How bifurcation is affecting drive-to-leisure customers

DALLAS — There’s been much talk this year about the bifurcation in the hotel industry, where higher-end hotels are outperforming their midscale and economy counterparts. Group and business travel has remained strong this year, while leisure travel is showing price sensitivity.

Mitch Provosty, CFO for Dallas-based RREAF Holdings, said he sees some bifurcation signs in the company’s drive-to-leisure beachfront properties. RREAF has a portfolio of 14 hotels in drive-to-leisure locations (within a four-to-five-hour drive of a major metro area). Eight of them are on beaches in Florida, Georgia and South Carolina.

Mitch Provosty

Provosty said most of the clientele for the beachfront locations are generally blue-collar. While he said he doesn’t have specific data, he thinks they are suffering more in this current economy.

“Most of our beachfront hotels are workforce vacations. They’re not Ritz-Carltons, and they appeal to a certain guest demographic,” he said. “I think they’re hurting worse in this economy than people as a whole.”

Provosty said that shows up in the hotels first in ADR. “Occupancy has stayed about the same,” he said. “There’s now a ceiling on the ADR, which is a ceiling on RevPAR. It just seems like our typical clientele in the drive-to-leisure market is more price-sensitive… We bring [ADR] down to see what people would sell at, and our occupancy is pretty much the same. Then you try and push it back up, and you just can’t.”

Provosty spoke to Hotel Investment Today earlier this month about a wide range of topics, including the bid-ask spread keeping RREAF out of the M&A market, the draw of RV parks and the challenges of new construction.

Hotel Investment Today (HIT): What’s the deal environment looking like right now?

Mitch Provosty: I don’t think my assessment over the last year has changed. Since the rates are up, there’s a disconnect between buyers and sellers on the cap rate, and I think the interest rate cut (this interview was conducted before the Federal Reserve did its 50 bps rate cut) will help reduce that gap. So you’re still seeing quite a bit of a gap.

HIT: Do you anticipate making acquisitions in the next 12 months?

Provosty: If it pencils and they come up… Typically the thing we’re looking for is an older mom and pop [property] on the beach. We’ve liked that market. Sometimes they come up, and sometimes they don’t. Sometimes, they come up with a price reflective of 2021 when everybody was on revenge vacation. Well, that’s just not going to happen again.

HIT: What’s your philosophy on hold time and when do you typically dispose of those properties?

Provosty: A lot of times, we create so much value that we can pull our investors’ equity out and continue to send them checks in the future. So, if we do that, we’re not really selling. We are just letting everybody have their cash flow. They’re not making any more beachfront properties.

HIT: You’ve made significant investments in RV parks over the last year. What’s the draw for RREAF?

Provosty: We view them as hotel resorts, basically without hotel rooms… We’re in the early stages of it, and we have had some successes. We will look at existing and/or greenfield projects, and there are lots of different ones that we can do. For some of them, you can go out and sell the pads like condos. Some of them are really, if you look at them, it's basically multifamily. They are long-term stays and some run just like a transient hotel.

HIT: Can you talk about the challenge of any new-build right now?

Provosty: The challenge for every other hotel that you want to build on the beach or anywhere is the absolute cost of construction. What I’m seeing is the floor on the beach is about half a million dollars, if not higher, and you really can’t make those numbers work well. That’s why it’s not happening.