In Part 2 of our series on conversions, the discussion turns to tapping a variety of
dollar distributors and partners to revamp acquisitions, holdings.
Note: In a series of articles, Hotel Investment Today dives
into what conversion experts see trending. Here is Part 1 with an overview on the
U.S. conversion market.
NATIONAL REPORT – When it comes to financing conversion
projects, there are a variety of options available to owners, developers and
investors who see the value in acquiring or reinventing an existing asset whose
profitability is stagnating.
In many cases, a property’s lethargy can be traced to shifts
in consumer expectations, the shiny new dual brand down the block or PIPs that,
for some reason, went poof.
To some industry players, a strong injection of “green
stuff” can wipe out such ills. Now, how are they getting it done?
Financing and friendly franchisors
“Debt is available from a range of sources, depending on
trailing cash flow, extent of CapEx required by the conversion plan,
and desired leverage and recourse levels,” asserted Krystal England, CIO
of real estate and development for private equity firm TMGOC Ventures.
England observed there’s been a positive trend in the debt
markets, particularly to acquire existing assets, noting they
“have improved substantially over the last nine to 12 months.”
Debt is available from a range of sources, depending on trailing cash flow, extent of CapEx required by the conversion plan, and desired leverage and recourse levels.
Krystal England
Traditionally, Rockbridge has been using bank financing to
execute on its renovation/conversion projects, noted Matt Welch, managing
director, investments. Rockbridge several years ago transformed the historic
Noel Hotel in Nashville, Tennessee, into the Noelle, a boutique hotel near
Printers Alley, and recently refreshed guestrooms and added amenities,
partnerships and services.
“We are cautiously optimistic that spreads may begin to
creep down and that more lenders will increase their activity,” Welch added.
Texas-based NewcrestImage employs a multi-layered financing
strategy, according to Managing Partner and CEO Mehul Patel. It includes
leveraging traditional debt financing by partnering with national and regional
lenders.
Private equity and joint ventures are also part of the mix
for NewcrestImage and include partnerships, like one with Hospitality Capital
Partners, that provide flexible funding structures, [as well as] SBA loans and
tax credits, according to Patel, which he said are especially relevant for
adaptive-reuse projects in urban markets.
When a conversion play involves rebranding, Ben Rowe,
founder/managing partner of KHP Capital Partners, said the funding structure is
built into the initial financing, which is both an acquisition loan and a
construction loan, and usually part of the underwritten business plan.
“We’re financing these projects with 50% to 65% debt with
the remainder comprised of equity from our funds, key money and, potentially,
cash flow from operations. Our lenders are mostly money center banks, but we
also finance our projects with debt funds, life insurance companies and
regional banks,” Rowe said.
Leaders also are seeing franchisors offer financial
incentives to help motivate brand-jumpers.
“We have seen all of the major brands be aggressive with key
money and other incentives to drive unit growth, particularly in the lifestyle
space where they are focused on growing their portfolios,” Rowe added.
We are cautiously optimistic that spreads may begin to creep down and that more lenders will increase their activity.
Matt Welch
Welch suggested that there may be more willingness to help
incentivize conversions for new brands with any such financial support likely
examined on a case-by-case basis and “based on a multitude of factors.”
Patel said in addition to key-money contributions,
incentives include offers of reduced royalty fees in the first one to three
years, PIP financing support and expedited approval processes.
Partners, products, upbranding
So, what are investors looking for in conversion brands?
Patel said NewcrestImage prioritizes brands that align with evolving consumer
preferences, operational efficiency and market positioning, with key criteria
including strong brand awareness and distribution.
“Hilton, Marriott and IHG properties often deliver instant
RevPAR uplift,” said Patel, adding loyalty-program strength and a brand’s
ability “to attract high-frequency, high-spend guests is critically important.”
Flexible brand standards also are a plus. “We work with
brands that allow customization to match the market’s needs,” Patel said.
Flexibility is an important consideration for KHP Capital
Partners as well. “We’re looking for brand partners that allow us the greatest
flexibility when it comes to how the hotels are operated and how we execute
renovations,” Rowe said. “Of course, we want to see reasonably consistent
standards in terms of product and service quality, but we want the flexibility
to invest capital in a manner that will truly enhance the guest experience
rather than simply meeting some new brand standard.”
Cutting to the chase, Rockbridge’s Welch put it this way:
“We are looking for 1) an ROI on the capital investment and 2) the ability to
meet consumer demands and help drive increased room nights and overall guest
spend at the property.”
Rather than executing the required PIP to maintain the existing brand, which is typically a defensive approach, we’re reimagining what the hotel can be and investing capital to do something transformative, delivering a lifestyle experience that generates a higher ADR. As a result, we’re getting a higher ROI on our renovation dollars.
Ben Rowe
“At a basic level,” added Rowe, “We’re looking for brand
partners that are going to be most effective at delivering the target customers
and driving a higher ADR in the most cost-effective way. In some cases that
means moving to a new lifestyle soft brand within the same brand system; in
other cases, we’re shifting to a new brand system. As part of this assessment,
we’re considering how saturated the market already is with that brand system,
particularly within our targeted price point.”
From a product perspective, NewcrestImage is focused on
flexible design trends in conversion brands that allow it to maximize existing
layouts while integrating modern amenities, Patel said. It’s also looking to
market relevance, wherein experience-driven offerings such as rooftop bars,
co-working spaces or wellness-focused amenities help properties stand out.
Operational efficiency via low labor models with strong RevPAR potential to
ensure profitability also are key, he added.
KHP’s Rowe indicated consumer trends around hotels can
enlighten conversion decisions. “We’re converting traditional hotels into
lifestyle hotels. These hotels are defined by bold design and strong individual
brand identities, embodied in engaging programming, energized restaurants and
bars and personalized service,” he said.
In addition to benefiting from growing consumer demand and
more flexible operating and renovation standards, Rowe said lifestyle hotels
offer greater means and opportunity to generate outsized performance
improvement. “By delivering memorable experiences, lifestyle hotels overcome
commoditization, increasing ADR potential and enhancing loyalty,” he said. “Urban
lifestyle hotels also have the potential to generate greater leisure demand,
particularly for weekend getaways, making them less dependent on traditional
business travelers. Additionally, restaurants, bars and lounges play a larger
role in positioning lifestyle hotels, and successful concepts can add cachet
and help drive ADR, generating incremental NOI per key.”
KHP Capital also is upbranding hotels, which Rowe cited as
“a big part” of a conversion opportunity. “Rather than executing the required
PIP to maintain the existing brand, which is typically a defensive approach,
we’re reimagining what the hotel can be and investing capital to do something
transformative, delivering a lifestyle experience that generates a higher ADR.
As a result, we’re getting a higher ROI on our renovation dollars.”
In many cases, a well-executed upbranding can unlock premium
ADR and loyalty-driven revenue, Patel noted. “For example, our recent
DoubleTree Suites conversion in Columbus, Ohio, saw a 20% RevPAR uplift within
months of rebranding.
Such a boost is often the hope in upbranding to help justify
the incremental ROI spend to execute the renovation/conversion, noted
Rockbridge’s Welch. “Conversions can be highly disruptive. So, you need to
believe that there is incremental revenue following the brand change,” he said.