Owners extracting value with incremental rooms

Source - Hotel News Now

By Patrick Mayock
Editor-in-Chief
patrick@hotelnewsnow.com

REPORT FROM THE U.S. - When the Lexington New York City emerged from its $46-million renovation in late 2013, it boasted more than the usual upgrades to public spaces, and furniture, fixtures and equipment. The property’s physical layout also had changed through the addition of 15 rooms carved out from existing suites.

Owner DiamondRock Hospitality Company has pulled that same arrow from the quiver as it attempts to extract every last bit of value from its portfolio of primarily high-end urban and resort hotels.

The real estate investment trust added five rooms to the Courtyard New York Manhattan/Midtown East during the property’s renovation late last year, according to Sean Mahoney, CFO, executive VP and treasurer, during an earnings call with analysts earlier this year. Executives were also in the process of adding:

• more than 40 additional rooms to the Hilton Boston Downtown/Faneuil Hall;
• 13 rooms to the Vail Marriott Mountain Resort & Spa;
• four rooms to the The Westin Washington, D.C. City Center; and
• three rooms to the Lodge at Sonoma Renaissance Resort & Spa.

DiamondRock is not alone.

Denihan Hospitality Group’s recently completed renovation of the Affinia 50 in New York saw the addition of 45 rooms through the elimination of 20 suites, Igor Krnajski, the company’s senior VP of design and construction, told Hotel News Now.

Loews Hotels & Resorts, meanwhile, increased the key count at its Loews Regency New York Hotel from 353 rooms to 379, according to Richard Senechal, the company’s executive VP of facilities.

Extracting value
Many buyers evaluate the return they could generate by adding incremental rooms to an existing asset, explained David Black, managing director of project and development services at Jones Lang LaSalle.

“Everyone when they are buying a new hotel they’re looking at, ‘How can I monetize this asset to increase its performance? What are the different angles?’ There are a lot of different things that are happening. Many are looking at ways they can increase key counts,” he said.

Converting existing suites is a common outlet, Black said. The decision requires a careful examination of pros and cons. In certain markets, such as New York and San Francisco, for instance, a premium suite is a unique selling point that creates a certain degree of cache.

“In the super-luxury market, the suites still hold a lot of importance,” Black said.

Also common is converting unused meeting spaces, concierge floors, fitness areas or food-and-beverage outlets, he added.

Instead of dedicating the second or third floors to lavish F&B footprints, “a lot of (owners) are trying to create more energized food-and-beverage spaces closer to the lobby as an offshoot of the lobby,” he said.

The trend applies to existing owners as well as new buyers coming in with an infusion of capital, Black said.

“The asset management approach is twofold. One part is the business of managing the business, the hotel operations and how we drive greater revenue and return on investment,” he said. “But there’s also that piece that is managing the value of the resale. Those two things combined, existing owners are always looking at the best approach to their renovation, what’s the best bang for their buck. … Some of it ties to quantity of hotel rooms. The other is trying to respond to trends to the marketplace.”

Market by market
Market dynamics alone should drive the decision to tweak a hotel’s existing layout, sources said.

“The hotel was originally 34% suites—many more than demand warranted,” Senechal said of the Loews Regency. “We broke up some of the suites to increase the key count from 353 to 379, which will generate additional revenue. We still have lots of great suites, including six signature Grand Suites being individually designed by four world class designers.”

In some cases, market forces drive owners in the opposite direction—converting existing standard rooms into suites.

The Roedel Companies did exactly that during a conversion of a 115-room Fairfield hotel to a 100-room Holiday Inn Express. Doing so allowed executives to drive a higher rate premium in the property’s secondary market location, according to David Roedel, business development team leader.

“I can see it going either way,” he said. “It really just backs into the strength of the market. Where is that hotel positioned? How many sell-out nights are there?”

Executives at the Excel Group have executed similar renovations in the 11 hotels they acquired during the downturn.

“There’s a substantial demand in the market for suites,” Shoham Amin, managing partner, said. “We believe there’s a rate premium we can achieve by adding suites to our properties.” That premium ranges from $15 to $25 depending on the hotel and market demand, he added.

Neither Roedel nor Amin are married to the guestrooms-to-suite approach, however.

“If the market received an increase in demand, I believe we would potentially considering doing the reverse,” Amin said. “It may not be across the board. If there’s a lot of unused space there would definitely be an opportunity to increase room counts.

“It is market-driven.”

HNN contributor Leora Lanz provided additional reporting.