Mission Impossible Part 1

 

The hotel business used to be fun.  It was full of camaraderie, meeting new people, developing long lasting relationships.  Well stuff happens doesn’t it?  Awhile back we all got a wake up call.  It was from Darwin. 

Now we need to hold on and survive.  Like a fish on a sand flat at low tide.  We know the water will come in sooner, hopefully sooner.  In the meantime we need to be nimble, act fast and make all the right decisions. 

The first focus is RevPAR because an increase in RevPAR correlates directly to an increase in equity, value and yes, as a collateral benefit, cash flow.  In fact according to a recent article in Hotel Online “a general rule is that every 10% increase in RevPAR translates into a 45% gain in the value of the hotel and its profits”. 

So, how savvy are you as an owner in today’s revenue management.  I actually had an epiphany on this in the last couple of days.  I was working on a hotel that seemed to need an immediate boost in average rate in order to overcome a cost structure driven beyond reasonableness by a union contract.  But when we raised rates the pace didn’t just slow down, it was hard to perceive a trickle.  When we raised rates we eliminated those pesky OTAs (Online Travel Agents) and we dropped off the first page of Expedia.  By the way only 25% of people go beyond the first page of Expedia and they are probably mostly hoteliers checking rates. 

What happened is we abandoned one of the new paradigms – Optimize Your Ability to be Found Online.   We didn’t touch the rates in May.  May was picking up just fine.  And then all signs of life were gone.  No one could find us. 

Check out the Billboard Effect.  Exposure on Expedia directly correlated to the Hotel’s Web bookings on its own site.  People shopped on Expedia, sometimes booked on Expedia but they also went back to buy on the Hotel’s site.  Without the Billboard Effect we were becalmed. 

Forget what you used to know.  Learn about links, pay per click, SEO, OTAs, and online advertising.  These aren’t the good old days full of fun frolic and a reservations board with lots of little pieces of tape.  Learn or be a victim of Darwin’s wake up call. 

Stay tuned for a discussion of service and profitability.  Mutually exclusive?

No News is Good News

This is going to be a very informal, casual post.  In fact it will more so resemble an editorial of sorts than anything else.  An opinion if you will. While reviewing emails yesterday one in particular captured my attention with the use of two simple words, “PRESS RELEASE“.  Naturally I expected to see a piece of very current and topical information but much to my chagrin was burned by a Wikipedia-esque explanation of National Asset Management Agency (“NAMA”).  I’m searching for a logical explanation to help me understand exactly why a brokerage company would feel the need to issue a press release covering a topic that not only fails to be urgently newsworthy, but more importantly has no exclusive relation or tie to them whatsoever.

Entrepreneur.com defines a press release as the following, ” A public relations announcement issued to the news media and other targeted publications for the purpose of letting the public know of company developments.”  Nothing about the information shared in this “PRESS RELEASE” educates the public on company developments occurring at CBRE Hotels.  The definition continues on to say, “First, be sure you have a reason for sending a press release.  A grand opening, a new product or a special event are all good reasons.”  Am I missing something here?  The press release strategy is a great technique and tool when a company actually has something of value to share.  When it doesn’t, blasting one just to throw a letterhead and logo in people’s faces defeats the purpose entirely.

What I find most amusing about this is that NAMA has already been addressed and discussed in numerous other news reports, blogs and periodicals prior to this “special report”.  One of which was a March 5th, 2010 blog by Barbara De Lollis on USA Today’s Hotel Check-In, featured HERE.  Barbara explains what NAMA is in a fairly concise manner and if anyone were to be further interested in a more detailed definition, there’s always Google, Wikipedia, the NAMA website, etc.  Point being, this news has been shared.  It’s all out there and has been for some time.

In closing I’d like to take this opportunity to announce that today is Tuesday, which is followed by Wednesday and that next month is May. Also, it’s 2010.  Tell your friends, you heard it here first.

– AM

Vegas, Baby! Vegas? Part 2 – The Disaster Formally Known As City Center

Over three weeks ago I was lying in my bed at Aria, livid and contemplating writing this blog as the turmoil unfolded around me. Instead, I decided to sleep on it (for three weeks) to ultimately deliver a more sound, level-headed evaluation of my Las Vegas City Center experience. Verdict: little has changed – City Center is a disaster.

It’s January 2010; I find myself prancing around the office bragging about my recently booked room at Aria at $175/night for March Madness opening weekend. I love the fact that amongst my peers I will be first to experience the 4,000+ room centerpiece at the center of the strip (hence the name City Center).

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As a quick reference, City Center, the largest private development investment in the U.S. by MGM and Dubai World, is an entire city block located between the Bellagio and Monte Carlo. City Center is nearly complete, encompassing the 4,004 room Aria hotel/casino, the 1,495 unit Vdara condo-hotel, 392-room/224-unit Mandarin Oriental condo hotel, the twin 37-story Veer Towers condo buildings, the 500,000 SF Crystals shopping/entertainment center, and the yet-to-debut 400-room Harmon Hotel.

The Harmon Hotel has been plagued with structural deficiencies. The proposed 49-story building has been shrunk down to 28 stories and mechanic leans on the building have severely delayed the project.  If it should ever open, it will be managed my The Light Group, one of Vegas’ most renowned restaurant operators but with no hotel background. This may prove to be a blog post of its own.

From the time City Center broke ground, it was destined for doom. Six deaths have occurred since construction began. In 2008, construction workers shut down and walked off the site to protest safety conditions at the project.

How about the cost. The $11 billion investment thus far has almost tripled the initial budget of $4 billion. In 2009, JV partners MGM and Dubai World had seemed ready to go to war when Dubai World sued MGM for breach of contract. Despite a work-out that ensured the completion of City Center, Dubai World had other issues to face. Dubai World has nearly $60 billion in liabilities and is in the process of trying to restructure about $22 billion in debt.

Dubai World may be the poster child for extravagant, unsound hotel investment at the height of the market. In 2006 and 2007, Dubai World scooped up some of the most expensive hotels in the country including the Fountainbleu Miami and prime assets in Manhattan and DC. In the trailing 5 months however, Isthamar, the private investment arm of Dubai World, has had to hand back the keys to both the W Union Square and former Knickerbocker Hotel in Manhattan.

City Center has only sold 25 of its 2,400 condominium units since sales began closing at the end of January. Of those units, 9 were at Mandarin Oriental and six were at Vdara. However, $24 million was forfeited to City Center in residential deposits. The inability of City Center to sell the residential units has resulted in an expected operating loss of $255 million for the first quarter 2010.

This year, Aria has achieved an ADR of $195 at 63% occupancy. Can we expect more from Aria? Not unless the property solves their many operational miscues.

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I’ve just landed in Vegas and in the cab to Aria. In typical fashion, I strike up a conversation with the Vegas cabby on a number of topics but most notably City Center. When he asked me what I thought, I fed him much off the same hoopla I just rattled off in this blog. In response, I received an assessment much wiser and more telling than my research on debt figures and body counts. He said, “If the guest can’t turn on the lights, the hotel will fail.” Little did I know.

I arrive to the eye candy of Aria; waterfalls, intricate art, vast open spaces, and pleasant fragrances being pumped into the air. The allure quickly wears off as I find myself 10-deep in line to check in. Granted it’s one of the busiest weekends of the year, but they only have half the check-in windows open. After roughly 30 minutes of waiting, clearly held up by disgruntled guests ahead of me, I am greeted to a relatively quick and painless check-in.

I head through the casino and to the elevator, up thirty-some floors and to my destination. With only one set of elevators at the center of the building, I quickly realize it is a 200-yard trek to either end. A housekeeper guides me to my room. Upon entering, I see the room only has one king bed; this is not going to work as I am staying with one other.

Another half mile walk, 30 minutes in line and I’m back at the front desk. When I told the agent I requested two queen beds, the response was less than well received. “All we have left is king-bed rooms.” I know you’re thinking, “haven’t you shared a bed before? Get over it!” To you I say, “see how willing you are to share a bed with an intoxicated 250 pound man when you get back at 7 am from Drai’s After Hours.”

So after some calling around to see what the other MGM properties had to offer in way of 2-Queens, we are still at square one. Surprisingly, the Mandarin Oriental offers two-doubles. You would think at that price comes bigger beds. The agent steps away to talk to his manager and comes back offering me a one-bedroom suite. Still it has a one king bed but he puts in a request for a roll-away.

When I get back to the room, and this is no exaggeration, I spend 40 minutes figuring out the technology: 10 minutes figuring out the lights and automated curtains, 10 minutes turning on the TV to put on the game, 10 minutes trying to figure out the touch-screen room controller, and the rest admiring the heated toilet/beday. The toilet is fantastic but the rest of the gadgetry is highly inefficient. The wall switches are incredibly delayed, as is the remote control. And at some points, pushing buttons simply does nothing. This is when I understand the enlightenment of the cabby.

Later on that evening, I stopped by the front desk and pleasantly let the manager know that we were still awaiting the roll-away. Two hours later, we are exhausted and ready for bed but still awaiting the roll-away. When the phone agent returned my call, this time the response was far beyond not well received. “We are all out of roll-aways.” It’s 2 am, my brother is curled up in a ball on the rock-hard love seat, and in a somber whisper asks, “can I just have a pillow and blanket?” Problem is, the rooms have no extra pillows nor blankets! The phone agent apologetically insists that they will be delivered immediately.

Back to wear we started. I am lying in bed, brainstorming this very blog post. It is 45 minutes later and still no pillow nor blanket. Time for bed. I turn to hit the “Goodnight” button. The TV turns on, loud waterfalls start echoing from the speakers, the curtains are opening and closing and lights turning on and off. I officially hate Aria.

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The more optimistic part of me thinks that Aria has much to offer. The public space is very well-done and inviting, the restaurants are top-notch, and at the end of the stay, they kindly refunded a good portion of the cost without asking. But again, going back to my original Vegas Baby, Vegas? post, stick to what you’re good at.  The Bellagio is the benchmark for fine hotels/casinos in Vegas and as it turns out, is operated by MGM.  Although it doesn’t have the technology of Aria (tube TVs still in many of the rooms), guests keep coming back because it is operationally spot-on.

I wish the best for Dubai World and MGM with City Center, but as a wise cabby once said, “If the guest can’t turn on the lights, the hotel will fail.”

-Mike Kitchen

6 things regarding the stinking hotel investment biz picking up.

I was going to say that I wanted to do a little overview to kick off what we hope will be the start of continuous blogging by PLA in conjunction with our social media contest. But while the contest is real and will start soon, I actually just posted this on a LinkedIn discussion and thought it was too long to not post here. So there, honesty.

Every time I see the words bid-ask gap I cringe. 2007 with no debt would have equaled a weak marketplace. Debt is the big spearhead. At reasonable LTV and current rates, bid ask should be manageable through good negotiations.

So I believe first its debt, special servicers and lenders obviously hold the keys (double entendre). Servicers have the ability to make non recourse debt available through assumable financing once they and the trustees ok the terms as best for security holders. Balance sheet lenders of course can originate as their business plan calls for it. Maybe most important in the sense of a true marketplace is all the hotel groups that are healthy (at least somewhat), whose 3-year-old portfolio decisions means a non-recycled portfolio. Foreign money is a big deal too. Some items that make me think the above, and also help me plan my own strategies.

– CMBS – Combined maturities and upside down loans simply add up to too much. At some point SOME significant percentage of the loans special servicers are dealing with will become REO assets and be sold. Based on the 2010 amounts of maturities that have been talked about for so long, that is where the late 2nd/ 3rd quarter estimates came from, that of course not all matured on Jan 1, they have to get into REO hands, valued, approved and then to market. I still think 3Q is when a decent amount of assets get to market.

– CMBS REO Timing – Recently a servicer we are doing work with told me their average REO period is 20 months, from foreclosure to sale. So just because these loans become REO assets doesn’t mean they go right to market. The assets available as REO in 2009 were really not good assets. The next round should be better, but probably with brand issues or major work to get value add realized. The best assets will probably be allowed to wait for some market stability. So that’s where I think the biggest misperception is about the “tidal wave” of assets, that many said were coming.

– Balance Sheet lenders old loans – Heard from some, worked for some and engaged by some buyers on hotel debt deals done direct from bank to friendly investment groups. Another reason that tidal wave may be more like a strong surfing wave. But at the end of 2008, CMBS only represented app 80% of all commercial loans outstanding. So from a maturity standpoint alone, there are some big numbers to be dealt with, and plenty of debt has not been sold.

– Balance Sheet lenders new loans – Been told about also and our CM group starting to work on some origination. Several big lenders and medium-sized lenders are ready to lend. Leverage may not be as bad as people have been thinking, and some news items across the wires over the past month about deals and debt. One deal directed by a lender we were told had 30 term sheets and 15+ aggressive lenders on the deal. Good market, but not a “sexy” brand or asset.

– Hotel groups – Like all our peers, our company has done a ton of servicer and lender BOV’s since the 1st of the year, but the surprise for us is almost an equal amount of BOV’s for owners, purpose seemingly stated earlier, getting moving on old business plans and liquidity.

– International – If it weren’t for LaSalle, we’d really need to consider that all big major market deals would be done by International Investors. They aren’t going anywhere, and apparently will buy certain assets at prices that just aren’t doable according to some.

So it’s coming, not as big as some thought/hoped, but likely to start in the 3rd quarter, that’s my thinking. At some point it will just exist, a real debt market and a real transaction market, in the end it always seems as if it came fast. I think it also always seems slow while you’re waiting as well. Your thoughts?

– Beider