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Resort rebound piques investor interest
January 25 2013

Things are looking up for the resort segment, where demand increases and loosening debt are spurring interest from investors, according to a panel at ALIS.

Highlights
  • Debt is becoming increasingly available for the resort sector.
  • The hot markets comprise the usual suspects: Hawaii, Miami and the southern Californian coast.
  • Resort customers have changed dramatically in recent years; they now crave experiential stays that offer value.

LOS ANGELES—A lot of people might say, “Don’t get into the resort business.” To which Christopher Pfohl, senior VP of acquisitions and new business at Pyramid Hotel Group, would say, “That’s not true.”

His unguarded optimism for the sector, in which Pyramid manages 16 resort properties in the Caribbean and United States, was on display Wednesday afternoon during “The Resort Sector” panel at the Americas Lodging Investment Summit.

Though still volatile, the resort segment has experienced significant returns in demand, an infusion of capital expenditure from owners and interest from outside buyers—as well as the availability of debt and capital to support it, panelists said.

“Lenders are still conservatively underwriting resorts, but if you have a good story, you’re a good sponsor and you have a track record of success they’re now looking at your future 12 months instead of just your past 12 months,” said Robert Lowe Jr., CEO Of Lowe Hospitality Group, which has more than 35 independent luxury and upscale hotels and resorts under management.

Those buyers can get debt for resort assets at “very low rates,” he added.

“When performance rises and interest rates are low the underwriting criteria gets much more friendly. … It gets much easier to refinance and find debt or equity partners who are willing to play,” said W. David P. Carey III, president and CEO of Outrigger Enterprises Group, which has 45 properties and nearly 11,000 rooms under management or development,.

However, the speakers noted funding for new development is largely nonexistent.

But new opportunities are opening up. The sandbox is spilling beyond the typical target resort markets in Hawaii, for example, as major debt and equity now is sniffing around properties in secondary markets, Pfohl said.

Hot resort markets
That said, the top resort markets still comprise the usual suspects: Hawaii, Miami and the southern Californian coast, for example.

“We think Waikiki is great. Pricing is up, but we still think there’s growth,” Pfohl said.

Orlando, Florida, is also on the rise, as are urban resort projects in major markets, such as New York, he added.

“We think this urban resort concept really can work and make sense in big cities,” Pfohl said.

But sometimes the regions with the most opportunities are also those with the most challenges, Lowe said.

“Our No. 1 goal as a company is to outperform the market as an investor. … Those markets that are hotter offer fewer opportunities for us to outperform the market as an investor. … There are fewer opportunities for us there right now, but there are some.”

Lowe generally focuses on markets off the beaten path where the competition is less fierce.

“We just have to be incredibly focused on where we best perform. That leaves the regional resorts. We see more opportunity today in regional resorts, but we have to be careful about which ones we pick,” he said.

Another key factor to consider is accessibility, the panelists said. Far-flung exotic locations might have appeal on paper, but time-strapped consumers are far less likely to visit if doing so requires two days of travel just to get there.

“It doesn’t matter how good your resort is. If people can’t get there, they’re not going to fill the place,” Carey said, adding his group spends a lot of time studying airlift and fuel prices.

Tracking changes in travelers
“There’s been more change in the consumer pattern behaviors in the past four years than in the past 50 years,” said Richard Ragatz, president of Ragatz Associates, a consulting firm for the resort real estate industry.

For one thing, they’re far more educated, Lowe said.

“They do lots of research, and they’re focused on value of the experience per price paid,” he said. “You’re not going to fool them. You’ve got to be honest upfront and really show them what your properties (are) and what you offer them.”

What constitutes value has changed as well, Pfohl added.

“Now it’s very experiential. It’s creating Facebook moments,” he said, adding that value is directly proportional to the memories guests create from their stays.

That thirst for experiences means resorts must rely on the local community like never before, the panelists agreed. The most successful properties are those who offer guests activities and programs that immerse them in culture.

Corporate groups, on the other hand, have remained somewhat rigid upfront when negotiating rates and the overall package, Lowe said.

“But then as they get to the property, the companies are doing pretty well, they want to reward their employees,” and food-and-beverage spend increases along with the use of additional amenities, Lowe said.

“We tend to be beating our forecast in the non-room-revenues area of our resort operations quite a bit,” he said.

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