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Lowe, Destination connection looks for growth
January 30 2013

Lowe Enterprises and its subsidiary Destination Hotels & Resorts are looking to increase the number of hotels in their portfolios by focusing on independent properties in resort and urban locations.

  • Rob Lowe of Lowe Enterprises favors hotels as an asset class because of the ability to create value.
  • With 40 hotels in its portfolio, management company Destination Hotels & Resorts achieves about $800 million in revenue.
  • Concentrating on assets needing deep renovation is a staple of a near-term growth plan; development opportunities will come as the business climate improves.

LOS ANGELES—Rob Lowe can be placed high on the list of hotel industry supporters when it comes to the great asset-class debate.

Lowe, the CEO for Lowe Enterprises, invests in real estate in most sectors from office to industrial to mixed-use developments, having more than $5.5 billion of commercial, hospitality and residential assets.

However, the company’s top executive sees Lowe Hospitality Group subsidiary Destination Hotels & Resorts as a value creator with ample opportunity to grow.

“Across the various real estate sectors, we like hospitality because we are a hands-on value creator,” Lowe said during a break at last week’s Americas Lodging Investment Summit. “We believe with hospitality you have more levers to create value in the asset than you have in other real estate classes.

“The hotel industry is more volatile but that means there is more opportunity because you can play cycles,” he continued. “We think this cycle is going to last longer than past cycles because what we see is a longer extended period of little new development.”

Focusing its efforts on independent hotels, Lowe Enterprises, through its subsidiary Lowe Hospitality Group, has ownership interests in 13 properties. Destination Hotels & Resorts manages those assets and other hotels under third-party management contracts. Destination’s management roster includes 40 hotels with approximately 9,200 rooms.

Earning approximately $800 million in revenue each year from the management business, Jamie Sabatier, Destination’s president and COO, said doubling the size of its portfolio during the next five or six years is a reasonable expectation.

And a big part of that growth strategy is through exposure.

“Having people understand … while we are placing money and doing acquisitions for the Lowe family of assets, getting the word out about the full range of what we do is the biggest opportunity,” Sabatier said.

“Our infrastructure, depth of experience and size are well ahead of where our PR profile was—often it’s the opposite with companies,” Lowe said. “We see a great opportunity for growth ahead.”

A familiar client list
Destination includes a number of heavy-hitting owners among its clients with independent assets, including LaSalle Hotel Properties and Pebblebrook Hotel Trust.

In 2012, Lowe Enterprises sold the L’Auberge Del Mar in Del Mar, California, to LaSalle for $76.9 million, or $640,000 per key, but retained Destination as the management company.

“They had the opportunity to choose whoever they wanted from the management standpoint and felt we were the right ones,” Sabatier said. “The proof in our performance is in what owners are doing, saying and acting upon.”
Future growth markets
Sabatier said the company has made inroads in urban markets, and it wants to continue that growth.

“That is a focal point, along with continuing to grow the resort portfolio,” he said. “We’re not looking to grow globally but are actively looking in the Caribbean and Mexico because the customer base in those geographies is the same customer we’re tapping into in the U.S.”

“The proliferation of independent hotels in urban and resort areas—it’s clearly where the customer is going because they want a customized experience,” said Russ Urban, Destination’s executive VP of business development and acquisitions and a 30-year hotel industry veteran who joined the company at the beginning of January. “Where the capital has been in the last five to 10 years has been with brands. I see a real shift in that. It’s an uncrowded field where DHR has a real expertise.”

Urban said with the amount of “uninspired management in this space, we have an achievable growth plan.”

Lowe’s investor roster includes insurance companies—Allstate Life Insurance Company and Guardian Life Insurance Company of America—as well as major public pension funds, joint ventures and commingled funds, Lowe said.

“My personal theory about investing in hotel real estate is you have to either be a contrarian, which is difficult to do over the long term, or you have to have a competitive advantage in a specific niche of operations,” Lowe said. “That’s what Destination Hotels & Resorts does in those upper-end resort and urban markets.

“We’re in the business of creating value,” he said, as well as improving profitability, which includes a capital infusion for property improvement at the time of the acquisition.

Los Angeles-based Lowe Enterprises, which was founded by Lowe in 1972, isn’t entirely focused on independent hotels. In late 2011 it announced it secured up to $33.3 million of non-recourse, floating rate financing secured by the Doubletree by Hilton Hotel Boston-Bedford Glen in Massachusetts and the Embassy Suites Chicago-North Shore/Deerfield in Illinois.

“We do invest in brands from time to time when we see our customized model can add value,” Lowe said.

But, he added, “it absolutely won’t be our focus to have branded assets.”

The executives said the company is interested in developing—and managing—properties in select locations. Lowe said they are looking at a couple of development opportunities now.

“We’ve been a very active developer of properties in the past,” Lowe said. “We have a strong development capability in the firm. We will maintain that capability for the time we begin to see opportunities again. The market for feasible development projects is thin, but we are looking at a couple of markets.”

“The time in the cycle will dictate our reemergence on the development side,” Urban said. “There are a lot of deep renovation opportunities now that have our attention.”

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