Boutique Business Goes From Burgeoning to Booming
Lifestyle/Boutique Conference Shows Segments Gaining Mainstream Acceptance
What Ian Schrager and Bill Kimpton started almost 30 years ago on opposite ends of the country in gateway cities like San Francisco and New York has now met in the middle. Independent boutique hotels can work — and thrive — in cities like Milwaukee, and developers at the fourth annual Lifestyle/Boutique Hotel Development Conference in Miami last month talked about potential projects in faraway places like Montana, Kentucky and Tennessee.
The segment has reached mainstream acceptance by consumers, investors and even hotel franchise companies. Jay Coldren, vice president of lifestyle brands for Marriott International, said during the conference’s opening general session it’s because of a generational — and transformational — shift happening. Gen Y consumers and their preference for lifestyle hotels will be taking over the buying power from Baby Boomers in the next five years.
Coldren heads Marriott’s fast-growing Autograph Collection, a pseudo-brand allowing owners more independence, yet with a connection to the powerful Marriott system. Other hotel franchise companies have similar offerings, like Choice’s Ascend Collection, and more will follow in the next five years, said Jeff Low, CEO and founder of Stash Hotel Rewards, during a later breakout session.
Lodging Hospitality, in conjunction with HVS Hotel Management and academic partner The School of Hospitality Management at Michigan State University, produces LBHDC. More than 300 hoteliers attended the event at the Fontainebleau, which was highlighted by a keynote conversation with Anthony Melchiorri, the star of the Travel Channel’s hit new show “Hotel Impossible.”
Investors and lenders are also taking notice of the growing segments. Neil Shah, president and chief operating officer of Hersha Hospitality Trust, said during the ‘Transactions Temperature’ panel that in some markets independents have recovered faster than their branded counterparts. They’re trading at similar or even premium levels, in part because they are unencumbered of a franchise or management contract. During the last cycle, he said, many lenders were only interested in branded properties, but “not anymore. That’s changing as more investors are interested in independents.”
The general acceptance of the segment and success stories like the Iron Horse in Milwaukee have helped pave the way for new development in secondary markets. Patrick Goddard, president of Trust Hospitality, said his company even targets some of those non-gateway cities. “There are different prices, investments and it may be harder to get financing, but it can be done,” he said.
When LBHDC began three years ago, the lifestyle and boutique segments were burgeoning. They’re now booming.
Growth Begins in Miami
Nowhere is that trend more evident than in Miami, and in its Miami Beach submarket, one of two epicenters (Manhattan is the other) of the boutique and lifestyle hotel industry. As Coldren said, “If you’re serious about this segment, you must be in Miami.”
New data from STR shows the strength of the Miami area markets. Year-to-date through August occupancy for Miami was 77.7%, while RevPAR increased a whopping 8.2%. And perhaps most promising is the news that ADR has almost fully recovered to pre-recession levels, a process that took 48 months.
The success of the lifestyle and boutique segments is having an effect throughout the industry. All hotels, but especially lifestyle and boutique properties, need to become “more experiential and sensory,” said Marriott’s Coldren. “The alternative is to perish.”
An example of how this segment has grown is seen in the financing arena. While many believe it’s difficult for non-branded hotels to attract debt or equity financing, Jason Pomeranc of Commune Hotels said a brand can actually be a negative for a boutique hotel seeking financing, particularly in some high-rate markets like New York City.
“With some products and in some markets it’s warranted [to affiliate with a brand], but lenders and institutions are starting to see in certain sectors you can do without brands and be better off,” said Pomeranc. Commune includes a JdV Collection and the Thompson-brand hotels. He said the company is also developing a new value-oriented, design-driven chain that will compete with boutiques in lower price segments.
The boutique segment is a beneficiary to what Denihan Hospitality President David Duncan called a “raindrop recovery. Recovery very specifically depends on where you are,” he said, adding that while nationwide about 35% of jobs lost in the downturn have returned, in New York City 135% of jobs have returned. Denihan has 16 hotels under two brands (Affinia and James) and a collection of independent properties. “That’s why we focus on the top five to 10 markets and in the center cities of those markets.”
Lenders Taking Notice, Too
In the final analysis, finding financing for a transaction involving a boutique or lifestyle hotel isn’t much different than for a more traditional branded property. Most speakers agreed it’s all a matter of strength: a strong story, strong sponsorship and management and, perhaps above all, strong cash flow.
“In putting together the capital stack for a boutique property, the first questions to come up are what is the cash flow, how stable is it, how does it compare to the peak of the market and how much more room is there to grow,” said Frank Nardozza, chairman & CEO of REH Capital Partners, who spoke on a panel titled ‘The Boutique Lending Landscape.’ “If we can articulate the cash flow, we can then get the interest of capital, both debt and equity.”
While she agreed “cash is king,” attorney Suzanne Amaducci-Adams said capital sources also look at other factors in considering debt or equity placement for a boutique hotel transaction. Location, uniqueness of product, food and beverage offerings and sponsorship are on her list of important items.
“The market is critical. Miami is so hot right now it’s a lot easier to get financing for a boutique hotel here,” said Amaducci-Adams, a partner with the Miami firm of Bilzen-Sumberg. “The hotel needs to be unique and part of that often is food and beverage. But, at the end of the day, it’s all about sponsorship.”
Still, some significant barriers exist for boutiques that make acquirers, and especially developers, work harder to get funding for their projects. The consensus among panelists was that boutique and lifestyle hotels are financeable, but it may cost more to do so. Nardozza speculated while loan-to-value ratios for financing of a traditional branded hotel may be as high as 70%, it’s more like 60% to 65% for non-branded properties or boutique hotels. And debt yields (net operating income divided by the amount of the loan) tend to be higher, he said. Cassie Resnick, a vice president of Mast Capital, pegged yields for boutique deals at 9%-10% up to 13% if it’s a particularly risky deal.
Another panel at the conference tackled the problem of how to overcome the often-negative perception lenders have about unbranded and independent boutique hotels. Craig Greenberg, president of 21c Museum Hotels, acknowledged the issue is especially critical in the markets in which his firm operates. The company has a successful property open in Louisville, KY, with another to open next month in Cincinnati, followed by one in northwest Arkansas.
“It’s definitely more challenging, especially in smaller or medium-sized cities, to get money,” said Greenberg, who showed the audience an elaborate chart outlining the variety of funding sources—a mix of tax credits, rebates, grants, equity and traditional recourse bank loans—used to develop the first 21c. “In that kind of environment, it usually takes a perfect story to put together a financing package.”
Oliver Striker, a director at UBS Investment Bank, agreed, saying his firm, which provides both CMBS financing and direct investment, takes a “holistic approach” to evaluating financing proposals, both from traditional hotels and also boutique and lifestyle properties. While he said location is a primary factor, it’s not the only one.
“Gateway cities with high barriers of entry and depth of demand are obviously preferred,” he said, “but sponsorship is also crucial, especially the depth of experience they have in the sector. It’s also important the sponsor has skin in the game, because it forces them to keep their eyes on the ball.”
Despite these caveats, speakers on both panels believe financing for boutique and lifestyle products, both branded and non-branded, is becoming more mainstream.
“Because real cash flows are showing up on the bottom lines of boutique hotels, there is more receptivity in the lending community to funding and capitalizing [these products],” said Nardozza. “It’s a more familiar product to guests and a more familiar product to the capital markets.”
Low, the founder and CEO of Stash Hotel Rewards, said one of the biggest challenges facing independent hotel owners and operators is their “isolation.” They have no “idea bank” to draw from.
At LBHDC, a panel of independent hoteliers traded best practices and discussed similar challenges they face competing in a branded world. The session — titled, ‘Independents’ Day’ — was moderated by Paramount Lodging Advisors Associate Michael Kitchen, and also included Stash’s Low, Clarendon Hotel Owner and General Manager Ben Bethel, Gemstone Resorts Principal Jeff McIntyre and Cambean Hospitality President Brian Scheinblum.
“What’s cool about being an independent is the customer tells us what we should be doing, not the brand,” said McIntyre. “We’re in the business of making memories.”
Being nimble and capable of reacting quickly to problems and market situations were the consensus advantages independents have. “We can do what we want when we want,” said Scheinblum, whose Cambean Hospitality owns and operates four small boutique hotels in South Beach.
Online travel agencies were the biggest challenge facing independents, the panel agreed. “Independents have twice the bookings from OTAs,” said Low. “Think about that, there’s so much money going out. Meanwhile you’re calking your window to save money and you’ve got an entire wall missing. A lot independent players just aren’t aware …
“If OTAs are like crack, then flash sales are like meth. Either way, your teeth fall out.”
During the downturn, Scheinblum said, there were many hotels probably “borderline losing money on every single room they sold through OTAs” because of the reduced rates and high commissions.
“Capture and keep,” said McIntyre of the strategy needed after bringing in a customer through an OTA booking. “We don’t just look at the 24% (cost), but (OTAs) are also a search engine to us. Many customers look at pricing and product offerings and then book at the hotel’s website. There is a billboard effect.”
Bethel, who had no prior hotel experience, said he’s not afraid to call other owners and properties he respects to ask for advice. It was his only education after maxing out credit cards and using home equity loans to buy the dilapidated building in Phoenix two weeks after he first considered the idea.
At the Clarendon, he doesn’t see an ROI in having a sales staff and doesn’t employ a director of sales. Instead, he heavily incents his front-desk staff with 20% to 50% commissions for every room upgrade, early check-in or additional pool pass sold, meaning they can make up to $80,000 per year on their $10/hour salary. “Our front desk staff is so important, not just for loyalty building, but to increase revenue,” he said.
Even more outside the box, Bethel charged guests for his property taxes during the downturn to stay afloat when he couldn’t even make his debt service. A 5% property tax fee was included on all folios and also listed as a surcharge at all online sites. “We brought in $90,000 initially and it enabled us to catch up,” he said. “It’s not what I wanted to do, but at the time was something I thought was a great idea when we were having problems making ends meet.”
If boutique hotels are experiential, Tim Dixon emphatically said, the food and beverage operations inside them must not be outsourced. “Conflict of culture,” said the always outspoken owner of the Iron Horse Hotel in Milwaukee during the “Should You Outsource Your F&B” panel. “An experiential hotel has to be a seamless transition.”
His point was employees from a company different than the hotel operator would be serving different masters with different priorities, creating a divide in the hotel’s operations and culture. Famed Chef Douglas Rodriguez, the innovator of Nuevo Latino cuisine, disagreed, citing some very successful hotel restaurants he and his team run.
The other two panelists — Larry Spelts, director of asset management with Charlestowne Hotels and Antoni Yelamos, chief creative director of Food Culture — were somewhere in the middle of the debate, admitting there were various scenarios and agreements that could work. Arrangements between hotel operators and restaurant operators are not “one size fits all,” Yelamos said.
“If you’re bringing it into your own operations because it’s a necessary evil, don’t do it,” Spelts said. “You have to be passionate about it.”
Dixon, the developer of the award-winning Iron Horse, said he considered multiple celebrity chefs and was on the verge of signing with Michael Symon when the deal fell apart. “He said he had to have control and that ended it,” Dixon said. “He should have, it’s his brand, but not at my experiential hotel.”
The panel’s celebrity chef quickly interrupted. “But Tim, you sound pretty passionate,” Rodriguez said. “Not everyone is.” His point: Celebrity chefs and outsourcing could be a viable option for hoteliers not dedicated to doing it on their own, like Dixon.
“Each hotel is a different formula, but it can work,” said Rodriguez, who has two acclaimed hotel restaurants — Deseo at the Kierland Resort & Spa in Arizona and De Rodriguez Cuba on Ocean at the Hilton Bentley South Beach. “I’ve got a 60-table restaurant at a hotel in Scottsdale and after 35 reservations they stop taking more. If that was my restaurant, I want to fill it up! But they want their hotel guests to be able to come down and have a quiet meal.”
Situations like that, along with room service, breakfast and banquet serving, are other typical points of contention between hotel and restaurant operators, but also areas for compromise.
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