Uncovering Returns in a Changing Hospitality Sector

EisnerAmper, in partnership with iGlobal Forum, held the Global Leaders in Real Estate Summit on September 28, 2017 at the Lotte New York Palace in New York City. The hospitality panel was moderated by Nelson F. Migdal, shareholder at Greenberg Traurig, and included the following panelists:

• Russell Flicker, co-founder and managing partner at AWH Partners
• Mark J. Gordon, managing partner at Intrinsic Hotel Capital
• Nolan Hecht, managing director at Square Mile Capital Management
• Phillip Summers, managing director at Lazard

Mr. Migdal began the discussion with a question about where opportunities for investment returns still exist. Mr. Hecht discussed how the hotel market is still healthy and he has seen approximately 90 straight months of growth.  His focus is on repositionings in markets with no supply. Mr. Flicker pursues a strategy of looking for “controllable value-add” projects, such as converting brand-managed hotels to franchise-managed hotels.

Panelists gave an overview of the differences between a brand-managed hotel in a full-service capacity vs. the franchise model. In a brand-managed hotel, the brand provides a full service environment where not only is the hotel name based on a brand (i.e., Hilton or Marriot), but also all management, services, and amenities are provided by the brand. In contrast, the franchise model follows the strategy that while a brand is still incorporated by virtue of the hotel name, the franchise operator/owner self-manages the property.

Mr. Gordon discussed the importance of brands in the industry, and how brands are leading the charge in terms of incorporating new technology in the hotel industry. Mr. Flicker spoke about the limited number of brand families currently in existence, and their resulting power in terms of negotiations with other related companies such as Expedia. When the moderator asked about value-add concepts in the industry, Mr. Flicker discussed amenities that full-service brands provide such as gyms, ballrooms, and restaurants. Offering catering helps drive room reservations well in advance of guests actually staying at a hotel.

Mr. Gordon discussed his company’s strategy in the select-service side of the business. He has found that the hotel industry has lagged behind the real estate industry as a whole in terms of design trends. Seeing this as an opportunity for success, his latest venture is a hotel that will have rooms which are smaller than the industry standard, but larger communal spaces. The hotel will be built on the principle that people who stay in hotels want a high level of design and  the opportunity to participate in activities and amenities with other guests.

The panel also discussed areas to avoid in the hotel industry. Mr. Gordon spoke about the luxury hotel industry and how while it might be a project that appeals to someone’s passion, the investment side of the sector is very risky. Furthermore, he believes that the full-service sector includes some risk as well. He reiterated his focus on the limited-service side of the business to keep his risk profile low but achieve the most profitability.

With recent competition from services such as Airbnb and increasing price pressures from booking companies such as Priceline, it is clear there are risks and obstacles for investments in the hotel industry. Nevertheless, as the panelists discussed, there continue to be areas for growth and opportunities for those who are willing to develop strategic plans in the right markets.