If companies including the Four Seasons and Ritz-Carlton are managing your hotels, what do you bring to the game?
Our core competency is asset management. That can take many forms — for example, revenue enhancement projects. We’ll do market research and customer surveys and look for ways to expand revenue, such as adding wine bars to some properties. That’s one recent project that has been successful. At the InterContinental Chicago, for example, we spent a couple million dollars and have seen nearly a 20% EBITDA yield based on 2009 results. We also expand properties by adding suites and rooms, and we try to be bold about that. We spent about $22 million at one hotel to add rooms and a high-end restaurant, in the middle of the recession, and we achieved a very high return on that investment.
In managing a portfolio of properties, do you try to hedge against regional downturns by spreading yourself around the globe?
We aren’t focused on geographical diversity so much as being opportunistic and asset-specific. It has to be high-end luxury; we’re not into commodity hotels. We own assets throughout Europe and North America. That said, we are exiting Europe and will be North America–focused going forward.
Why are you leaving Europe?
We own only three hotels there and two are under what’s called a lease-hold structure, which differs from outright ownership. One reason is that we don’t have a sufficient critical mass from a cost-benefit analysis. And the [general and administrative] costs associated with overseeing European hotels are pretty high — you need separate advisers to do your accounting, legal, and tax structuring, so it gets complicated. We’re not saying we think Europe lacks attractive markets, but our strategy is to sell our properties there, pay down debt, and use our capital to fund growth here.
The expense of running a high-end hotel in any region must be significant.
It is, but even throughout the recession we spent money on our hotels to keep them in great physical condition. We think that will enhance earnings growth going into the recovery because we won’t have to pump additional money into them to make up for not having spent. We have great assets in great markets, which creates a high barrier to entry.
To what degree does the real estate adage “location, location, location” apply to hotels?
That gets back to my comment about barriers to entry, which include the advantage of specific locations. For example, in Washington, D.C., we own the Four Seasons in Georgetown. Nobody could get a hotel built in Georgetown today, it would be impossible. There is no land, no chance of getting zoning approval, and so on. The same holds true for a lot of our beachfront hotels in California. And in Chicago we own the Intercontinental Hotel on Michigan Avenue, where there are no empty land sites. So that really enhances the long-term value of our hotels in that they are, in a very real sense, irreplaceable.
Are there hotel-specific metrics that you use to guide investment and cost-cutting decisions?
We track two measures closely. One is “RevPar,” which is revenue-per-available-room. It’s the multiplier of your occupancy and your average room rate, and we have the highest among any of our peers. That’s proof that our model works. The other measurement is a third-party report from Smith Travel Research that tracks all metrics for hotels in each category, from resort to luxury to upscale, and so on. So in each of our markets we can compare ourselves against our competitors to make sure we are number one or two and getting [superior] market share. Everybody’s revenues were down in the downturn, but the key is, are you still doing better than your competitors?