Measuring the success of publicly owned hotels
 
Measuring the success of publicly owned hotels
22 MARCH 2016 8:18 AM

It can be difficult to measure whether publicly owned hotels are performing as expected, driving convention business, or both.

REPORT FROM THE U.S.—In recent years, a number of cities, counties and other public agencies have developed or acquired hotels, most often as a way to spur convention business to the particular market. Depending on how it is measured, the success of these properties has varied, sources said.

“It is certainly a case-by-case basis whether they make sense, so it’s important to understand the criteria by which you evaluate their success,” said Tom Hazinski, managing director of HVS Convention, Sports & Entertainment. “Following the 2008 (economic) crash, none of them went into bankruptcy or failed, so from that perspective they’ve all been successful. The financing is typically structured in a way that makes these hotels quite a bit more of a secure investment than a traditional debt-equity deal. From that perspective they are very solid investments.”

Measuring success gets a little murky when looking at the role of public-owned hotels in developing or retaining convention business for a market, he said.

“It’s much more difficult to measure, because one always has to compare it to a scenario in which the hotel wasn’t built. So it becomes a hypothetical comparison,” Hazinski said. “By and large, cities making investments in their convention centers need to maintain those assets so the alternative scenario (to not building a hotel) is losing out on convention business altogether.”

Two sides to the story
Hazinski cited Baltimore as an example of the two ways of measuring success of city-owned hotels. In 2006, the city of Baltimore issued $300 million in bonds to build the 757-room Hilton Baltimore, which opened two years later. According to Baltimore City Council President Bernard Young, the hotel has lost $70 million since opening, and last year he introduced legislation to explore sale of the property.

“While the city has had to use back-up sources of revenue to pay debt (on the hotel), the level of business at the convention center expanded dramatically since the Hilton was built,” Hazinski said.

In 2015, for example, the city was scheduled to host a record 29 citywide conventions. And according to STR, the parent company of Hotel News Now, occupancy and average daily rates for the city’s central business district improved steadily from 2010 through 2014, with decreases in both metrics in 2015.

The city of Phoenix faced a similar situation with the Sheraton Grand Phoenix, a 1,000-room, city-owned hotel that opened in September 2008 following the issuance of $350 million in municipal bonds. And while occupancy and rates have generally improved for the downtown Phoenix market since then, the hotel posted operating losses in 2012 and 2013 before rebounding with a profit in 2014, the last year in which performance figures are available.

Last fall, the city put the hotel up for sale, and TLG Phoenix purchased it in February for a reported $300 million.

Another issue is the effect publicly owned hotels might have on privately held competitors. In 2011, the city of Cedar Rapids, Iowa, purchased a former Crowne Plaza Hotel for $3.2 million and converted it to a DoubleTree hotel. According to Cedar Rapids City Manager Jeff Pomeranz, following a flood in 2008, the city received more than $50 million in federal and state grants to build a downtown convention center and arena, with part of the funds used to buy the hotel. 

“The (hotel) has definitely helped bring in more citywide conventions and larger groups, but more than anything, it has enabled the city to bid on large conventions and citywides that other cities of similar size in Iowa and throughout the Midwest had already been able to do,” said Ravi Patel, president of Hawkeye Hotels, which operates 56 hotels in 16 states, including a Fairfield Inn & Suites in the Cedar Rapids market.

“I look at it as a large net positive; however, sometimes when there is a city-owned hotel in the market, it’s hard to get rates to where you want them to be,” he said. “It’s hard for a Fairfield or even a Hampton when the DoubleTree is selling rooms at a lower rate because it has to capture enough base business to get occupancy to a safe, sustainable level.”

And while Pomeranz said events at the convention center drew nearly 380,000 attendees in 2015, it is hard to validate how the property has helped other hotels in the market. According to STR, occupancy for the market’s 35 properties has hovered around 60% for the past six years, with a high of 62.5% in 2012.

Success stories
Some other public-owned hotels have either performed as expected, helped drive convention business, or both. In 2011, the city-owned Omni Dallas Hotel opened and within one year the property was exceeding performance expectations. First-year occupancy was 68%, about eight percentage points higher than projected. In that first year, the property generated $18.1 million in earnings before taxes, interest, depreciation and amortization, about $3 million more than forecasted.

“The Omni has exceeded our financial expectations, but it has also helped us generate additional convention business and has now created even more hotel development in the Dallas area,” said Ron King, executive director of convention and event services for the Kay Bailey Hutchison Convention Center connected to the Omni.

According to King, 24 citywide conventions are slated in Dallas this year, up from 22 in 2015 and 19 in 2012, the first full year of operation for the Omni.

“The opening of the Omni, given its size and the fact that it is directly connected to the convention center, has increased interest in the city’s convention center on a national scale,” said Kathleen Donahue, SVP and partner in HVS Consulting and Valuation and based in Dallas. “Perhaps most importantly, the opening of the Omni has put Dallas on the map and increased the city’s appeal, and that in turn has benefited hotels in the greater market because of the overflow demand potential and the exposure of Dallas as a convention city.”

Hoteliers in Columbus, Ohio, generally have been positive about the effect of a 532-room county-owned Hilton that opened in 2012 near the city’s convention center. 

“It’s been very positive for hotels in the market,” said Charles Lagarce, president of Columbus Hospitality Management, which operates 12 hotels, mostly in the Columbus market. “It has allowed us to retain and attract some citywides we wouldn’t have been able to keep or get previously because we didn’t have the comprehensive package—including a headquarters hotel—that groups demand.”

He said the key to success of the project was a collaborative effort among city officials, convention and bureau executives and hotel owners and operators.

“It was a true collective effort: our city officials, Experience Columbus, the county commissioners,” Lagarce said. “Everything and everyone was extremely transparent through the process, which has been very helpful, especially in regard to what the hotel’s expectations were. (Hilton management) has also done a great job in having integrity in what it was intended to do, which is to be there for the big convention blocks.”

The jury is still out
Several other hotels—one that recently opened in Denver and one about to open in Cleveland—will further test whether publicly owned hotels are good bets.

In November, the 519-room Westin Denver International Airport opened within the airport as part of a transit center that will link the airport to Denver’s city center by rail. And while it’s too early to determine how the hotel will perform, costs to develop the project have risen substantially since its inception. 

According to a 2014 audit, the original 2011 development budget of $500 million had increased to $544 million by 2013 and might increase to $599 million or more. Since then, the auditor’s office said the final price tag might exceed $721 million.

In Cleveland, a county-financed 600-room Hilton opening in June might be under budget by as much as $25 million. The $25 million, which was part of a contingency fund for the project, will be used to build an underground walkway to a nearby parking garage.

Whether the hotel is a financial success and what effect it will have on other properties in the market is yet to be determined, said David Sangree, president of Cleveland-based Hotel & Leisure Advisors.

“When you have a city or county owning a property, you have a group of legislators who are not hotel business people but who are in fact your managers and your owners. They make certain requirements that aren’t typical for a hotel project,” Sangree said. “In Cleveland, the costs for this property are much higher than any other hotel built in Cleveland historically on a per-room basis.

“They have put in a number of things into the hotel that if you were a private developer you would ask the government to pay for; you wouldn’t do, like the underground walkway to the parking garage. One could argue that is a necessary thing to add, but if a private developer was building that hotel they would try to get the government to build it.”

2 Comments

  • cwilson1 March 22, 2016 12:42 PM Reply

    Very interesting article, Ed. Well done.

  • Bob Nelson March 22, 2016 9:22 PM Reply

    “Following the 2008 (economic) crash, none of them went into bankruptcy or failed, so from that perspective they’ve all been successful.” That’s incorrect. Trenton’s city owned Marriott at Lafayette Yards opened in 2002, went bankrupt and was sold for pennies on the dollar in 2014. Douglas Palmer who used the hotel as a crowning achievement to help his mayoral re-election when it opened was long retired and moved out of state by the time the hotel failed raising the question of whether or not real estate speculation is an appropriate use for taxpayer dollars.

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