REPORT FROM THE U.S.—Spending for capital expenditures during 2011 is forecast to increase for the first time since 2008, though it still will remain at low levels, according to Bjorn Hanson, divisional dean and HVS Chair at the Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management at New York University.
The forecast for the coming year is for capital expenditures of approximately US$3.5 billion, which represents an increase of 30% from 2010 levels, following decreases of 40% during 2009 and an additional 18% decline during 2010.
An estimated US$5.5 billion—a record amount—was invested in capital improvements for existing U.S. hotels during 2008 compared with US$2.7 billion in 2010.
The reasons for the increase are twofold, Hanson said.
“One is the brands have been very flexible in working with most owners with the declines in profits and lower returns and allowed owners to defer some capital projects,” he said. “… but with the outlook as being more favorable … the brands are starting to say, ‘We’ve been patient. Now it’s time to start requiring some of these expenditures.’”
The second reason comes from guests. Travelers were understanding when times were tough, but as the economy shows signs of improvement, albeit spotty improvement, they’re either becoming impatient or are just starting to voice their opinions, Hanson said.
Owners realize it’s a competitive market, and there’s a business need to increase the amount spent, he added.
Default Ad Will Appear Here
Tackling the top of the list
The top three issues owners will tackle, in order, include:
“The hotel industry has redesigned lobbies to focus on the behavior of younger generation Xers and millennials,” Hanson said. The new spaces are social hubs where guests can hang out and interact.
Bedding, flat-screen TVs and high-speed Internet access were added during the most recent upcycle, Hanson said. This time around, owners are focusing on the fixtures: furniture, carpeting and wall covers, for example.
Divisional dean at the Tisch Center for Hospitality, Tourism, and Sports Management
3. Curb appeal
Last but not least are the improvements to the exterior that will boost curb appeal and attract guests, he said. This includes things like repaving parking lots and improving landscaping.
Paying for improvement
Thought the industry has recovered since the doldrums of 2009, not all owners have the capital reserves to pay for these improvements, Hanson said. Cash flows and revenue per available room are certainly better in aggregate, but not every property has seen an uptick.
Fortunately, brands are still exhibiting some flexibility.
“Brands are being more flexible than they have been probably at any time in the past, except for the past two years,” Hanson said.
If an owner can’t afford one standard, the brands typically will compromise and prioritize expenditures. They’re not going to kick an otherwise good owner out of the system, Hanson said. Doing so is not constructive behavior, especially for a property in a great location and a strong market.
And it’s not as though owners must front the costs entirely on their own. Lending is “not very difficult” to come by for CapEx, Hanson said.
“It’s safe financing from a lender’s point of view. It’s usually a low amount relative to the value of the asset, meaning the security supporting the credit.”
A potential speed bump is the fact that many first mortgages do not permit many kinds of secondary financing. Owners must first get a waiver from the first lender (a.k.a the mortgage holder) before proceeding.
Select REIT CapEx spending
What follows is a brief rundown of second-quarter CapEx spending and/or forecasts for future CapEx spending for select U.S. hotel real-estate investment trusts. (Information was sourced from second-quarter earnings reports. Companies are listed in alphabetical order):
Ashford Hospitality Trust
Ashford anticipated CapEx spending in 97 of its legacy hotels.
Chatham Lodging Trust
Chatham completed significant renovations at five of the company's 13 hotels, or 40% of its portfolio.
FelCor Lodging Trust
“For the quarter, we spent (US)$36.3 million on capital improvements at our hotels (including our pro rata share of joint venture expenditures). During 2011, we intend to spend approximately (US)$85 million on capital improvement and (return-on-investment) projects. Approximately (US)$60 million, or 6% of our annual revenue, will be focused on renovating seven hotels, as part of our long-term capital program to maintain our portfolio quality and competitive positioning.”
Host Hotels & Resorts
“The company invested (US)$75 million and (US)$121 million in return on investment projects during the second quarter and year-to-date of 2011, respectively. These projects are designed to increase cash flow and improve profitability by capitalizing on changing market conditions and the favorable locations of the company's properties. Major ROI projects substantially completed during the second quarter include: the first phase of our re-development project at the 1,756-room Sheraton New York Hotel & Towers and the expansion and renovation of 21,000 square feet of meeting space at the St. Regis Hotel, Houston. The company expects that its investment in ROI expenditures for 2011 will total approximately (US)$220 million to (US)$240 million.”
LaSalle Hotel Properties
“The company invested (US)$10.8 million of capital in its hotels, including the completion of guestroom renovations at the Westin Copley Place hotel, Hotel Rouge, Topaz Hotel and Hotel Viking.”
Pebblebrook Hotel Trust
“The company’s revised 2011 outlook is based on the following estimates and assumptions: … Total capital investments related to renovations, capital maintenance and return on investment
projects of approximately (US)$63 to (US)$68 million.
“On April 6, 2011, the company acquired The Westin Gaslamp Quarter for $110 million. The 450-room, upper upscale, full service hotel is located in the historic Gaslamp Quarter of San Diego, California. The property offers three food and beverage outlets, over 32,000 square feet of meeting and event space and is currently undergoing a (US)$25 million capital reinvestment plan that is expected to be completed in the first quarter of 2012. Starwood Hotels and Resorts (Worldwide) manages the hotel.”
RLJ Lodging Trust
“The company released renovation projects totaling (US)$115 million, spread across 51 properties. The 2011 capital program is largely focused on upgrading and/or repositioning 24 hotels acquired in 2010 and 2011, including seven brand conversions. The balance of the renovations will include brand related upgrades at other select hotels.
“A total of (US)$11 million was spent in the first quarter of 2011 on five hotels, two of which were conversion projects—The Red Roof Inn in Washington, D.C. was converted to the Fairfield Inn & Suites Washington, DC/Downtown and the Wyndham hotel in New York City was converted to the Hilton New York Fashion District.”