Hotel Real Estate 101: DON’T BE LAZY

We recently closed a deal that is causing us to be regularly asked by our peers “how did you sell this?” and “how did you achieve the price?” (if you have not yet read our announcement, you can view it here).

In answering the above, I think I may need to preface this by saying that I’m afraid I may have come a little full circle here. In more recent years I’ve found myself harping on to owners that Hotels are different –that  they’re not just hotel real estate. They are BUSINESSES first, real estate second.

Meanwhile, in the classic fashion of contradictions that somehow seem to dominate my life, I’d have to say that we really looked at this particular property as a REAL ESTATE INVESTMENT – and not just a hotel. So, rather than just focusing on reducing costs and driving revenues – the mantra of every hotel operator/owner – we decided it was time to go back to (real estate) school, and brush up on our old training there. We wiped the slate clean so to speak, and looked at the investment from the BIG picture. With this I mean we analyzed ALL its characteristics.  For example: we asked ourselves, “operations aside, what are the asset’s strengths and what are its weaknesses, and how do we address them? What future potential is there and what are we doing about that, and what are we DOING to MAXIMIZE or ADD VALUE to our investment?”

After all, these are the fundamentals of real estate (See 4 components of the deal mentioned in the case study).

So, the answer really was a return to basics really – REAL ESTATE basics.

Finally, when approached with interest and passion, this can be very fun and exciting stuff, too (just think of it like playing with building blocks, so why not have some fun while at it – and you might be pleasantly surprised). Meanwhile, to push yourself and to know you left no stone unturned is incredibly rewarding, as is to feel you have completed a job well done.

Meanwhile, I am happy to report that the real education was the rediscovery that when we approach this with commitment and passion, it can be very fun and exciting too! Just think of it like playing with building blocks, so why not have some fun while at it – and you might be pleasantly surprised too! And the feeling from pushing yourself to the max and the knowing that you left no stone unturned is incredibly rewarding too. Why do it any other way?!

The real bonus is that you invariably find you end up having a most satisfied seller and buyer.

After all, we ARE in the service business, and this is the ultimate reward isn’t it? And isn’t that what it’s all about?

– Jim Mouzourakis

O’Hare Hotel Market – Media just leaves too much out – Webcast

Crain’s Chicago Business Webcast

What I have learned about interviews for different periodicals or websites which are not dedicated to lodging is that they select only comments which directly relate to their ultimate article or story, regardless whether other information which has been provided gives better color.  Now, not that we should expect anything different, but what else was said?

– The word fundamentals was mentioned a minimum of 5 times, yet was never referenced.  Much was said with regards to this industry not being one of a single market or even nationally.  The fundamentals of a hotel, the market, the brand, the room count, management, etc., is what determines success above all else.

– That two identical assets next to each other may perform differently due to management as we have always known, but in today’s environment, they may be able to survive vs not simply based on the last value and the existing debt.

– That with regards to the investment market, the reason for lack of deals to date has been lack of debt as much as anything else, and no one transaction/workout/etc is going to start a market, but rather distribution throughout the segments available to investors so as to set guidelines on different metrics.

– That it’s interesting 20% of all Commercial debt is CMBS, but more than half of the “distressed” assets, defined as minimum of 60 days delinquent in the Chicago area are assets with CMBS loans.  In other words the timing and availability of that debt is what is creating the gross majority of issues, not developing at the wrong time.

– That all these distressed assets don’t magically just come to market, but must first meet objectives of the lender or special servicer handling the loan, which takes time.

– That break-even used to be low 50%’s Occ, but with reduced rates and higher interest payments break-even has gone up, and while the average Occ% of all the distressed assets in the greater Chicago area remains above 60%, they no longer can break even, but would have had over-leverage not been so rampant.

– That the interest of the lenders and special servicers in specific Chicago issues such as the revamp of McPier and the subsequent renewal of Housewares shows they DO want to know about specific issues as well as fundamentals, but need it to be explained to them.  The same should be reported.

And much much more.  Nevertheless, it’s nice to have your opinion wanted.  It’s just too bad that this industry remains generalized all the time by not only media but often those inside it.

Beider

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

The recession is over?

At least that’s what you read in about one of every two economist’s updates.  One opinion specifically I heard was from Peter Linneman, who gave the Keynote at USA GRI last week, that “we” had found bottom, not necessarily meaning recovery in commercial real estate.  A number of different statistics and thoughts naturally going into this statement, but one stuck out which a) I wonder if realistic and b) how does it pertain to Lodging.

He mentioned that with regards to CRE fundamentals, a return of the jobs lost during the recession, more than 7 million, need to return plus an additional 1.5 million jobs to fill new office space which has been built since the end of 2007.  Clearly with a focus on the office asset class, returning to supply-demand statistics from end ’07 will take about 3 years assuming above normal job growth of 3 million jobs per year or 4 years assuming normal job growth (who determines what that is anyway?)

Personally since in CRE ego always seems to take precedent over statistics once money gets rolling, I doubt we follow any specific statistic like job loss and growth.  That  being said, if using the same statistics what is the impact of job loss and gain on hotel operating statistics?  Figure getting those jobs back means business travel similar to that of 2007 and subsequently disposable income to create leisure travel similar to that of 2007 as well.  However, I assume there is nowhere near as much new hotel supply opened since end ’07 compared to that of office, so removing the 1.5 million jobs for new office space completely, with the same above normal job growth of 3 million per year simply suggests demand-supply fundamentals return 6 months earlier.

It’s always interesting to use a well known economist’s perspective to view the recovery in a specific industry, however most importantly, it shows that again general assumptions simply don’t apply.  Travel may be related to job loss and growth, but there are so many different price points to stay at in hotels, the lower of which fill faster in early recovery. Also from a CRE perspective it really is dependent on the availability of debt and the willingness of the investors who have stated they have billions of dollars to invest (who have clearly not lost their jobs), to invest back into CRE.  I highly doubt it’s going to take 4 or 3 years, and nobody really knows how long it will really take.  However, the more positive sentiments from the economists, the better sentiment of those who live by their prognostications, and maybe people start hiring again.  Then everybody wins.

– Beider

Please Don’t Let ‘Party In the USA’ Be Our National Song

Have you ever seen the commercials for Jamaica?  You know, the ones with the ever-relaxing tagline “come to Jamaica and feel all right,” performed to the rhythm of Bob Marley’s “One Love.”

With the Travel Promotion Act (TPA) passed by Congress last week, a nationalized public-private marketing firm will be put in place to promote foreign travel into the United States.  Which has me thinking, what is America’s song? It has to be The Boss or Cougar, right?

More important is the criticism/skepticism surrounding the TPA, which is funded by $10 fee to visa-exempt foreign travelers.  Currently, the United States and its European counterparts do not charge an entry fee. Should the TPA be signed, European delegates warn that they too will impose a similar fee for American tourists.  While 10 dollars, 10 pounds, or 10 Euros may seem relatively insignificant, travel taxes become a noteworthy cost when coupled with already exaggerated airline fees.

My personal argument is as follows:

The United States offers an array of experiences that simply cannot be matched.  The variation from one destination to the next is best publicized by state and local promotion.

Take Michigan for example.  The “Pure Michigan” advertisements do a splendid job of making people believe the Great Lakes State is a wonderful destination (no comment).  However, if trying to promote the USA as an entire nation, how much air-time will Michigan get or the other 49 states for that matter?  Can you really promote San Francisco, Orlando, and New York City all at once, considering it is not reasonable or feasible to experience all of it in a single trip?

Nationalized travel promotion makes sense for Jamaica and most other nations because experiences are similar throughout and visiting several destinations is realistic.

It will be interesting to see how we are marketed as an entire nation.  I can imagine it will be well produced, beyond a collage of Nascar clips, Applebee’s, and music by Miley Cyrus.

-Mike Kitchen