The Investment Low-down The teams at Hotelier magazine and Starwood Hotels and Resorts partner for the fourth-annual investment roundtable

Interview by Rosanna Caira.

Rosanna Caira: What type of year was 2013 for your company, and how is 2014 shaping up?

Bill Stone: It was a big year across the board, skewed by a very large transaction — the acquisition by Starwood Capital of the Westins, but if you strip that out, it still continues to be active, and it is something we see going into this year.

Paresh Raja: Ontario has done quite well, too. The markets we’re in increased occupancies, not as strong as out west, but we’re seeing good growth, and we are looking forward to a really positive 2014 in both occupancy and ADR.

Philippe Gadbois: We’re coming out of the first quarter with pretty good numbers, but strip out Alberta and Saskatchewan and [the industry’s] performance is ho-hum.

Barbara Mech: Since 2009, we have seen consistent growth and improvement year-over-year. I would agree that much of the growth we have seen has been in Alberta and Saskatchewan, particularly with respect to ADRs. We have enjoyed very stable, favourable interest rates for the past few years and that’s continued, so it’s been a very good environment that’s expected to continue.


Caira: Where is the focus in terms of new builds and conversion?

Scott Duff: We are probably evenly split in Canada. The West has been the focus for new construction, although we’ve had conversion there as well; Atlantic Canada, those have been all conversions.

Allison Reid: In 2000, we signed 200 deals globally, a lot of those were new builds, and they never happened. In 2013, the majority of our deals were conversions. [The hotels] were open, so 2013 will be our highest development year so far because they will open. In 2014, we are seeing a lot more new builds coming back into that mix, a lot of conversions and a lot of repositioning.

Mech: From what I see, a lot of the projects are with experienced operators who have a track record and have owned a number of hotels and operated them successfully, and perhaps had some new builds in that mix — branded hotels, as opposed to the motel style — and typically they are looking for leverage around the 50- to 60-per-cent mark.

Sukhi Rai: We have 14 properties through B.C. and Alberta. We have two under construction — one in Spruce Grove [Alta.] and in Kamloops, B.C. We’re doing a lot of development in the suburbs. We’ve got eight hotels in the pipeline. So, we’re focusing on new development.

Brian Stanford: Alberta, Saskatchewan, Newfoundland have a much different component, but we’re seeing more interest in Central Canada, Ontario, Quebec on the conversion side. In large part because there are a lot of underperforming assets that are under branded, that can be acquired at relatively low capital cost. It’s a little tougher in Western Canada, because even if the asset is not performing well, the starting point can be pretty high in terms of getting in. So, seeing those conversions, the problem is that nine times out of 10, it’s around an acquisition.

Segment Trends

Caira: What segments are most appealing from a consumer and development point of view?

Reid: The number-1 thing we’re dealing with is how [to] limit risk. So, select-service products have limited risk in that they’re quicker to build, they’re cheaper to build, they’re more efficient, and there is a bigger pool of potential take out opportunities. And, the group business has changed in the big boxes. Group business is down. Generally speaking, travellers are more efficient with how they travel, and I don’t see that going away for a while. What is new is this focus on luxury, which has come back in the last six months, where projects are starting to get done…. The full-service is pretty much only going in now if there’s a municipality that’s looking to compete, from a convention centre standpoint.

Gadbois: In today’s environment, the biggest risk, because it’s the most expensive and you’re not seeing the lift on rate, is typically the traditional full-service downtown box. Where you can see rate lift in certain markets in Canada — not all — is in luxury, and you’re seeing that a little bit in Toronto, maybe starting inVancouver, Montreal. After that we’re sort of tapped out — maybe Calgary? But there’s an announced three-million- foot project in Calgary on an A-plus site…. And everybody can wrap their head around the commercial, retail, the parking — no one can wrap their head around the hotel component — because it will cost.

Stanford: [Select-service is] the easiest point of entry from a development perspective. The only thing I might add is that whether we’re in Eastern Canada or Western Canada, we still have some challenges on new builds. In Western Canada, the issue’s not getting occupancy, it’s can I develop it at a reasonable cost?…. In Ontario, we are struggling with less occupancy and more of a rate issue.

Industry Trends

Caira: What are the biggest hotel trends?

Duff: Technology is huge. Travellers, many of them younger, are very sophisticated from a technology point of view. We are introducing keyless check-in into hotels; [it’s] your own 24-hour stay, it doesn’t have to be in at 3 p.m. and out by 11 a.m. [It’s] being introduced at the Aloft Cupertino [Calif.], across the street from the Apple headquarters.

Reid: Lobbies are back to being socializing spaces, but it’s not the way it was 30 years ago when we went to the bar and had a few drinks. [Guests would] rather sit in the lobby with their iPad than in their guestroom by themselves staring at a wall…. That’s how we came up with the Aloft — [guests play] pool, there’s a bar, but there are also little alcoves to sit and read a book.

Gadbois: [There’s] the evolution of the full-service Marriott bedroom — where the full-service bedroom doesn’t have a desk anymore, doesn’t have a desk chair anymore, because Gen-Y wants to work from the lounging chair, from their bed, so they have a table that floats, open closets…. The expectation today, even for someone who is not Gen-Y, is for something that’s a little less safe.


Caira: How is 2014 shaping up in terms of how many assets are going to be sold this year?

Stone: Other than the blockbuster big merger deals, I think it’s going to be very consistent with the last few years. So, again, stripping out the sale of the five Westins, probably we will be somewhere between $1.2 and $1.5 billion. That deal alone was just under $800 million. What’s in the market changes quickly; there are going to be further large assets on the market that will skew those numbers very quickly.

Caira: Is there still a lot of foreign capital coming into Canada?

Stone: We’ve seen way more legitimate interest in the last couple of years than we have in the last 25. The legitimate [interest] is people spending time underwriting, flying over, looking at it. These are groups that are very forthright; they identify their capital source and their motivation — having said that, it’s also a big step from those warm and fuzzy conversations to closing a transaction. But it is, in my view, escalating. It started with the Americans, but we’re dealing with European groups now for an asset in Montreal. We’re in the throes of doing a couple of resorts out west with Asian groups, and there’s everything in between.

Caira: How is the current exchange rate influencing what’s going on in the marketplace?
Stone: I don’t think, surprisingly, it’s a big factor. Somebody said that to me years ago; they said we’re smart enough to assess a market or the potential of a property — we’re not smart enough to factor in currency. So, we’re going to go in, we’re a long-term hold, and hopefully we’ll be lucky enough the currency won’t be a big factor. But, I don’t think it’s an incentive to get people to buy in.

Caira: How much are properties being sold for, and how do the rates compare to past years?
Stone: We’re a small market. We have 100, 120 hotels that sell in a given year, so it’s hard to take that average and say things are up or down. But I do think we’re at the top end of the range. The last frothy period was 2006 and ’07, and for big urban assets, the pricing is exceptionally strong. Toronto is a great example of two different markets within a 30-minute cab ride. In downtown Toronto, we’re seeing very high prices, anywhere from $200,000 to $600,000 a key. Looking at Toronto airport, it’s not as strong. And there have been examples of deals getting done around the airport, service transactions of $100,000 to $110,000 but there’s also … others that are getting done at $30,000 to $40,000 a room.

Caira: Is the hotel industry still viewed as a very risky endeavor?

Stanford: Most lenders who were in the game in ’06 and ’07 had a few properties that got on the wrong side of the balance sheet, but not all that many. So a lot of the new players in Canada may be looking at it and saying, ‘Yes, it may be riskier than [investing in] an office, but it’s not as bad as we may have perceived it.’


Caira: What are primary sources of financing?

Rai: We’re still going to our banks, because we have an existing portfolio. But, recently, just the last couple months, we were getting amortization for 25 years with some of these banks; they’re cutting down to 18 to 20 years now. Some banks aren’t exceeding 15 per cent, 15 years…. The rates are still at the same picture, but on our existing properties that are older than four or five years that have a good performance, there’s lenders coming to us and saying ‘turn it around with us, and we’ll give you these rates’ and they’re phenomenal rates. On the new development side, there’s only a few banks that are giving that 60 per cent or 55 per cent and giving us 20 to 25. Right now, as of the last couple of months, we’re not even at 25 amortization.

Caira: Why is that?

Rai: There’s a lot of supply coming in a lot of these places, especially in the West, Calgary airport. Everybody’s there, everybody’s trying to get there. So the banks want to push back. Raja: We’ve had multiple bids on our recent projects. [We] recently purchased a hotel [with] 30-day due diligence, 30-day close; we didn’t even approach a lender until after due diligence, and I had multiple ones ready to close, impressive rates, 25 years still. This was Ontario; we found the same thing in Manitoba, so we found aggressive rates, 25-year ams, and multiple bids on every project so far. But, debt to equity is also pretty high on our end, so we’re putting a bunch of money down, and that’s where risk is eliminated. That’s where you get the aggressive lenders, and they are across the board, from schedule A to credit unions, to private equity. The rates are great, covenants are great, so we’ve been surprised at how much money there is out there and how aggressive lenders are.

Travel & Tourism

Caira: Do you think the dollar will increase demand for tourism?

Duff: I wouldn’t see it hurting it. It may even keep more Canadians at home as well, as it becomes more expensive to travel in the U.S.

Stanford: What gets us more optimistic is the travel forecast. We’re looking at domestic business and domestic leisure travel forecast going up between 2.5 to three per cent per annum over the next three to four years. And that’s assuming a stable economy globally and nationally. [In] the U.S. market, the numbers are only a fraction of what they were 10 years ago, but last year was the first year we saw positive growth, and we’re talking the U.S. market growing by two to 2.5 per cent over the next two to three years. So, from a baseline perspective, that bodes well in terms of occupying room nights…. We’re starting to cap out relative to huge supply increases. And we’re going to fall back into that 1.5-per-cent supply growth, that’s 5,000, 6,000 rooms nationally. So that’s going to allow a lot of those markets’ demand to catch up, which helps rates, which helps profitability. Other than certain markets, where maybe there’s been huge development interest, you’ve got a short period of over-building, that fundamental supply demand drives profitability, and it drives investment, and all those things look good for the next three to five years.

Raja: I echo Brian’s sentiments, but…. I am concerned about the government’s lack of funding of the Canadian Travel Commission. The fact that this country does not promote itself in the U.S. is criminal. So, as an industry, we need to keep lobbying to increase those efforts, because it’s fine that we will grow that inbound U.S. market by two, 2.5 per cent, but we’ve lost 20.

Caira: Travel and tourism provides 4.5 per cent of the GDP to the Canadian economy, but when you compare it with global travel and tourism, it contributes 9.5 to the world economy. So we contribute much less from a travel and tourism perspective to the world. So there’s some great potential for us to catch up, but whether or not we have the funding and the wherewithal to push this, that becomes a question [for] the government. Are we spending enough time and energy promoting Canada as a destination?


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