date in order to capture market share. “When times are difficult, that’s when you want to make sure your property is up to standard or better to beat the competition,” Staniloff explains.That said, customer expectations continue to drive changes in brand standards, which raises the price tags on Superior’s projects.
The slumping Canadian dollar has also increased costs as hoteliers take a hit on materials and equipment imported from the U.S. Holloway’s Rapps identifies HVAC units, elevators and steel as key items that have increased in price due to the declining loonie.
Regardless of economic conditions, time marches on and properties continue to age. As Thorsteinson points out, customers will let you know when it’s time to refresh, whether it’s through online reviews or at the front desk. However, it’s not ideal to let it reach this point.
Staniloff recommends using housekeeping staff as a customer baseline to identify when a hotel starts showing signs of wear. As he explains, the benefits of putting money “back into the box” will be seen in the bottom line. “You have to keep relevant, because your competition will eat you up if you don’t,” he says.
Volume 28, Number 3