Urban Renewal

No matter the state of the economy, the only direction for The Hotel Group is up. That attitude is the reason the Edmonds, WA-based hotel management and development firm recently feted the $10-million renovation of the Crowne Plaza Hotel in downtown Billings, MT and is converting a tired Holiday Inn Select in Cleveland to a Doubletree.

“Cities come to us,” Edmond A. Lee, chief executive officer of the 24-year-old firm, said in an interview in Billings in mid-May. “We're opportunity buyers.”

Lee and other THG executives were in Billings to help celebrate the renovated, 289-room Crowne Plaza, a former Sheraton acquired by THG in 2006. Among the elements of the renovation: a redesigned lobby, a new lobby bar called Montana's and a new 16,000-square-foot conference center.

The occasion prompted a party for Billings, a city of 100,000 with only two-percent unemployment and an economy thriving on the medical and refinery industries. Billings aims to draw meetings and other business to a hotel it can “count on,” in the words of Mayor Ron Tussing.

Expect a similar celebration when the Cleveland property debuts as a Doubletree just before Christmas.

The Hotel Group owns, manages and operates more than 30 properties in 10 states. It buys below the market for “pennies on the dollar,” says CEO Lee, and then repositions the properties to perform above the market. Most of its holdings are in the West.

FROM THE BOTTOM UP

The Hotel Group buys in cities “where there's a huge gap between where a property should be in the market versus where it is now,” Lee says. “Occupancy and revenue per available room (RevPAR) are key; we look at getting 25- to 30-percent improvement in value.” THG has owned properties as briefly as 18 months and up to 12 years; purchase, repositioning and sale at a profit usually take three to five years, says Lee. The process typically involves a year and a half of renovation, a year to reposition and one to three years to stabilize, he says.

THG looks for “market momentum” in second- and third-tier cities with income generators, Lee says. Like Billings, Cleveland boasts its medical industry, in the form of the Cleveland Clinic, is a key driver.

“The deals come to us,” Lee says. “We have two full-time acquisitions people, so we're not passive.”

In Billings, THG hopes the spruced-up Crowne Plaza becomes “the preferred hotel for meetings,” says Doug Dreher, THG president. The competition is a Best Western; the Northern, which THG managed in the early ‘90s, is closed. With the help of THG's “mojo” — consisting of a major capital infusion and team spirit developed through intensive training — the Crowne Plaza should do fine, Dreher says. He also notes “intuition” plays a part in THG's otherwise methodical strategy.

The Hotel Group expects to limit its portfolio to 25 to 30 properties, and over the next few years aims to split it evenly between owned and managed hotels, Dreher says. The typical property will be 200 to 400 rooms and eventually THG expects to move into new-builds.

The company was formed in 1984 and today is one of the largest ownership and management companies in the industry and the largest management firm in the Northwest. Since its launch, The Hotel Group has managed more than 100 properties in 20 states, overseen the design and development of 30 new hotels and executed renovations at 25 hotels. It maintains regional offices in five cities.

Money, of course, is at the root of all THG strategy. According to a company news release, THG will only acquire properties if estimated costs, covering purchase price and renovation, do not exceed 60 percent of estimated replacement costs. Marketing and management courtesy of THG are expected to improve the property even if overall market conditions don't get better.

In 2007, 17 of THG's 25 hotels posted record EBITDA and RevPAR, Dreher says, and through the first five months of 2008, the portfolio as a whole was up 11 percent; at the same time, the increase in oil prices and the “subprime debacle” could lead to a softening, he says.

“We don't want to ‘awfulize’ the economy,” Dreher says. “We want to be pragmatically optimistic.”

That could describe the views of Leonard Clifton, general manager of the Holiday Inn Select in downtown Cleveland. The 380-room property is undergoing a major renovation, including guestroom refurbishment down to the studs; it ultimately will become a Doubletree — and starting rates will go up from $139 to $169.

Clifton hopes to capitalize on revival of downtown featuring new condos being built nearby corner, a Galleria shopping/office complex featuring a big, new Dollar Bank branch and a few blocks away, the long-awaited debut of the bus-intensive, $4-billion Euclid Corridor. Talk of a new convention center also remains heated.

“The Cleveland market right now has a lot of upside to it — as much as a downside,” Clifton said in an interview in late July in his hotel's new Au Grill. “The inner city still has a lot of corporate business: the Cleveland Clinic, the sports arenas and the Rock Hall give Cleveland a fair share of transient business. The corporate client will stay downtown because there's something to do.”

Clifton has worked in hotels in Dallas and St. Louis, where, he says, “when people go home for the night, they stay home. “We don't die at 6 o'clock.”

Now all Cleveland has to do is build a convention center so it can compete with Indianapolis, Columbus, Pittsburgh and Kansas City, Clifton says. And even if it does, such a project is likely to take five years.

In the meantime, he hopes to make it through this economic downturn. Transient business is down, group business “close to non-existent.” In addition, a Hotel Indigo and a luxury, “green” hotel is planned for locations not far from the Doubletree.

“Last summer, we ran 77- to 78-percent occupancy,” he laments. As of the third week of July, it was 48 percent year to date.

Still, hotel man that he is and Cleveland booster that he has become, Clifton is optimistic. “I hope to get a bigger piece of the pie at the end of the day,” he says. “We'll have a lot to offer with a new Starbucks, $15 million in renovations and attached parking.

“I just pray that the economy turns around so corporate business can continue to support the city.”

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