Mr. Trump Jr.

Finance & Investment

The Changing Face of Hotel Investing

By Donald Trump Jr., Executive Vice President Development & Acquisition, The Trump Organization

Co-authored by David Orowitz, Vice President of Development, The Trump Organization

If you believe everything you read about the current state of hotel development and investing, you might be inclined to give it a pass. But from where we sit, though profits from hotel operations are way down industry wide, the opportunity to create value on the investment side is stronger than it has been in years. Combining a long term strategic vision with astute instinct and the appetite to act upon marketplace opportunity can put hotel investors in the right place at the right time today.

At The Trump Organization, experience as hotel owner, developer and operator provides a unique perspective on what is possible, whether it is new development, completion of stalled projects, or repositioning of assets. Rooted in local residential and commercial sectors, going back to my late grandfather's beginnings in Queens, New York, we have broadened our portfolio in recent years to create what we call the next generation of luxury hospitality: Trump Hotel Collection. Our approach to developing this relatively new global brand provides a good case study for how one might approach hotel investment today.

Trump Hotel Collection saw its genesis in the opening of Trump International Hotel & Tower at One Central Park West in New York City 12 years ago. At the time, The Trump Organization was steeped in residential and casino development, but was not yet established in the luxury hotel sector. The success of that project - combining hotel, hotel condo and residential sales geared to an international clientele - sewed the seeds for the brand that I launched with my father, sister, Ivanka, and brother, Eric, two years ago.

Since then, Trump Hotel Collection has made its mark with the successful openings of Trump International Hotel & Tower Chicago and Trump Las Vegas in 2008. In November of this year, we will debut our first island property - Trump International Hotel & Tower Waikiki Beach Walk.

In early 2010, we will add a second New York City hotel - Trump SoHo - to the growing portfolio. Distinct from the Central Park West property in location and style, it will bring world-class dining, spa and other amenities to that desirable downtown neighborhood. With six other projects in the pipeline in urban and resort locations around the world, and more to follow, we have placed the brand squarely at the top of the global luxury hotel market.

The properties mentioned above by name are hotel condos or a combination of hotel condo and residential projects; each commanded sizeable premiums and sales velocity in their offerings, even relative to the robust market conditions at the time. Less than two years ago in Waikiki, for example, all 462 hotel condo units sold out in pre-sales for more than $700 million in eight hours, setting a world record for the total dollars purchased within a single residential development in a single day.

While we are longterm believers in using real estate to finance hotel projects, these are by no means the only types of projects worth pursuing, particularly in the current market. We are actively pursuing straight management contracts as well as licensing agreements for use of the brand name by local developers with the best projects in markets that we are new to. We are likely to develop and own projects as well as manage other people's properties, not just condo hotels but straight hotels or others with a residential component, or perhaps, a golf component, drawing on that area of expertise.

Our outlook on what makes a good project, focused always on both long- and short-term considerations, requires an especially keen eye in today's economy. Here are some of the primary factors we consider in entertaining opportunities in 2009 and beyond:

• How we can bring to a project 5-star hotel brand standards that generate a premium on the revenue side without our development partner spending more than is necessary to make it happen.

• Ensuring that the location of the project is in the best spot it can be - commanding the best views, a river or water location, or other factors that will command a premium in sales and room rates.

• Evaluating the project under the harsh light of short-term viability. Is it a place that people want to live, stay or do business today?

• Avoiding pitfalls - like issues of access - that can doom a project before it gets out of the ground. If it's difficult to get to, we are likely to forego the opportunity;

• Knowing how longer-term factors might affect the value of the asset. Is new hotel supply planned for the area? How much and at what level? What would prevent over-building?;

• Understanding the effect of scale on the project. Will the market produce the same ADR and occupancy for a new 400-room property as it does for an established 100-unit hotel?

• Underscoring to our constituencies that they are making the secure decision when buying a hotel condo unit, residential unit or club membership in pre-sale. They need to know that the project will be completed on time, with the best possible amenities. They need to be convinced that we will deliver on the promise of our brand, freeing them from the worry of making the right decision for themselves.

As we look to leverage our capabilities in the current market, we are evaluating several metrics for investment. We do not rely on 10-year pro formas and IRRs as these projections become irrelevant as soon as developers come into the market and (foolishly) build more than is demanded. History shows that developers will attempt this at least once during every decade.

Instead, we seek strong short-term as well as long term performance by choosing projects in markets and micro-locations with high barriers to entry. For example, New York City is a tough place to build. We are confident that Trump Soho's location, unparalleled views, and scale allows us to provide an amenity package that is unique for the area and will be unrivaled. When we went to Chicago, we built our property on the river directly off Michigan Avenue and minutes from the best office space in the city. This location is uniquely positioned to capture business and leisure guests; initial returns are proving this to be true, even in a down market. In each market, we seek to make a statement with iconic architecture and amenities and services ideally tailored for the particular location.

Finally, we never make an investment based on what others might pay for the asset later. It needs to be viable now, in today's market, at today's prices. From a technical perspective, we ensure that the return on the asset comes from operating profits and not expected, but highly uncertain, capital appreciation.

Our organization has come a long way from my grandfather's day. In fact, a study conducted by Peter Linneman, founding chairman of The Wharton School's real estate program, showed that Trump-branded projects (hotels and other types) command significant premiums and sales velocity over other developments of similar location and construction quality. The company's growth has been grounded in unwavering long term strategy combined with a short-term carpe diem propensity to make the deal. That a measure of our success is due to aspirational buying is true; yet that brand tenet has been born out of level-headed thinking and solid decision-making beyond the world of sound bites and cover stories.

We are long term believers in the luxury segment as an enduring sector of the hotel industry. The biggest challenge with luxury real estate over the past year has been the talk and the press coverage about it. The fact is that demand for luxury has declined less than in other segments. The poor relative and absolute REVPAR performance of luxury properties is driven by the excessive supply built over the last few years. As we expect few new luxury hotels to open between 2011 and 2015 - and challenges to all developers to finance and construct properties at the level of quality that we have recently seen -- we believe that the strong performance will return for world-class properties.

David Orowitz contributed to this article. Mr. Orowitz is Vice President of Development at the The Trump Organization where he is responsible for real estate acquisitions and strategic partnerships. David received his bachelor's degree from Hamilton College and graduated with honors from the MBA program at The Wharton School. To contact David, please email him directly at dorowitz@trumporg.com

- Photos courtesy of Trump Hotel Collection

Donald J. Trump Jr. is an innovator and leader in today's young business world. As an Executive Vice President at The Trump Organization, he works in tandem with his siblings Ivanka and Eric to expand the company's real estate, retail, commercial, hotel and golf interests nationally and internationally. His extensive real estate development experience, rigorous education and inherent business sense add a level of detail and depth to the management of all current and future Trump projects. Mr. Trump Jr. can be contacted at 212-832-2000. or donjr@trumphotels.com Extended Bio...

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