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Boutiques get creative to attract investors
July 2 2012

Boutique hotel brands are looking to public and private lenders to fund new construction projects.

Highlights
  • The funding process has required more creativity than ever, said Patrick Goddard of Trust Hospitality.
  • “It’s extremely challenging out there,” said Craig Greenberg of 21c Museum Hotels.
  • Funding is expensive in Latin American countries such as Brazil and Colombia.

REPORT FROM THE U.S.—With financing parameters still tight and a dearth of new supply entering the market, finding funding to expand smaller boutique brands can be a daunting task.

But the leaders behind some of the segment’s most innovative brands are applying that same creative thinking to fuel expansion.

It starts with having a good story to share, said Craig Greenberg, president of 21c Museum Hotels.

 

Craig Greenberg
21c Museum Hotels

“Convincing financial institutions to finance small brands such as 21c is difficult because their initial reaction is they are looking to finance large brands because that is the simplest story to tell internally,” he said. “We have to spend a lot more time telling our story and educating them about what 21c is and who is behind it and what our performance has been like.”

The 21c concept, which combines a contemporary art museum with a boutique hotel, launched in 2006 with its first property in Louisville, Kentucky.

The brand has three hotels in its construction pipeline (Cincinnati; Bentonville, Arkansas; and Lexington, Kentucky) and discussion of another property in Durham, North Carolina.

The group uses a combination of public and private funding to get its deals off the ground. The Bentonville and Cincinnati properties are completely funded and in the construction process. Greenberg said total costs are approximately $31 million and $51 million, respectively.

Meanwhile, the Lexington property is still tying up some loose ends, but Greenberg expects the total cost of development to be somewhere between the other two hotels.

The Cincinnati and Lexington projects are both historic rehabs, which he said will add to the cost of development. However, there are historic tax credits available.

Patrick Goddard, president and COO of Trust Hospitality, which operates 20 luxury and boutique independent hotels in the U.S., Caribbean and Latin America, said the funding process has required more creativity than ever.

 

Patrick Goddard
Trust Hospitality

“In our experience, the underwriting is substantially more detailed and sophisticated than it has ever been (at least in our environment),” he said. “The combination of these factors combined with lenders applying more stringent lending requirements and shortage of workable deals makes the investment world tougher to navigate.”

Trust has a three-pronged approach when it comes to expansion, Goddard said. The company works with developers on new-build hotel projects; targets existing hotels that appear to have upside potential from a sales, marketing, revenue-management or operations perspective; and identifies acquisition opportunities (or new development opportunities) for investment partners in the luxury and boutique hotel space.

The company has eight new builds under construction that are expected to come online during the next three years: The Langford, Miami; Brickell House, Miami; The Circ, Hollywood, Florida; Zemi Beach, Anguilla; Los Micos, Bahia de Tela, Honduras; Vive, Waikiki, Hawaii; Casa San Agustin, Cartagena, Colombia; and B3, Bogota, Colombia.

The projects cost between $10 million and $25 million and involve all types of funding, including private money, private equity, government funding, conventional loans, EB5, fractional sales and co-op money, Goddard said.

Success begets success
In 2011, 21c Louisville had an average daily rate of $214, an average occupancy of 75% and a revenue-per-available-room index of 164, Greenberg said.

Such strong performance numbers, coupled with the company’s ability to secure more than $10 million in non-recourse financing on its Louisville property earlier this year, boosted 21c’s track record to help grease the skids with other financial partners, he said. 

Indeed, success begets success—something with which B Hotels & Resorts’ Chris Tompkins is familiar.

The Weston, Florida-based company has seen tremendous investor interest after generating strong demand with the opening of its first property in Fort Lauderdale, Florida, the senior VP of marketing and brand programs said.

“We have received requests from well over 50 hotel groups that want to convert their hotels into the B brand,” Tompkins said. “We have also been approached by a group that is doing development for two hotels they have already received funding for.”

 

Chris Tompkins
B Hotels & Resorts

The B brand has two projects in the pipeline: The B Resort Lake Buena Vista near Walt Disney World, which is slated to open fall 2013; and the B South Beach, Florida, which is projected to open during the first quarter of 2013.

B also recently launched a new brand, b2, which Tompkins said will skew to the younger “iPad generation.” The first b2 hotel will be located in downtown Miami and will open during the first quarter of 2013.

“We have made our viability apparent because of our growth,” he said.

Tompkins added that the brand is looking at four properties—all with different ownership groups—in Boston, Washington D.C., San Antonio and Chicago.

Trust has operated hotels for more than 27 years, and although Goddard believes there is a place for brands in the world, “there are many markets in which the cost, contract longevity and lack of flexibility of a brand causes more risk for an investor than an independent,” he said.

“Our independent hotels beat our branded competitors in six different markets today in RevPAR penetration by over 20%,” he added.

Funding in international markets
Funding varies from market to market.

“Funding is expensive in Latin American countries like Brazil and Colombia, so we find that often we are either dealing with private wealth or co-ops where there are tens and sometimes hundreds of investors,” Goddard said. “In the U.S. we are seeing a lot of foreign money coming from China and Latin America in addition to traditional lending slowly returning in gateway cities for well heeled sponsors.”

Butterfly Hotels Group, a boutique hotel chain in Hong Kong, has opened five boutique hotels in the past four years. The group’s executive director and GM, Bill Chan, said in an email that he wants to take the brand international, but Butterfly is mainly interested in four major cities in China—Beijing, Shanghai, Guangzhou and Shenzhen because of promising demand and market potential.

“We have planned to go international, but in a slow and careful pace,” he added.

For now, the brand is focused on adhering to its motto, “Stay Central and Live Metro”.

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