NEW YORK—Property-improvement plans and repositioning programs are ways of life for hotel companies in the post-recession economy. Driftwood Hospitality Management is maximizing both strategies as it folds recently acquired assets into its portfolio.
The North Palm Beach, Florida-based company is in the midst of three major renovations—two of which include rebranding—at properties it acquired during 2011 as part of a joint venture with affiliates of Apollo Global Management. The dramatic facelifts can cost up to nearly 50% of a hotel’s acquisition price.
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Brian Quinn
Driftwood Hospitality Management
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“Complete renovations and rebranding are core parts of the strategy we have when it comes to acquiring properties,” said Brian Quinn, Driftwood’s executive VP of development. “We specifically look for assets that need a fresh start in operations, looks and brand when we are looking for hotels to buy. That’s where the real opportunities are during this cycle.”
The recent acquisitions and PIPs include:
- The Sheraton Columbus Hotel at Capitol Square in Ohio, which Driftwood acquired for $19.5 million in September 2011 when it was a Hyatt-branded property, is undergoing a $9.5-million renovation. The hotel has 400 guestrooms.
- The 249-room Hilton in Raleigh-Durham (North Caroline) Airport at Research Triangle Park was acquired for $16.5 million and will begin a $7-million renovation in July. It will not be reflagged.
- The 217-room DoubleTree by Hilton Downtown Wilmington (Delaware) Legal District, acquired in September 2011 for $12 million, is undergoing a $4-million renovation. It will not be reflagged.
In addition to adding immediate value to the assets, the renovations will provide a stable operating environment for the hotels as Driftwood’s exit strategy from them does not include an immediate sale. Quinn said the company isn’t necessarily a flipper of assets and that it likes to hold a hotel in its portfolio “on the longer end of three to five years.”
“If it gets really frothy and buyers come in, then you can't fall in love with the real estate,” he said.
While Quinn said he is seeing more activity on the new-build front, Driftwood is content to spend its $400-million JV fund on acquisitions that lead to renovations and conversions.
“There is some of the pressure with new construction starting to happen,” he said. “But we’re not in the market for new-builds as an owning company. There are plenty of opportunities to spend the fund we have on existing assets that need our expertise.”
Dry powder in play
Driftwood can be placed in the thick of the race to strategically put “dry powder” into play as the hotel industry’s transactions volume accelerates, Quinn said.
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| The 400-room Sheraton Columbus Hotel at Capitol Square in Ohio, formerly a Hyatt property, was acquired by Driftwood Hospitality Management in September 2011 and is undergoing a $9.5-million renovation. |
Dry powder, or cash to deploy, is plentiful for the company after last year’s JV that targets the purchase, renovation and reflagging of full-service hotels across the United States. With approximately $50 million of that $400 million spent, there are opportunities aplenty for Driftwood, he said.
“The platform operates optimally with about 100 units to optimize the talent and drive the highest rate of efficiency,” said Quinn, who joined the company last year and has been involved in the hotel industry for nearly 25 years. “We're going to use all the tools we have to expand the platform, and with the Apollo relationship, we'll continue to be deliberate and disciplined in our approach to acquisitions.”
Adding to its portfolio of 33 hotels with 6,827 guestrooms will come via several avenues. While the company wants to fully expand its third-party management business, it also will continue to invest in hotels.
Quinn said approximately 60% of the total portfolio has some form of investment from Driftwood ranging from 5% to wholly owned. The rest of the portfolio is third-party management contracts. The company also likes asset-management deals.
“We will stay the course,” Quinn said during the interview conducted during the recent New York University International Hospitality Industry Investment Conference. “Each opportunity that presents itself is a unique situation that we can adapt to.”
Plenty of opportunities
He said the number of distressed hotels that are underperforming because of a lack of attention from special servicers, lenders, owners and management companies could provide many opportunities in the not-too-distant future.
“There are hundreds in that situation,” he said. “If and when they come to market, the landscape will be a completely different animal.”
Even during a frothy environment, Driftwood wants to grow methodically—up to about 20% a year.
Quinn said the company’s wheelhouse is efficiently operating hotels with 200 or more guestrooms, but it doesn’t shy away from smaller properties when the right opportunity is presented.
“We are sensitive to demand generators and how well they hold up during a downturn,” he said.
Secondary cities provide many opportunities for JVs such as the Driftwood-Apollo marriage, as the recent acquisitions of the 400-room Sheraton Columbus (Ohio) Hotel at Capitol Square (formerly a Hyatt), the 217-room DoubleTree by Hilton Hotel Downtown Wilmington (Delaware) Legal District and the 249-room Hilton Raleigh-Durham (North Carolina) Airport at Research Triangle Park.
“What we like about all three of those markets is those demand generators hold up well even when there is downward pressure,” Quinn said, adding the government, legal business and research business tends to be resilient.
