Once again this year, Hotelier partnered with Starwood Hotels and Resorts to host the second-annual Investment Roundtable

Last year was supposed to signal new beginnings, but even best laid plans can be foiled. Today, we’re dealing with a new normal as occupancy rates slowly increase along with hotel supply, especially in Toronto, where luxury mixed-use projects are reshaping the city’s landscape. Interest rates remain low, Americans are staying home and Canadians continue to champion the staycation. There are the attacks by Mother Nature, the struggle with OTAs and the seemingly endless airline woes. In the end, hoteliers have readjusted their thinking and are slowly seeing returns. To discuss these issues, Hotelier joined with Starwood Hotels & Resorts to host the second annual Investment Roundtable, moderated by Rosanna Caira, editor and publisher of Hotelier, and featuring the nine hotel operators, owners, financers and developers listed on the previous page. Keep reading to find out what’s on their minds in this abridged version of the roundtable discussion.


What’s your perspective on the state of the industry in the past year?

Brian Stanford: Bottom lines were flat. If you look at the East versus West it wasn’t much different in terms of end result of the performance metrics, which are much better out West. That’s largely rate-driven, not occupancy driven. This year we’re looking at a modest demand outpacing the supply growth and some improvement in occupancy, maybe no more than inflationary impact overall in rates. But that should translate into something between five- and seven-per-cent of an improvement to bottom line, which is a good starting point.


Is the recession over?

Chip Ohlsson: The recovery has been [ongoing] since 2009. The difference is we had a huge drop-off, and everybody wanted to see a huge rebound. It’s going to be a slow climb.

Stanford: As you look at the economic impacts on our industry, the realities are overall occupancy room nights in 2011 were better than they were in 2007 and 2008. The issue is we had a six- to seven-per-cent increase in supply, which is mitigated occupancy, but more importantly, mitigated rate recovery. We didn’t fall quite as dramatically as the U.S. market did, and we are not rebounding at the same level either.

Kenneth Gibson: We are our own worst enemies in this industry — on price. That’s been a trend. It’s not a trend when you get into a little bit of a weaker economy. The first thing that we do as an industry is start discounting rate rather than product quality.

Ohlsson: It’s funny. It takes a day to cut rate but years to recover it.

Stanford: If you look at Central Canada, and the occupancy performance we’re having in Toronto, Montreal and Central Canada as a whole, it’s stronger occupancy levels than what we’re seeing in Western Canada. We are sitting there with rate structures, overall, that are $6 to $7 below where they’re at, which is having an impact on our profitability, our values — all those things — and it just doesn’t make sense, because we are in a better position in Central Canada than we have been, probably from 2005 and 2006.

Edward Khediguian: You’re not going to induce demand, demand is driven systemically; it is what it is. It’s a mixed bag of demand driven by sector, which is what you’re seeing out West, but there’s also a limit.

Philippe Gadbois: We’ve created a monster; it’s called a revenue manager, and the theory behind that introduction is it’s better to get $1 more than your cost than nothing.

Khediguian: You also have less supply in some of these Western markets versus the GTA. In the GTA you have a lot of supply — I’m not saying supply from a negative perspective; there’s a lot of unit, a lot of holders, a lot of dynamics in diversity and branding, there’s a lot of movement. So when there is diversification in a particular segment or sector — whether it’s the hotel sector or the mining sector — it’s more elastic from a price standpoint.

Gadbois: That same comment applies to major American cities — you do not see that cannibalization that we throw up on ourselves here.

Kevin Toth: What’s really changed is OTAs have commoditized our industry. That’s the real monster. We just had the Hotel Association conference, and $7.1 billion in North America goes to OTAs, that historically, would go direct to hotels.

We go to Europe and pay huge rates, but people don’t do the same in Canada. Why?

Ohlsson: There wasn’t a lot of luxury product in Toronto, but now that it exists, it needs to charge a luxury rate. The problem is these luxury hotels open[ed] at a bad time, and they opened together and cut each other’s throats, as opposed to [stand]ing firm.

Toth: They have to build some volume base. And the opportunity and hope is once that base is built in, and redistributed, they’re going to be able to move their rates.

Stanford: Downtown Toronto has become one of the biggest challenges of a rate issue across the country. We have run 70 per-cent in Downtown Toronto for the last 10 years, we will do so even with this new product, and if [these] new asset[s] that need to command $400, $500 rates are trying to strive [for] 70-per-cent occupancy, you’re going to do it at a $200 rate. If they hold the rate strategies intact for a period to build volume over time, that’s going to be a positive thing. But we have not moved rates.


Do you suspect there will be any unforeseen development in the next year?

Gibson: Development is going to continue to be a bit muted in the next couple of years, and I hope it’s going to be. If you think about the Toronto Airport, how somebody can justify building a hotel in the Toronto airport market is beyond me, because we’re struggling with a market [where] there’s an oversupply.

Stanford: From a development perspective, 2000 was the best year we ever saw. We had 10,000 rooms come into the market — we’re not going to see that pinnacle in the next five to six years. We are going to see 4,000 to 5,000 rooms coming into the market on an annual basis, which is one to 1.5-per-cent supply growth, and a disproportional amount of that is going to be in Western Canada, primarily because we can make the economics work better. We’re still going to see development in Central Canada, but if we’re looking at one to 1.5 per cent nationally, that’s going to be two to 2.5 per cent out west and less than one per cent in Central Canada.


How do you choose the brand when you’re looking to build or convert a hotel?

Toth: We look at the market first. We look at what’s not there to see if there’s a brand that’s better for one of our buildings. We look at changing brands. We’ve been successful in changing brands in some cases and not so successful in other cases; it takes a year to recover your capital costs and get your piece of business back because there is loyalty to certain brands. So, to go out and just willy-nilly change brands isn’t always the best thing for us.

Ohlsson: Changing brands and segments almost makes the most sense. Changing brands is a tough piece, but when you change brands and segments, that’s where you get the lift.

Does brand loyalty still exist?

Drew Coles: Technology has helped that evolution immensely. Fifteen years ago you didn’t have OTAs, and you didn’t have electronic booking channels easily accessible. You had to get with a big brand to get plugged in.

Ohlsson: We used to be very loyal to a brand, and then we became loyal to segments, and then we became loyal to the point systems. One of the things we’ve rolled out in the last year is called GPS, and what we’re trying to do is put the hospitality back into it and use technology to do that. It’s about learning about people’s habits and what they like and what they want. Telling them, we know you like this drink, we know you like to eat this; we know you like to check out late. We have a lot of access to information, and we don’t use it enough. We’re hoping to make people loyal to brands again.

Toth: We look at brand valuation, mostly from a three-pronged stool. It’s not only does the brand have a loyalty program — because most brands have it — but what’s the legacy of that loyalty program, what’s the depth? Do I want to make my investment with a brand, or do I want to make my investment with Expedia?

Ohlsson: We’ve moved away from free room nights, and now we’re giving lifetime experiences. If you can go to the Tonys or the Oscars — those are the experiences people not only talk about with social media, they tweet about it; it’s on Facebook.


Where do you source your primary financing?

Gadbois: Our owned assets, because primarily our owner is U.S.-based, and deals primarily with Bank of America and Mass Mutual. Our managed assets are financed through a variety of means, from cash to credit union. We started to work with NMG and, again because our single-largest third-party owner is a public vehicle, a lot of the cash to those plays comes in the issue of debentures.

Vinod Patel: We try to make it a mixed bag. Obviously GE is a key partner on the debt side, and we have some schedule-A banks through relationship lending over the years that they’ve funded us. Recently we’ve started doing business with BDC to diversify. They’re a lender, but they’re still a lender in terms of last resort because of their methodology and their approach to the business. So we prefer the GE mentality — they’ve understood our business and talk the same lingo.

Toth: Ours is primarily private equity. One of our major shareholders is an offshore, publicly traded company. And we have a variety of lending partners on our development side and acquisitions from class-A to class-E lenders.

Will access to debt change in the next year?

Khediguian: It’s very cyclical in this industry — guys come in, guys come out; there aren’t many focused lenders that have business groupings focused on the segment. So, that’s good and bad. If it’s focused, you’ve got an intelligent way to underwrite structures so you’re sustainable and feasible over a longer period. There are lots of lenders. Colliers did an excellent job in their report; they did a profile on the capital debt. Folks who come in and do stupid structures and owners and borrowers taking advantage of those stupid structures, if not done properly, they get caught through the cycle and obviously the lenders get caught. You’re right in diversifying your lending base; you’re right in taking different options through the cycles, but obviously not to over-depend on someone who will be in and out. Maintain your relationships with the folks that are going to be consistent, and do the right kind of structure.


How do you feel about the Canadian fundamentals moving forward?

Gibson: The fundamentals in Canada in the economy are still pretty solid; it just hasn’t translated into RevPAR.

Scott Duff: We’ve continued to rely more on leisure traffic from domestic sources, because you didn’t have the strong Japanese economy 10 years ago or a weak Canadian dollar that made it easy to charge big rates for American traffic. All that stuff’s gone away; you’re having to rely on more Canadian-based traffic, and you wonder if households will start to feel the crunch because of interest rates going up. What’s going to happen to your leisure markets as well and the economy as a whole?

Gibson: It’s cheaper for Canadians to travel out of Canada so that has put some pressure on domestic travel, and the economy is good, it’s driving the dollar.

Patel: That paired with oil prices, the secondary, tertiary markets rely on that drive up market if the decision is whether the family [should] get out there for a weekend or [if] a corporate guy [should] make six trips a year instead of 12. A $100 barrel of oil doesn’t help.

Gadbois: The biggest challenge, at least in the medium term, is still Central Canada — how Ontario and to some extent Quebec, reinvent themselves away from a manufacturing-based economy.

Stanford: We have our own economy in the hotel sector that we need to be cognizant, and it doesn’t really matter which financial institution you look at, the prospects for economic growth over the next five years, while positive, are not [seeing] a huge rebound. We’re looking at two to 2.5-per-cent growth GDP, and maybe there are certainly brighter spots. We looked at travel outlooks, and if you look at the next five years, there’s nobody who is expecting travel growth in almost any province above 2.5 per cent per annum.

Patel: There’s a flux of capital coming into the city in terms of development, and it is a haven for a flight capital from other parts of the world. You see these condo developments, which concerns [me] because not one office tower or commercial facility is going up, and you’re scratching your head saying, ‘OK, where’s this going?’

Toth: It’s almost as if we’ve given up [on] the inbound/outbound international traffic. I’ve heard Canada is the number-1 tourism brand in the world — it sure as hell doesn’t translate into traffic in Canada.

With the trend to lifestyle brands, is there room for brands that have been around for years?

Duff: It’s hard when you have a large system, where you may have several hundred or 1,000-plus units to turn around. You could be pushing a decade — by the time you’ve done that, the world’s onto the next thing. To be fresh and novel is going to be hard.

Gibson: You’re not going to build a lifestyle hotel in North Bay, Ont., et cetera. That’s a more urban city-centre type for a consumer. There’s still a need to have the diversified brands in secondary/tertiary markets.

Duff: Frankly a prototypical new limited-service product in those markets would be an oasis. You’ve got markets where Comfort might be the most recent hotel that’s gone into that market, and that was maybe 20 to 25 years ago.

Ohlsson: You’re not using the lifestyle brands to replace it; you’re filling a void. We built a property in Rogers, Arkansas, and it was an Aloft, and it did exceptionally well. And I couldn’t figure out why the bar was doing $3,000 a night, and then you start to realize the hottest place in town used to be the Applebee’s.

Coles: Is the tail wagging the dog or is the dog wagging the tail? Some of these lifestyle brands came out to embrace the lifestyle segment, and then you talk about the old buildings, and how do you marry that together? We have the old buildings in Canada, we have a brand that’s been a traditional brand, and we’re having a look at areas like Chateau Lake Louise that has a natural lifestyle environment for a certain segment. We can’t modify the box itself, but we can modify what’s inside the box, and the service offering comes with that.

Gadbois: The other category we haven’t talked about is green, so congrats to Starwood with Element. But there’s really no green brand on the normal transient property.


Could you highlight future bright spots and challenges in the industry?

Toth: One of the bright spots in our company is new Canadians moving to Toronto. We want to create opportunities where we can share Ontario and the Muskoka area, Northern Ontario, with them.

Gibson: We’re in the low spot of the cycle, and although we are not going to see double-digit growth, we’re in for a few years of positive growth based on the timeline.

Duff: Not to be a downer, but overall geopolitical instability is — just look at what’s happened since we did this a year ago, and wow. Just factoring in the natural element — everything from the uncertainty about wanting to spend money but also the way it could affect our industry. It seems every week you’ve got another Air Canada-related issue.

Coles: We seem to be building volume. Rate can be a challenge, but the real challenge is how we translate that into building investment value in our hotels — real value and sustainable value and not just getting back to ’07 values.

Stanford: We are in a much better supply/demand balance today. We are looking at no more than 40 to 50 new projects a year, so there isn’t going to be a lot of development to drive that. If you look at the next two to three years, development is going to be mitigated, but that’s not a bad thing. We really need that catch up; the projects are going to be more difficult, because we are going to be looking at secondary and tertiary markets and have to work harder to make those projects work, but they’re going to be there. That’s a much better story than 2009/2010.

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