Mr. Roedel, III

Development & Construction

Renovations: Meeting Changing Market Demands

Address how changes in market culture lead to changes in ownership and increased upgrades/renovations

By Fred B. Roedel, III, Partner & Managing Member, Roedel Companies, LLC

We have all been through a very trying economic period in the hotel industry during the past few years. Customers are continuing to expect more features & benefits from hotels, brands are challenged to design and implement brand standard changes that differentiate their product and provide the investor the opportunity to maximize revenues and market performance and Owners are constantly challenged with meeting their return on investment requirements and expectations while trying to keep up with the changing culture of customers and brands.

This constantly evolving environment will cause some owners to divest of assets versus investing in them and provide an opportunity for other owners to position their hotels to maximize their revenue, free cash flow and long-term investment return as markets improve.

Being the Best Hotel in a Market

The objective of any hotel owner/investor should be to develop and operate a hotel that performs at the top of its market. Every market is different in some way, but what is not different is that the paying customers ultimately determine what hotel will be a top RevPAR performer.

One key culture change in the hotel industry is that customers are expecting hotels to provide them with similar, if not better, features and benefits that they have in their own homes. Examples include faster high speed internet, HD television content, rooms with quality furnishings and finishes and an overall experience that lets them relax while they are not in their own homes. Today’s customer are experienced, they know what they like and don’t like, they can determine the overall condition of a hotel very quickly, they recognize if a hotel is well maintained and they make their purchasing decisions accordingly. If owners allow their assets to become poorly maintained and don’t stay on top of their respective markets, to know if and when they should be investing in certain improvements, they will have little opportunity to capture the market that does exist and maintain their overall investment.

Three years ago our firm made the decision to renovate all of the guestrooms in one of our hotels. This particular property consistently received very high quality scores from the brand and we had no issues with our customer base, but the hotel had been open for 8 years and its decor had become dated against the latest standards of the brand. Most thought we were crazy to be investing the dollars we did during that challenging and worsening economic period. That investment allowed the hotel to maintain its customer base, pick up additional accounts that had been staying at “newer” hotels in the market and we have since been able to drive rate more aggressively with the improving market. We did not renovate the entire property; just the areas that, if not improved / renovated, would most negatively impact our ability to maximize occupancy and revenues. With the improving economy we have the plans in place to renovate the balance of the hotel in the next year.

Brand Standards

The brands are experienced and good at what they do. They have vision, they clearly understand their various product lines, their targeted customers and they listen to their customer base, making sure they evolve their product lines to meet customer expectations.

Brand standards are critical to all of us. Standards that are well thought out, implemented and constantly verified give all investors the confidence that their own investment can be in the best position to maximize its ROI potential. Consumers look for and demand consistency between hotel properties. Customers do know when a property is not up to par with current standards. All owners need to realize they can only maximize a hotels financial performance when the product meets the customer’s expectations.

Over the past few years the brands, understanding of the economy and its impact on the hospitality industry, have been judicious in delaying standard upgrade deadlines. All owners need to understand and expect that the brands are going to take their feet off of the brand standard deferment brake pedals with an improving economy. If you spend the necessary time to determine the positive effects these standard changes can have on your property, then implement a plan to get the work done, this is a good time to get any improvements completed at a price that will be far better than it could be one year from now.

Owner Expectations and Challenges

At the end of the day hotels are simply one of many segments in the world of real estate investment and operation and it is not the only one facing constantly changing environments and conditions which either enhance or negatively impact an investment. As with all investments owners need to constantly evaluate specific investments against their own investment criteria to determine if they remain viable within those criteria. Within our firm we look at the following areas and review whether a naturally evolving marketplace and/or brand standard upgrades will help or hurt our investment and operations

Investment

• What are the real opportunities within a given market to maintain and/or improve revenues and free cash flow
  • Will property improvements differentiate our hotel
  • What improvements would provide a product that would allow us to increase our ADR by some dollar amount
  • Are we in a market where no improvements would provide an end product that could result in an increasing ADR

• What changes do we believe will enhance the long term earnings, cash flow and disposition value of the asset
  • Maintaining the building structure is critical to the long-term return on your asset
  • As I have stated I previous articles if you do nothing else, do not let your property fall into a position where a litany of other issues can begin to negatively impact the property and consume dollars you might prefer or need to invest in other areas of the hotel

Operations

• Will the property be able to drive increasing revenues and occupancy
  • Are the changes ones we can make and will they allow our hotel to be the number one property in our competitive set
  • Will the investment be matched by an improvement in revenues and/or free cash flow

• Fixed & Direct Operating Costs
  • Will the costs to meet increasing customer expectations or maintain additional brand standards be greater than our ability to improve revenues?
  • Or, will change improve our ability to control or reduce operating costs in general
  • Certain improvements may be invisible to any guest but may provide operating costs savings, improving your free cash flow Energy is the largest cost in many hotels that offers many inexpensive opportunities:
  Water - invest in water saving devices:
  < Flow restrictors on sink faucets are invisible to any guest
  < A typical sink faucet moves 3 gallons per minute, install a restrictor to reduce that flow to 1.5 gallons per minute
  Electricity:
  < Thermostat systems are getting more inexpensive all the time

• Operating Free Cash Flow
  • At the end of the day this is all that matters
  • Be prudent and smart with any investment – don’t do it just because you think you need to
  • What all of us need to do is properly operate our hotels, repay our obligations and ultimately get a return on our investment – even in these most trying of times

Times involving change also provide opportunity for many investors. There are many ownership groups going through their own analyses now and many of them are determining that now is the best time for them to divest of assets. The bottom line is that there will be opportunities to acquire hotels in currently challenging markets, invest in the necessary and/or brand mandated improvements and ultimately realize a return on the investment. These challenging times for the hotel industry will not last forever. The unfortunate reality is that many owners are not investing in their hotels creating a larger and larger opportunity for those who do. Look for your own opportunity, do the necessary homework and keep your investment balanced with the economic expectations. Above all do all you can to keep your hotel in the best position to realize the economic benefits of an improving industry - embrace change, it is not all bad.

Mr. Fred Roedel is a Manager of Roedel Companies, LLC along with his brother David. He shares the responsibility of developing and implementing the annual strategic plan of Roedel Companies. He also shares the responsibility of approving the final design, budget and timeline of any asset developed. Mr. Roedel is President of ROK Builders, LLC, the wholly-owned Construction Management subsidiary of Roedel Companies. In this capacity he is responsible for developing the strategic and annual plans of ROK Builders. Mr. Roedel, III can be contacted at 603-654-2040 ext. 105 or FredRoedel@roedelcompanies.com Extended Bio...

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