Understanding Market First Step to Turnaround

Q&A with Tom Engel, President of T.R. Engel Group

Tom Engel spent the 1980s helping launch brands like Embassy Suites, Crowne Plaza and Hawthorn Suites, then turned his attention to managing the hotel portfolio of AXA Equitable during the 1990s as an executive vice president of its $1.8 billion lodging and leisure group. Engel now often finds himself in between the brand and owner as an asset manager.

Engel founded the T.R. Engel Group in 1999 and the Boston-based firm provides asset management and advisory services for hotel investors. Business has been good for Engel, whose firm currently has six asset management assignments, including a high-profile Marriott in Munich and a DoubleTree Resort in Orlando. On the advisory side, he’s recently spent time in the Middle East working at three properties there.

Engel says a large focus of the business now is with investors who need help increasing cash flow and their distressed asset’s value, both having dropped severely during the recent downturn. He recently chatted about the state of the hotel industry and offered some insight into his approach to turning around a distressed asset.

Tom Engel

Stoessel: How do your asset management assignments differ from advisory roles?
Engel: The asset management business focuses on the day-to-day how to stay alive and keep productive in profiting and meeting debt service. We work for investors on a global basis. Our niche is upper-upscale and full-service [properties].

On the advisory side, we generally go where the business is — sometimes a portfolio of 22 limited-service properties to one 5-star property. Those are usually shorter term, but if we do it right as an advisor, we hope they say, ‘These guys are smart, we’d like to keep you aboard.’ But in particular these last two to three years we’ve been retained by predators not with the title, like a major special servicer who’s got a big hotel on its hands and no hotel expertise or background. They just want to know soup to nuts what’s going on and are not in a position to hire an asset manager.

Are things starting to get a little better? Where do you see the industry headed this year?
I think in dominant markets, like New York, we’ll see continued growth in supply and demand. Overall industry recovery, meaning profitability, has been pushed back a year to 18 months largely because 2011 didn’t materialize as many thought. Last year was flat because of the debt markets and Europe being a mess. I think 2012 will be positive with the signs we’re seeing in the economy and a stronger corporate meetings market.

Do you think we’ll see an increase in hotel transactions this year?
That’s tougher to answer. There’s a confluence of things happening, from what will materialize with the CMBS market and all the balloon loans theoretically coming due, written at the peak, to whether the credit markets can support both refinancings and acquisitions. When the credit markets get spooked by the slightest level of nervousness on a daily basis, I can’t predict what will happen.

How much will distress factor into the equation?
I think the worst is over. What you’ll see unfolding is special servicers finally executing and selling some assets, which will be bought by conventional hotel investors and the legacy private equity coming back into the market. And I think you’ll see some currency with REITs as the stock market settles down.

What are the key steps to turning around a distressed asset?
The first and foremost thing TRE or anyone should do is spend some time and look at the characteristics of the market. There are always dynamics in a given marketplace: new demand drivers coming in, people upsizing or downscaling the size of their companies, changes in airlifts — we spend a lot of time understanding the overall macroeconomics of the market.

Second, what is the nature of the competitive set? There’s generally one clear cut winner in that comp set, and we go to school to see what it is they’re doing, in product, management, brand — what makes it click?

Third, we get into a deep assessment of the subject property’s quality or lack thereof. Generally speaking, the distress will be traceable to one of two things: the building is decent, but got grossly overleveraged, or the subject property missed getting fixed during the last cycle and is now flat worn out. That circumstance is the one that creates a difficult situation. If the owner is struggling and hotel is near obsolete, you’ve got a tough time bringing it back to health.

Which situation is more common?
Generally we’ve been involved with assets that are good in terms of product quality, but got in a vicious spiral of a reduction of rates and a lack of cash flow. That’s when we go to work and try to identify the problem, and that may necessitate a change in management, even just the GM or revenue manager. We look for ways to strengthen the mix of business, because generally in lousy times this industry starts deep discounting to get heads in beds. We’re typically saying to the owner, ‘I hate to tell you this, but you should have had more oversight on the property management than just allowing the undermining of your prices.’

What type of relationships are you getting in between with the owners and the brands and managers?
Candidly, significant tension occurs in the business today with franchise and management agreements. Those are encumbered with clauses requiring approval to sell the property, who’s the buyer and franchise agreements saying you can only change the name of your property with [the brand’s] approval. This relationship has to improve coming out of this cycle, the nature of the business has so changed. Chains have no ownership position, yet they have features in agreements with control over the real estate and that’s the rub.

And the downturn has brought this tension to the surface?
There’s been such a steep decline in value that fingers started getting pointed. Brands have dug in while owners try to refinance their way out of balloon loans. The circumstances have been born out of adversity. With the industry coming out of the black hole, both parties have to embrace change and stop banging their heads together.

How will that happen?
The owners have to take a more appreciative position of brand standards and recognize continuous improvements are in everyone’s best interests, but brands have to realize there has to be increased flexibility with refinancing and the sale of an asset. The worst thing for everyone is when a brand delists for a product falling out of standards, so the monkey is on both parties backs to make the fundamentals work.

Related Stories
Capital Markets Key to Hotel Real Estate Rebound
Hotel Foreclosures an Oncoming ‘Train Wreck’
Memo to Distressed Hotel Investors: Understand the Opportunities and Risks

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