Conversion, PIP or sale: How investors can optimize every asset

Editor’s note: This thought leadership webinar on how hotel investors can determine whether a PIP, conversion or sale is the optimal choice for maximizing a hotel's ROI was sponsored by Encore. As the topic sponsor, Encore participated in the curation of participants but had no influence on the final editorial content. Register here for the complete on-demand event.

NATIONAL REPORT — Hotel investors stymied by the lingering impact of macroeconomic uncertainty are taking back control of their investment outcomes one asset at a time. In this exclusive Hotel Investment Today webinar, cross-disciplinary experts provided first-hand tips on their new criteria for weighing the merits of conversions versus PIPs versus renovations. They highlighted their best-practice advice on where they are uncovering hidden upside, what incentives they look for from hotel brands to keep a flag or reflag and the options for selling smarter in a soft market.

Offering guidance on how to get maximum ROI from every asset were:

• Ryan Bosch, Principal, Arriba Capital
• Derek Coleman, Vice President, Power Distribution, AVDI, Sales Support — Event Infrastructure Services, Encore
• Mary Beth Cutshall, Chief Growth Officer, Vision Hospitality Group
• Cartarwa Jones (CJ), Senior Vice President, Investment & Portfolio Analysis, RLJ Lodging Trust
• Darrin Phillips, CEO, Top Shelf Project Management
• Michael Ritz, Executive Vice President Investment, Peachtree Group
• Duane Schroder, Chief Growth Officer, Waterford Hotel Group

Mary Scoviak, Custom & Design Content Director, Hotel Investment Today by Northstar, served as moderator for this virtual event. Encore was the topic sponsor.

Bosch set the stage for the discussion with a snapshot of the finance markets. “We're in a short-term environment right now where deals are just difficult to underwrite for a multitude of reasons,” he said. “On the capital market side, if you're watching what's happening in the bond market, we've had 50 basis points of volatility in US Treasury rates. So, when you're trying to understand and underwrite what your borrowing cost is today, are you padding that with 20 to 35 basis points over the next 60 days, depending on where you land when your deal closes?”

Investors also need to understand how their lender is factoring in the impact of policy changes like the Post Liberation Day aftermath that widened credit spreads about 30 basis points.

“If you are underwriting a renovation, ground up construction, reconversion — how do you, price that in? No one has the perfect answer for that. So you have to stress test the deal to figure that out,” Bosch added.

One thing that is certain for investors, said Bosch, is that rising project costs mean lenders are writing bigger checks and doing bigger deals. That’s taking some regional banks out of play. “They no longer want to be in a space where they’re writing $20-million-plus checks on hotel deals.”

Conversion: Modifications that move the needle in 2025

Conversions have been the industry’s primary growth engine for years. But in this investment climate, the rules are changing.

“As a developer, owner, acquirer, manager of and lender for hotel assets, we absolutely love the conversion option. We think it's one of the most accretive options out there,” said Ritz. “You have so many potentially bountiful levers in a value-add opportunity. And in order to raise equity in today's climate, you really need to be value-add focused.” 
Before considering conversion, Ritz applies one key acid test: “Can I add value to something that I'm purchasing?”

“The answer to that is why we are really big fans of the lowest-touch conversions possible," Ritz said. "With all that volatility in the marketplace, the deeper the scope, the larger the project and, often, the more dream and vision you have in that asset. Usually, it's more challenging for the capital markets to get their arms around, meaning more risk, higher interest rates and lower attachment points from a lender perspective. So we've been successful in conducting conversions and renovations, but we've really done it on a finite scale.”

He sees “a lot of opportunity in the United States in particular, to convert assets to soft brands. “We love the soft brand concept but we think it’s extremely location dependent,” Ritz said. “If you sign on to Marriott or Hilton and you go with the soft brand, you're going to get some lift. But it's not an obvious equation to say that it's always going to be worth it. So, when I say light touch, I mean we go for newer vintage assets that have exit capability under their franchise agreements in which we're not doing a whole large-scale renovation or gut renovation.”

Jones prioritizes ongoing portfolio reviews to find opportunities to maximize value for RLJ’s investors. That’s led to six recently completed conversions and three more recently announced projects.

Jones' tests for rebranding assess how much upside is “inside the box” and how much CapEx it will require to tap into it. “We had a Wyndham in Charleston that we converted to a Curio. We went from $197 a night RevPAR to just over a $300,” she said. “But in addition to that, we were able to do other things to the box — just kind of change the food and beverage amenities and other different items to drive revenue. So our food and beverage revenue, for example, went up 82% post-repositioning.”

She also recommended investors weigh conversion options for portfolio assets at the end of their franchise terms.

The ground rules for assessing conversion potential are creating new checklists for evaluating overall revenue potential, said Coleman.

“We come across assets on all ends of the spectrum — from very large to very small. I think you have to look at each one holistically and say, ‘What are some of the opportunities I have here? Can I also host parties at my pool complex? What can I do to get more out of the outlet? Do I want to make it more attractive to local guests who just want to come in and watch an event? Do I have large walls that can generate income from digital branding for local events or MICE business?”

His best-practice advice for uncovering new revenue drivers is, “Look at all the space, especially non-traditional space you don't typically think about as revenue generating and then create an investment strategy that can help you drive that incremental revenue growth.” 

Before making any assessment of market potential, Coleman said investors have to recognize that the customer is changing. “Investors should understand the needs of the customer as an individual. It's important for operators and owners to really focus in on that, to think about the things that will drive revenue growth in that particular asset because those things are what guests want.” 

Schroder discussed the opportunities to leverage brands’ desire to gain flags and grow their footprint. Key money could be one conversion incentive, but how it’s allocated is asset by asset.

“Key money depends on what market you're going into, how many keys you have and what other considerations your project has that brand might prioritize,” he said. “The amount varies, but I definitely think there are brands that want to expand their footprint. So, they're more interested in giving key money and incentivizing you to switch to their flags.” 

When PIPs are the go-to

Webinar panelists agreed that rule one for making a renovation or PIP the best investment option is: Know your guest; know your costs and know when to stop spending.
 
“Construction costs have gone up regardless of the scope or scale. The supply chain also is a factor when you think about tariffs, the global economy and similar issues,” said Coleman.
 
He added, “We work with hotel owners and/or operators to carefully calibrate their infrastructure to fit the needs of their customers. We help them differentiate which amenities or services they have to invest in to satisfy guest demand and which are just ‘nice to have’ items they can cut if necessary. We collaborate with the investor to ensure that each investment decision will generate revenue, because that's the bottom line. If these improvements and these augmentations don't make money, then they're likely not going to get funded.”

Phillips said that owners aren’t just trying to optimize one PIP. “Our clients want to explore different options and want to understand what the costs of those options are to help them make decisions. We get a PIP to tell the owner what it costs to keep the hotel as is, or to look at a soft brand, or two other brands the owner would like us to look at. Sometimes they’re all Marriott or all Hilton PIPs. We just priced a 300-key project in the context of various options.”

As Schroder pointed out, investors have to determine how much value a brand has for them when making the PIP versus reflag decision. They also have to have a good relationship with the brand and be “on the same playing field.”

“Sometimes, owners look at a PIP and say, ‘I can do this, but no guest is going to walk into my property and pay $2 extra to stay at my hotel because of this,’” Schroder said. “But then, as an owner, you need to understand the brand's product has to be represented correctly. We all have brands. We all want our brand to be as good as the next one's, and that's kind of where they're also drawing the line in the sand and saying, all of the properties need to be at a certain level. And that's what's really driving this conversation significantly as well from the brands.”

Cutshall pointed to the importance of incorporating realistic contingencies into the renovation equation along with weekly monitoring on pricing once projects are under way. 

“Planning has become more important than ever before,” she said. “We are double, checking our pricing as much as we can to stay as current as possible, because things can shift day by day or week by week.”

She added, “I do think having enough contingency is critical. We were working through a deal yesterday as a team, and we took the contingency up another point just to have that confidence. It's very important to us at Vision Hospitality Group that we deliver up to expectation, and we don't disappoint. So we'd rather be prudent about our underwriting, our cost analysis, and make sure we have the right amounts of money to execute to the best of our ability, I mean, at the end of the day. Nobody can completely predict where things are going to go. We all want to see them, perhaps get a little bit more predictable. And wouldn't that be great?”

When it's time to sell

“This market is very tough to take something out for sale,” said Jones. She added that bid-ask spread remains significant but will “probably” shrink at some point this year. What will remain challenging? The uncertainty around variables from performance to tariffs that’s being figured into underwriting, noted Jones.

Waiting out the market won’t be an option for all owners, and it’s  not automatically the right choice for every property. Bosch and Jones expect CapEx-heavy PIPs to drive some sales later in 2025. “It’s probably a better option to sell from a return standpoint,” he added.

Expect to see more assets come to market as banks’ patience wears thin. Ritz is already seeing an uptick. “The last thing a bank wants is an asset on their balance sheet,” said Ritz. “They would rather sell the loan before they take the asset. If a refinance doesn't work, it'll move to a sale.” He added that there’s a growing disconnect between borrowers and lenders. “If the borrower doesn’t want to sell and can’t refinance, then the bank looks to do something else and be proactive with it, which typically results in them selling the loan or moving toward foreclosure.”

That might seem to suggest a few fire sales are in the offing, but Bosch and Ritz have straightforward advice for any buyers hoping for them: Don’t. “Someone will buy it before it gets to a distress point,” noted Ritz. That said, he does expect some quick, short sales, but neither predicts enough distress in the market to match the capital being raised for it.

As the panel concluded in their wrap-up remarks, there is no blanket strategy for success. 'In this market, or any market, optimizing value can only be done asset by asset,” said Jones.

Mary Scoviak is custom and design content director for Hotel Investment Today by Northstar.