The Chesapeake Point of View

Executing Successful Hotel Conversions

Executing Successful Hotel Conversions

March 29, 2013

Typically, the cost to do a conversion is substantially less than new-build construction. However, the market still views conversions as new properties, making it possible to capture more market share and significantly improve the asset value without the risk and investment of building a new hotel from the ground up.

Hotel owners considering a conversion need to think carefully about what brand would be the best fit for the property and the market, what resources and logistics will be required to renovate the hotel, what the timeframe and turnaround will be and what strategies they need to deploy to make the hotel successful. Here are some of the key factors owners must consider when pursuing a hotel conversion:

Listen to the market
Let your market needs determine what brand opportunities are available. The importance of converting to the right brand cannot be overstated. Evaluate and understand what available brands best fit your physical asset, deal points and investment strategy. Based on those criteria, you can determine which brand can create the best return on investment.

Create value

Once you have chosen the right brand for the right location, work to implement brand- and market-specific strategies to maximize the asset’s potential. The right brand is only half the battle. To minimize risk, you need to select a management partner experienced in conversions to execute your strategy.

Be opportunistic
Hotels in receivership can be purchased at reasonable prices and are not tied to a franchise agreement—the number of newer hotels that could not pay their mortgages is at an all time high during the past three years. If you can buy low, renovate and convert, it is possible to re-open as a “new” hotel in a matter of months with the right plan and partner in place.

Avoid pitfalls
Executing a successful conversion strategy is not without risk. It is critical to seek professional assistance to assess the major mechanical systems— heating, ventilation and air conditioning systems, plumbing, electric, elevators, laundry equipment, kitchen equipment, etc.—to avoid any major surprises that could affect your financial success. Also, unless you are updating your major mechanical systems, older hotels have less efficient systems and require more frequent maintenance, so budget accordingly.

Trust the experts
The best hotel management companies are adept at identifying the right opportunities, matching ownership financial objectives with the right brands and implanting the necessary support systems—from marketing, to staff management and smart revenue controls—all needed to make a new conversion deliver maximum return on investment. Typically, when making a brand conversion transition, owners are starting from scratch, with a new product, new price points and developing an entirely new clientele. Making that pivot requires proven management experience and demonstrated expertise.

Make a splash

The market loves something new. Renovated and converted properties typically experience a surge of interest and a certain cachet. At a time when quality opportunities for new builds are somewhat scarce, the comparatively costeffective and transformative impact of a quality conversion is an appealing alternative—particularly for owners and operators whose properties are underperforming. Capitalizing on that newness factor to create brand ambassadors for the long term is essential. The importance of a strong social media and Internet campaign during your brand transition will vastly improve market awareness and help expedite a ramp-up of hotel revenues. A propertymanagement team that is ingrained in the community and is social media savvy will be critical for immediate market exposure.

Transformative impact
A recent case study I am personally familiar with provides a perfect illustration of the key principles outlined above—and of the potential advantages of a solid conversion model: the successful conversion and transition of a Holiday Inn to a DoubleTree by Hilton in Raleigh, North Carolina. With the hotel’s Holiday Inn franchise agreement coming to an end, ownership determined that greater potential existed for a conversion than through re-upping the franchise agreement and pursuing more of the status quo. Ramp-up of top-line revenue was reduced through proactive management of the request-for-proposal process, reservation system management and a comprehensive ecommerce strategy, including targeted global-distribution-system marketing campaigns, website development, social media and customer relationship management strategies. In addi
tion, with no Hilton in downtown Raleigh, there was a need in the market. The conversion neatly filled that vacuum in the market. The results exceeded even the most optimistic expectations. The new DoubleTree by Hilton increased revenue per available room over the market/competitive set by 39.3% (with 25% of this increase because of rate increase alone). The hotel achieved a 22.7% post conversion increase in average daily rate. Additionally, it saw a more than 50% increase in profit post conversion and customer-service scores that far exceed DoubleTree by Hilton benchmarks, as well as an $8-million increase in asset value.

A growing trend?

It is not just owners looking to boost their bottom line who are taking advantage of a strategic and well-managed conversion strategy. Today, with the residual economic impact of the recent recession still lingering, many locations around the country are essentially closed because they are in such disrepair. Dramatic and successful conversions have reinvigorated properties like these in cities such as Houston; Jacksonville, Florida; and Louisville, Kentucky—reopening them as rebranded, renovated hotels. Ultimately, it all comes down to bottom-line results. How do you improve your asset value? How do you maximize ROI? As an owner, it’s
all about adding value and making money. Increasingly, it seems like the means to that end is a strategic rebranding and a hotel conversion with an experienced, results-oriented partner.