The 2015 Investment Roundtable

Hotelier: What type of year was 2014 for hotel investment in Canada?

Marc-Aurèle Mailloux-Gagnon: Most of our clients did very well in most markets in Canada, except in northeastern Quebec where the lower mining activity impacted clients.

Carrie Russell: It was a very strong year. A good year to us is one where we have a lot of feasibility work, in addition to our base of appraisal business. So when there is transaction activity, and there’s people developing, and then the regular refinancing and availability of debt, we tend to do well. We had a lot of feasibility work in Alberta last year.

Ayaz Kara: 2014 was a great year. We opened both our hotels last year.

Allison Reid: We had a really strong year in North America and around the globe. We almost had our highest signings since 2006 — that was the high-water mark for the last cycle. When you look back a couple of years from now, last year, hopefully this year and next year, will be the high-water marks; they will surpass 2006 with actualized room production.

John O’Neill: It was a successful year on three accounts: with our investment partners, our real-estate investment trusts and our public company partners. We accessed the capital markets in Canada twice, and so it’s been favourable for hospitality investment. From our management company side, we grew by about 40 per cent. We went from about 4,200 rooms to 7,000 rooms in 2014. And, then the most important thing, how did the hotels do? There are always markets that suffer, but overall we’re looking at RevPAR growth north of six per cent in North America.

Scott Duff: It was a good year for us in Canada. From a performance point of view our full-service hotels made their budgets last year, [and there’s been a] great increase on RevPAR index, for our select-service hotels. That’s continued to climb year over year. We had a few new-build projects in Western Canada that are still proceeding, which is great from a construction point of view.
Tom Andrews: We sold 40 hotels last year, which is a record for our company. And we think 2015 is going to be a busy year. The highest yardstick we have had before is 32 sales but typically, it’s 20 to 25 across Canada.

Hotelier: How many brands and properties does your company have? John, in your case, why do you have more properties in the U.S. than in Canada?

JO: Up until 2010 our company was focused completely in Canada, but everyone knows what happened in 2008. The U.S. market and valuations and results were harder hit than Canadian properties, so [it’s about] opportunity. In 2009, we started to germinate an idea that if we were going to grow, then the U.S. was the best place to do it. The dollar was at par in 2009, and even dabbled above par for a while, and the hotel valuations were very low, so it was all about raising money to get into the U.S. market to buy assets and grow our management company. It started in 2010 where we raised money through private means and dabbled into the U.S. market for the first time.

Right now, with our 63 properties, we own a brand called Oak Tree Hotels, and we have 38 units in 25 states. We build them, we buy them and we focus that brand on the highway traveller and the commercial traveller but primarily freight-train crews and support crews. We have another 25 properties in the U.S.; they’re all branded: 11 Hiltons (nine Hampton Inns and two Embassy Suites), nine Marriotts, four IHG properties, one Choice (Sleep Inn), two Westin hotels in Vancouver and Whistler, all brands, and in the U.S. we are focusing on the mid-market select-service.

AK: We have a Hampton Inn and a Homewood Suites at the Calgary airport. We opened the Hampton in December 2013 and the Homewood Suites opened in April 2014, and we’re working on the final drawings for our full-service Hilton and Conference Centre. It’s a great project ­— 366 rooms on top of the 257 we already have, and we’re doing a 50,000 sq.-ft. conference centre attached to it, with all three properties linked together.
We are bullish on the Calgary market. We started an opportunity fund; we have our own capital company where we raise money for ourselves. We’re raising $50 million to acquire assets in major centres around Canada and the U.S., and we want to grow that.

SD: We’ve got close to 70 hotels in Canada. That’s across seven of our nine brands here. Our largest brand in Canada has been Four Points by Sheraton; we’ve got 27 open and operating with another nine in the pipeline.
Starwood as a company skews to the upper upscale and luxury side of things — 80 per cent of our distribution falls into that category, with the remainder on the select-service side, but that’s going to shift as we continue to build momentum on brands like Aloft and Element. We will have close to 100 Aloft hotels open this year in about 26 countries. We have three in Canada, including our first in the west, which opened in Calgary in the spring of last year; that was a very dramatic conversion.

Hotelier: How do you think the state of the world, the global oil issues and its effect on Western Canada will impact the hotel industry over the next year?

CR: First and foremost, lenders are coming back and re-evaluating projects — updating work that was done in the last couple of years — to get an idea of the new state of the environment. It will slow down the pace of development in the resource markets, primarily Alberta and Saskatchewan. There are developers that see this as an opportunity, because things were getting overheated and development costs were very high. Long-time developers in the province will see this as an opportunity and proceed with their projects. Others will shy away, because they just don’t have the depth of knowledge of the market and the ability to finance the same way. That said, the lower price of oil, while it hurts resource markets, is helping other parts of the country — tourism is doing better; the resort markets are doing great.

MMG: From a lender’s standpoint, we expect a slowdown in northern Alberta, secondary and tertiary markets, eastern B.C. a little bit and Saskatchewan. As Carrie says, other markets will benefit from this, especially from the lower Canadian dollar. U.S. tourism should go up. Overall, I don’t think it’s going to be a great impact, but we have to watch certain markets.

TA: From an investment point of view, this year’s price for the Hotel Vancouver would be the same as it’s going to sell for 12 months out. It’s not going to impact the value of hotels. There’s so much demand now for foreign investors coming in to try to pick off our assets. [We] can’t quite get them over to Alberta for now; there’s some reluctance there. The impact is going to be regional. It’s not going to impact Toronto or Montreal.

AK: We see occupancies getting better, but our ADR is going down, because there is a lot of competition. People are starting to panic, because they need to capture more [business]. Hoteliers are worried about the rest of the year. They’re saying, ‘As long as we retrench, and there’s opportunities, we need to make sure that it’s cyclical,’ especially in Alberta, because we really haven’t seen a downturn in a long time. Even in 2008 it was short-lived, and the rest of the country felt it. If you go forward, most hoteliers will benefit from this, with construction costs coming down a bit. It’s going to be an interesting year, especially in the later half. I was at a luncheon with the premier of Alberta, and their forecast for the next five years is $60 to $65 [for] oil. They’re also looking at how Alberta can survive on those kinds of dollars. If you wait it out a couple of years, we’ll all be fine.

JO: There’s always going to be factors that affect regional markets, whether it’s the price of oil, currency or interest rates. Something that will affect the whole industry, like a terrorism event, that’s when we really have to stand up and take notice. But a drop in the price in oil will have positive effects in resort markets or drive markets, so there’s always opportunity. The lesson for me as an operator is not to be too focused in one market…. As long as you’re diversified, it balances out.

Hotelier: How is 2015 shaping up?

CR: It’s market specific. Vancouver is going to have an exceptional 2015; it’s a great convention year in the city, it’s benefiting from the inbound Chinese travellers, the U.S. market. The resort markets seem to be off to a great start. There’s going to be challenges in Calgary in terms of new supply and softening in demand. Edmonton will be the same. Lots of oil and gas markets will be soft. As we move across the country, southern Saskatchewan will be soft, Saskatoon not too bad, Winnipeg flat, and then [it gets] better when you get into the eastern markets. A good year in Toronto, should be a good year in Montreal, likely Quebec City, flat in the Maritimes. I don’t think the shipbuilding contract has shown the full effect in Halifax yet, but it’s partially a supply issue. Eastern Canada is going to be stronger than Western Canada given that Alberta won’t be driving things this year.

MMG: We see a very strong year ahead for Central Canada, especially Toronto and Montreal. For many years there, the supply growth was much lower than demand growth, so those markets will have reached functional capacity and negative supply growth, so we expect great performance in those markets.

Hotelier: Are rates improving?

SD: One of the things we’re hearing from our hotels in Alberta, from full-service properties in Calgary and Edmonton, is transient pace is off there, and even large corporate contract groups are coming back and wanting to renegotiate what their 2015 rates were. That’s where the biggest impact is going to
be for us.

JO: Right now new supply is ticking away at one to two per cent, and it hasn’t had a negative impact on the growth of our industry, but that will change. For 2015, not a big concern, but I will echo the comments about average rates. It’s a huge issue for us. From an industry point of view, average rates have not grown in Canada like in the U.S. As an industry we have been a little shy about charging appropriately for our product and our services, but costs have continued to grow quicker than our rates. It’s still shocking. Some average rates in some of our western Canadian properties are at or below the levels they were a decade ago, and there’s no reason for it other than operator confidence.

AK: I agree with John. The first thing hoteliers do is panic and drop rates. You need to hold on and say ‘No, I’m not going to do that.’

Hotelier: Which segments will see the most growth?

SD: The select-service side is where our bread is buttered. They are a lot easier to finance, they are a lot more likely to get built, they don’t have a residential component required to get things done and they are a lot more attractive to lenders. There’s a lot more places you can put these hotels. That’s why you see, for example, the Four Points brand growing, because it’s very adaptable for new builds and conversions. It’s quite scalable to be sort of a mini full-service hotel when it needs to be and more of a streamlined model when it makes sense as well.

AR: In 2015, we are starting to see luxury coming back. We’ll have some luxury signings. So the question that always comes up is what happens with traditional full-service hotels, because those have been the laggard. There’s been a barbell approach with select-service, and now luxury is coming back and independents. It’s going to be interesting to see what happens with full-service hotels and how they reinvent themselves.
CR: Extended-stay is another area we’re starting to see grow — the mid-scale extended, the TownePlace Suites, Home2 Suites, the dual branding of hotels [is also big], putting a limited-service plus and extended-
stay together.

AK: You can play on the hotels. For example, if limited-service is doing very well, you can look at ways to oversell it and try to upgrade people. It gives you lots of flexibility when you have properties that are joined together with that model.

JO: Select-service has been a big growth area. Extended-stay has still not seen that growth in Canada, but you will see a big explosion in the extended-stay product because of the risk-averse capital that is driving that market…. It’s less risky and requires shorter roads to stabilization and ramp up. A four-star resort may take four years to ramp up. Extended-stay can be stabilized in 45 days if you’re in the right market. If you follow that money, you hit your numbers in year one or two instead of year four or five.

CR: That’s one of the most surprising things for me in the Canadian hotel industry, how long it’s taken Canadians to grab onto the extended model.

AK: It’s partly due to the mixture of owners and operators in Canada…. They don’t want to take too much risk. There are very few extended players. You need to get out of that comfort zone. Our extended-stay has been open less than a year, and even now we’re running at 84 per cent. The numbers make sense at that point. We’re doing 70-per-cent occupancy in the longer than four nights. Our average is 3.1 days.
It’s great.

SD: You talk about why it has taken so long to do that. If you look back there was a time when there weren’t a lot of Hampton Inns in Canada or even Holiday Inn Expresses. There’s a hierarchy of brands that will go into a market. So, if you’ve got a town that has not seen new supply in 20 or 30 years, the first thing you are going to build is not going to be an upscale extended-stay product. If there was one branded hotel it was likely a Best Western, if there were two, it was a Super 8 then a Travelodge, or a Comfort Inn and then Hampton Inn, Holiday Inn Express. When you get that build up you start looking at a differentiated product.

JO: To clarify, that’s the next wave, the Home2, or the extended-stay, but I’m also talking about real extended-stay. Value Place Inns, for example, has 200 units in the U.S. with an average stay of 32 nights. That’s really extended-stay. There’s a market for people relocating. When I talk about extended-stay, I talk about that opportunity in Canada, because the U.S. market has clearly found it.

Hotelier: What are some of the biggest challenges you face as operators?

AK: As a newcomer to the industry, I see the Expedias having more impact and a bigger threat to the industry.

JO: While distribution has increased due to the Expedias and Hotels.com, I go back to one of my earlier comments about average rate growth, or lack thereof. While I talked about our lack of confidence, the other big reason for lack of growth has been the Expedias and Hotels.com. So on one hand, the distribution has been nice, but occupancy hasn’t risen. It’s just another new player trying to control the distribution. We’ve done all we can. We have more sophisticated yield-revenue management. The brands have done all they can by forcing their hotels, in a good way, to offer the lowest-price guarantee on Starwood.com, as opposed to someone else’s [site], but as a consumer there’s so much choice, so we have to sometimes offer opaque deals. So, if we got $99, we don’t jeopardize our rate integrity on a branded website. All of that has gone to keeping our rates artificially low and also reduce our profit margins. What’s the biggest challenge? Absolutely OTAs and booking agents.

CR: Expedia doesn’t eliminate the need for a brand in a lot of cases. That’s why we’re also seeing the soft branding — the collections, that you can plug into and be part of their systems.

SD: The collection type brands gives people flexibility to do their own thing, whether it’s from a design or a service offering, but you still have that global platform that someone will benefit from: loyalty program, central reservations.

Hotelier: So how important is branding today?

JO: I’m a huge believer in branding. I’m not a fan of the soft branding collection. It’s like being half pregnant. You need to be all in, embrace everything that brand has to offer, whether it’s a Hampton Inn or a full-service Westin. It’s [about] an emotional connection with your staff, your building. That’s why you have a brand. I don’t get that connection when I’m in a soft brand, a collection. There’s a little plaque behind the front desk and that’s it.

Hotelier: Millennials are keen to stay in independent hotels. Will that be a big consideration moving forward?

JO: That’s not a sustainable trend. Where’s the money? You gotta follow the money. They don’t have the money right now; they might in 15 or 20 years, but their aspirations may change. Yes, there’s a market for the small independent, but I don’t think that’s a big growth market. Branding will never go away, and the luxury hotel market will never go away.

SD: When people pay a lot of money for something, they want something that stands behind that as well — whether it’s a warranty on your automobile or the expectation that if I make a room-service order, it’s going to come in a reasonable amount of time. If I have a problem with my stay, I’ve got back-up to deal with it. That’s where brands are very important for people. There’s an expectation that is met, and there’s something standing behind that. There are great examples of completely independent hotels, but you need such a unique offering. I don’t think you can get away from branding.

Hotelier: Are there too many brands? How many more can we have?

SD: For our organization, we don’t have very many at nine. That’s less than half of what some have…. But there are many where you would be hair-splitting to define the differences. There are a lot of people chasing certain segments, lifestyle, boutique. There is a massive proliferation of hotels, and I don’t know what the demand is.

JO: The big hotel companies need to have more offerings, because their brand offerings are saturated in the markets they are growing in.

Hotelier: What are the biggest trends impacting hotels?

SD: Dual-branding, in some cases triple on a given site, allows you to attract a wide spectrum of customers. You can consolidate a lot of your management requirements, but you’re not putting all your eggs in one basket. And technology in hotels is changing all the time.

JO: Margins are challenged, because average rate growth [is] not keeping up with labour costs and operational growth. You talk about technology growth and the biggest one is the mobile check-in. You can check in when you’re not there, choose your room, have a bar code, bypass the front desk and go straight to your room. Mobile check-in will be across the brands in five to seven years. It takes a lot of time. Some have embraced it now.… It’s a cost-saver. But it’s also a service reducer. From an operator point of view, that’s going to help a little bit. From a consumer point of view, it’s convenient…. It appeals to the younger generation.

AK: Going forward, you’re going to see a mish-mash of catering to different categories of people. That’s a big challenge. There is a lot of thought going into the lobby design and the interaction that you have. Some people are looking at not dealing with people, but others look to mingle. Technology will be an opportunity to encompass that.

JO: Wi-Fi is another trend. Three to five years from now it will all be free. It’s not a matter of if; it’s a matter of when. We better plan for that.

AK: We need to embrace it. If we try to hang on to these things it will come back to bite us. I’m paying $300 a night, and you’re not going to give me $5 Internet for free?

SD: Beyond technology, mixed-use development has become a big trend in the last few years, often with residential. There are certain brands that are going to be more complementary to a residential pairing than others. We just opened Element, an extended-stay hotel here [in Vancouver] that has a huge residential component. It’s not branded residences, but that’s what drove a big part of the economics. They would never have built an Element like that as a standalone. In a similar vein, there’s also been amazing adaptive reuse of buildings — former offices or industrial space.

Hotelier: Where is the primary source of funding coming from these days?

CR: BDC is a big source of debt capital for hotels, credit unions, regional banks. It’s still very limited from the big banks. We are seeing more lenders come in, like TransCapital.

MMG: The fact that a lot of other commercial real-estate assets are bringing lower capital returns, like office buildings and multi-residential, will attract investors and also lenders who will benefit from a higher return. Now we’re seeing more external lenders coming to the Canadian market. The U.S. lenders are coming back more strongly — Merrill Lynch, Bank of America, Wells Fargo. We’re also seeing lenders and investors from outside the U.S., mainly Asian lenders, German, Aareal Bank, for example. The market is in an upward trend, and this comforts them. In 2009, you didn’t see many U.S. banks flowing to Canada.

AK: I still find the Canadian banks are archaic. There are opportunities, but if you limit the growth it’s so difficult because you have to raise your own money and be your own bank.

JO: From the debt perspective, that has changed for the good throughout North America. There are many examples of banks and credit unions lending on very good terms these days: low rates, good term, interest-only provisions for three or four years, so you can get a good start on rejigging a property. We never saw that previously. The debt markets are as healthy as we’ve seen. The Canadian banking system may be conservative, but it saved us as an industry in 2008 and ’09. For me, that created the opportunity in the U.S. in 2009 and 2010 because of the Canadian dollar getting so strong.

MMG: Canadian lenders should be more flexible in terms of financing…. Certain sponsors should be sponsored more aggressively. Yet we’re not doing it.

Hotelier: How will next year shape up?

AK: We’re very healthy in Canada. Debt-to-equity ratio is very low. There are huge opportunities. We’ve talked about segments and pockets slowing down, but overall it’s great going forward.

CR: There is good rate growth potential and lots of opportunity for rate growth. Resort assets and urban markets are strong and healthy.

MMG: The fundamentals are great, especially in downtown core areas like Montreal and Toronto. U.S. tourists will come here in higher numbers in the next few years because of the dollar.

SD: The low dollar will also keep Canadians at home.

JO: Slow and steady for Canada. This industry has had more cycles in the
last 30 years … and we’ll continue to have more…. There are a lot of brands that aren’t represented in Canada. That development pipeline is still happening. Money is coming into Canada, so there will be lots of activity in the next five years. We haven’t priced ourselves out of the market yet. There’s lots of room for growth on rate. People will always find ways to build products if there’s a need: conversions, mixed-use development.

Hotelier: What type of year was 2014 for hotel investment in Canada?

Marc-Aurèle Mailloux-Gagnon: Most of our clients did very well in most markets in Canada, except in northeastern Quebec where the lower mining activity impacted clients.

Carrie Russell: It was a very strong year. A good year to us is one where we have a lot of feasibility work, in addition to our base of appraisal business. So when there is transaction activity, and there’s people developing, and then the regular refinancing and availability of debt, we tend to do well. We had a lot of feasibility work in Alberta last year.

Ayaz Kara: 2014 was a great year. We opened both our hotels last year.

Allison Reid: We had a really strong year in North America and around the globe. We almost had our highest signings since 2006 — that was the high-water mark for the last cycle. When you look back a couple of years from now, last year, hopefully this year and next year, will be the high-water marks; they will surpass 2006 with actualized room production.

John O’Neill: It was a successful year on three accounts: with our investment partners, our real-estate investment trusts and our public company partners. We accessed the capital markets in Canada twice, and so it’s been favourable for hospitality investment. From our management company side, we grew by about 40 per cent. We went from about 4,200 rooms to 7,000 rooms in 2014. And, then the most important thing, how did the hotels do? There are always markets that suffer, but overall we’re looking at RevPAR growth north of six per cent in North America.

Scott Duff: It was a good year for us in Canada. From a performance point of view our full-service hotels made their budgets last year, [and there’s been a] great increase on RevPAR index, for our select-service hotels. That’s continued to climb year over year. We had a few new-build projects in Western Canada that are still proceeding, which is great from a construction point of view.
Tom Andrews: We sold 40 hotels last year, which is a record for our company. And we think 2015 is going to be a busy year. The highest yardstick we have had before is 32 sales but typically, it’s 20 to 25 across Canada.

Hotelier: How many brands and properties does your company have? John, in your case, why do you have more properties in the U.S. than in Canada?

JO: Up until 2010 our company was focused completely in Canada, but everyone knows what happened in 2008. The U.S. market and valuations and results were harder hit than Canadian properties, so [it’s about] opportunity. In 2009, we started to germinate an idea that if we were going to grow, then the U.S. was the best place to do it. The dollar was at par in 2009, and even dabbled above par for a while, and the hotel valuations were very low, so it was all about raising money to get into the U.S. market to buy assets and grow our management company. It started in 2010 where we raised money through private means and dabbled into the U.S. market for the first time.

Right now, with our 63 properties, we own a brand called Oak Tree Hotels, and we have 38 units in 25 states. We build them, we buy them and we focus that brand on the highway traveller and the commercial traveller but primarily freight-train crews and support crews. We have another 25 properties in the U.S.; they’re all branded: 11 Hiltons (nine Hampton Inns and two Embassy Suites), nine Marriotts, four IHG properties, one Choice (Sleep Inn), two Westin hotels in Vancouver and Whistler, all brands, and in the U.S. we are focusing on the mid-market select-service.

AK: We have a Hampton Inn and a Homewood Suites at the Calgary airport. We opened the Hampton in December 2013 and the Homewood Suites opened in April 2014, and we’re working on the final drawings for our full-service Hilton and Conference Centre. It’s a great project ­— 366 rooms on top of the 257 we already have, and we’re doing a 50,000 sq.-ft. conference centre attached to it, with all three properties linked together.
We are bullish on the Calgary market. We started an opportunity fund; we have our own capital company where we raise money for ourselves. We’re raising $50 million to acquire assets in major centres around Canada and the U.S., and we want to grow that.

SD: We’ve got close to 70 hotels in Canada. That’s across seven of our nine brands here. Our largest brand in Canada has been Four Points by Sheraton; we’ve got 27 open and operating with another nine in the pipeline.
Starwood as a company skews to the upper upscale and luxury side of things — 80 per cent of our distribution falls into that category, with the remainder on the select-service side, but that’s going to shift as we continue to build momentum on brands like Aloft and Element. We will have close to 100 Aloft hotels open this year in about 26 countries. We have three in Canada, including our first in the west, which opened in Calgary in the spring of last year; that was a very dramatic conversion.

Hotelier: How do you think the state of the world, the global oil issues and its effect on Western Canada will impact the hotel industry over the next year?

CR: First and foremost, lenders are coming back and re-evaluating projects — updating work that was done in the last couple of years — to get an idea of the new state of the environment. It will slow down the pace of development in the resource markets, primarily Alberta and Saskatchewan. There are developers that see this as an opportunity, because things were getting overheated and development costs were very high. Long-time developers in the province will see this as an opportunity and proceed with their projects. Others will shy away, because they just don’t have the depth of knowledge of the market and the ability to finance the same way. That said, the lower price of oil, while it hurts resource markets, is helping other parts of the country — tourism is doing better; the resort markets are doing great.

MMG: From a lender’s standpoint, we expect a slowdown in northern Alberta, secondary and tertiary markets, eastern B.C. a little bit and Saskatchewan. As Carrie says, other markets will benefit from this, especially from the lower Canadian dollar. U.S. tourism should go up. Overall, I don’t think it’s going to be a great impact, but we have to watch certain markets.

TA: From an investment point of view, this year’s price for the Hotel Vancouver would be the same as it’s going to sell for 12 months out. It’s not going to impact the value of hotels. There’s so much demand now for foreign investors coming in to try to pick off our assets. [We] can’t quite get them over to Alberta for now; there’s some reluctance there. The impact is going to be regional. It’s not going to impact Toronto or Montreal.

AK: We see occupancies getting better, but our ADR is going down, because there is a lot of competition. People are starting to panic, because they need to capture more [business]. Hoteliers are worried about the rest of the year. They’re saying, ‘As long as we retrench, and there’s opportunities, we need to make sure that it’s cyclical,’ especially in Alberta, because we really haven’t seen a downturn in a long time. Even in 2008 it was short-lived, and the rest of the country felt it. If you go forward, most hoteliers will benefit from this, with construction costs coming down a bit. It’s going to be an interesting year, especially in the later half. I was at a luncheon with the premier of Alberta, and their forecast for the next five years is $60 to $65 [for] oil. They’re also looking at how Alberta can survive on those kinds of dollars. If you wait it out a couple of years, we’ll all be fine.

JO: There’s always going to be factors that affect regional markets, whether it’s the price of oil, currency or interest rates. Something that will affect the whole industry, like a terrorism event, that’s when we really have to stand up and take notice. But a drop in the price in oil will have positive effects in resort markets or drive markets, so there’s always opportunity. The lesson for me as an operator is not to be too focused in one market…. As long as you’re diversified, it balances out.

Hotelier: How is 2015 shaping up?

CR: It’s market specific. Vancouver is going to have an exceptional 2015; it’s a great convention year in the city, it’s benefiting from the inbound Chinese travellers, the U.S. market. The resort markets seem to be off to a great start. There’s going to be challenges in Calgary in terms of new supply and softening in demand. Edmonton will be the same. Lots of oil and gas markets will be soft. As we move across the country, southern Saskatchewan will be soft, Saskatoon not too bad, Winnipeg flat, and then [it gets] better when you get into the eastern markets. A good year in Toronto, should be a good year in Montreal, likely Quebec City, flat in the Maritimes. I don’t think the shipbuilding contract has shown the full effect in Halifax yet, but it’s partially a supply issue. Eastern Canada is going to be stronger than Western Canada given that Alberta won’t be driving things this year.

MMG: We see a very strong year ahead for Central Canada, especially Toronto and Montreal. For many years there, the supply growth was much lower than demand growth, so those markets will have reached functional capacity and negative supply growth, so we expect great performance in those markets.

Hotelier: Are rates improving?

SD: One of the things we’re hearing from our hotels in Alberta, from full-service properties in Calgary and Edmonton, is transient pace is off there, and even large corporate contract groups are coming back and wanting to renegotiate what their 2015 rates were. That’s where the biggest impact is going to
be for us.

JO: Right now new supply is ticking away at one to two per cent, and it hasn’t had a negative impact on the growth of our industry, but that will change. For 2015, not a big concern, but I will echo the comments about average rates. It’s a huge issue for us. From an industry point of view, average rates have not grown in Canada like in the U.S. As an industry we have been a little shy about charging appropriately for our product and our services, but costs have continued to grow quicker than our rates. It’s still shocking. Some average rates in some of our western Canadian properties are at or below the levels they were a decade ago, and there’s no reason for it other than operator confidence.

AK: I agree with John. The first thing hoteliers do is panic and drop rates. You need to hold on and say ‘No, I’m not going to do that.’

Hotelier: Which segments will see the most growth?

SD: The select-service side is where our bread is buttered. They are a lot easier to finance, they are a lot more likely to get built, they don’t have a residential component required to get things done and they are a lot more attractive to lenders. There’s a lot more places you can put these hotels. That’s why you see, for example, the Four Points brand growing, because it’s very adaptable for new builds and conversions. It’s quite scalable to be sort of a mini full-service hotel when it needs to be and more of a streamlined model when it makes sense as well.

AR: In 2015, we are starting to see luxury coming back. We’ll have some luxury signings. So the question that always comes up is what happens with traditional full-service hotels, because those have been the laggard. There’s been a barbell approach with select-service, and now luxury is coming back and independents. It’s going to be interesting to see what happens with full-service hotels and how they reinvent themselves.
CR: Extended-stay is another area we’re starting to see grow — the mid-scale extended, the TownePlace Suites, Home2 Suites, the dual branding of hotels [is also big], putting a limited-service plus and extended-
stay together.

AK: You can play on the hotels. For example, if limited-service is doing very well, you can look at ways to oversell it and try to upgrade people. It gives you lots of flexibility when you have properties that are joined together with that model.

JO: Select-service has been a big growth area. Extended-stay has still not seen that growth in Canada, but you will see a big explosion in the extended-stay product because of the risk-averse capital that is driving that market…. It’s less risky and requires shorter roads to stabilization and ramp up. A four-star resort may take four years to ramp up. Extended-stay can be stabilized in 45 days if you’re in the right market. If you follow that money, you hit your numbers in year one or two instead of year four or five.

CR: That’s one of the most surprising things for me in the Canadian hotel industry, how long it’s taken Canadians to grab onto the extended model.

AK: It’s partly due to the mixture of owners and operators in Canada…. They don’t want to take too much risk. There are very few extended players. You need to get out of that comfort zone. Our extended-stay has been open less than a year, and even now we’re running at 84 per cent. The numbers make sense at that point. We’re doing 70-per-cent occupancy in the longer than four nights. Our average is 3.1 days.
It’s great.

SD: You talk about why it has taken so long to do that. If you look back there was a time when there weren’t a lot of Hampton Inns in Canada or even Holiday Inn Expresses. There’s a hierarchy of brands that will go into a market. So, if you’ve got a town that has not seen new supply in 20 or 30 years, the first thing you are going to build is not going to be an upscale extended-stay product. If there was one branded hotel it was likely a Best Western, if there were two, it was a Super 8 then a Travelodge, or a Comfort Inn and then Hampton Inn, Holiday Inn Express. When you get that build up you start looking at a differentiated product.

JO: To clarify, that’s the next wave, the Home2, or the extended-stay, but I’m also talking about real extended-stay. Value Place Inns, for example, has 200 units in the U.S. with an average stay of 32 nights. That’s really extended-stay. There’s a market for people relocating. When I talk about extended-stay, I talk about that opportunity in Canada, because the U.S. market has clearly found it.

Hotelier: What are some of the biggest challenges you face as operators?

AK: As a newcomer to the industry, I see the Expedias having more impact and a bigger threat to the industry.

JO: While distribution has increased due to the Expedias and Hotels.com, I go back to one of my earlier comments about average rate growth, or lack thereof. While I talked about our lack of confidence, the other big reason for lack of growth has been the Expedias and Hotels.com. So on one hand, the distribution has been nice, but occupancy hasn’t risen. It’s just another new player trying to control the distribution. We’ve done all we can. We have more sophisticated yield-revenue management. The brands have done all they can by forcing their hotels, in a good way, to offer the lowest-price guarantee on Starwood.com, as opposed to someone else’s [site], but as a consumer there’s so much choice, so we have to sometimes offer opaque deals. So, if we got $99, we don’t jeopardize our rate integrity on a branded website. All of that has gone to keeping our rates artificially low and also reduce our profit margins. What’s the biggest challenge? Absolutely OTAs and booking agents.

CR: Expedia doesn’t eliminate the need for a brand in a lot of cases. That’s why we’re also seeing the soft branding — the collections, that you can plug into and be part of their systems.

SD: The collection type brands gives people flexibility to do their own thing, whether it’s from a design or a service offering, but you still have that global platform that someone will benefit from: loyalty program, central reservations.

Hotelier: So how important is branding today?

JO: I’m a huge believer in branding. I’m not a fan of the soft branding collection. It’s like being half pregnant. You need to be all in, embrace everything that brand has to offer, whether it’s a Hampton Inn or a full-service Westin. It’s [about] an emotional connection with your staff, your building. That’s why you have a brand. I don’t get that connection when I’m in a soft brand, a collection. There’s a little plaque behind the front desk and that’s it.

Hotelier: Millennials are keen to stay in independent hotels. Will that be a big consideration moving forward?

JO: That’s not a sustainable trend. Where’s the money? You gotta follow the money. They don’t have the money right now; they might in 15 or 20 years, but their aspirations may change. Yes, there’s a market for the small independent, but I don’t think that’s a big growth market. Branding will never go away, and the luxury hotel market will never go away.

SD: When people pay a lot of money for something, they want something that stands behind that as well — whether it’s a warranty on your automobile or the expectation that if I make a room-service order, it’s going to come in a reasonable amount of time. If I have a problem with my stay, I’ve got back-up to deal with it. That’s where brands are very important for people. There’s an expectation that is met, and there’s something standing behind that. There are great examples of completely independent hotels, but you need such a unique offering. I don’t think you can get away from branding.

Hotelier: Are there too many brands? How many more can we have?

SD: For our organization, we don’t have very many at nine. That’s less than half of what some have…. But there are many where you would be hair-splitting to define the differences. There are a lot of people chasing certain segments, lifestyle, boutique. There is a massive proliferation of hotels, and I don’t know what the demand is.

JO: The big hotel companies need to have more offerings, because their brand offerings are saturated in the markets they are growing in.

Hotelier: What are the biggest trends impacting hotels?

SD: Dual-branding, in some cases triple on a given site, allows you to attract a wide spectrum of customers. You can consolidate a lot of your management requirements, but you’re not putting all your eggs in one basket. And technology in hotels is changing all the time.

JO: Margins are challenged, because average rate growth [is] not keeping up with labour costs and operational growth. You talk about technology growth and the biggest one is the mobile check-in. You can check in when you’re not there, choose your room, have a bar code, bypass the front desk and go straight to your room. Mobile check-in will be across the brands in five to seven years. It takes a lot of time. Some have embraced it now.… It’s a cost-saver. But it’s also a service reducer. From an operator point of view, that’s going to help a little bit. From a consumer point of view, it’s convenient…. It appeals to the younger generation.

AK: Going forward, you’re going to see a mish-mash of catering to different categories of people. That’s a big challenge. There is a lot of thought going into the lobby design and the interaction that you have. Some people are looking at not dealing with people, but others look to mingle. Technology will be an opportunity to encompass that.

JO: Wi-Fi is another trend. Three to five years from now it will all be free. It’s not a matter of if; it’s a matter of when. We better plan for that.

AK: We need to embrace it. If we try to hang on to these things it will come back to bite us. I’m paying $300 a night, and you’re not going to give me $5 Internet for free?

SD: Beyond technology, mixed-use development has become a big trend in the last few years, often with residential. There are certain brands that are going to be more complementary to a residential pairing than others. We just opened Element, an extended-stay hotel here [in Vancouver] that has a huge residential component. It’s not branded residences, but that’s what drove a big part of the economics. They would never have built an Element like that as a standalone. In a similar vein, there’s also been amazing adaptive reuse of buildings — former offices or industrial space.

Hotelier: Where is the primary source of funding coming from these days?

CR: BDC is a big source of debt capital for hotels, credit unions, regional banks. It’s still very limited from the big banks. We are seeing more lenders come in, like TransCapital.

MMG: The fact that a lot of other commercial real-estate assets are bringing lower capital returns, like office buildings and multi-residential, will attract investors and also lenders who will benefit from a higher return. Now we’re seeing more external lenders coming to the Canadian market. The U.S. lenders are coming back more strongly — Merrill Lynch, Bank of America, Wells Fargo. We’re also seeing lenders and investors from outside the U.S., mainly Asian lenders, German, Aareal Bank, for example. The market is in an upward trend, and this comforts them. In 2009, you didn’t see many U.S. banks flowing to Canada.

AK: I still find the Canadian banks are archaic. There are opportunities, but if you limit the growth it’s so difficult because you have to raise your own money and be your own bank.

JO: From the debt perspective, that has changed for the good throughout North America. There are many examples of banks and credit unions lending on very good terms these days: low rates, good term, interest-only provisions for three or four years, so you can get a good start on rejigging a property. We never saw that previously. The debt markets are as healthy as we’ve seen. The Canadian banking system may be conservative, but it saved us as an industry in 2008 and ’09. For me, that created the opportunity in the U.S. in 2009 and 2010 because of the Canadian dollar getting so strong.

MMG: Canadian lenders should be more flexible in terms of financing…. Certain sponsors should be sponsored more aggressively. Yet we’re not doing it.

Hotelier: How will next year shape up?

AK: We’re very healthy in Canada. Debt-to-equity ratio is very low. There are huge opportunities. We’ve talked about segments and pockets slowing down, but overall it’s great going forward.

CR: There is good rate growth potential and lots of opportunity for rate growth. Resort assets and urban markets are strong and healthy.

MMG: The fundamentals are great, especially in downtown core areas like Montreal and Toronto. U.S. tourists will come here in higher numbers in the next few years because of the dollar.

SD: The low dollar will also keep Canadians at home.

JO: Slow and steady for Canada. This industry has had more cycles in the
last 30 years … and we’ll continue to have more…. There are a lot of brands that aren’t represented in Canada. That development pipeline is still happening. Money is coming into Canada, so there will be lots of activity in the next five years. We haven’t priced ourselves out of the market yet. There’s lots of room for growth on rate. People will always find ways to build products if there’s a need: conversions, mixed-use development.