Matinum

Taking Charge of Your Health


♪ [Theme Music] ♪ MICHAEL STOLER: 54
million visitors to New York City. It may grow to
55, to 56 million. The hospitality industry is on
fire or are we a little worried about the future?
So, as opposed to me being my pessimist that I
normally am, I’ve brought together four individuals
who truly understand what’s happening in the
hospitality industry today. My guests include
Will Obeid, who is the President and CEO of
Gemini Hospitality, the owners of the Jade Hotel;
Sean Hennessey, who is the President of Lodging
Advisors; Tom Lydon, the President of the City
Investment Fund, who are the owners of the Crown
Plaza Times Square; and, last but not least, the
guy who knows where to get the money, Ronnie Levine,
who’s the Managing Director of Meridian
Capital Group. MICHAEL STOLER: A hotelier, an
advisor, a fund operator and a hotelier and the
money guy. Since you on a daily basis — how is the
hotel business doing? WILL OBEID: It’s great. It’s
great. Our hotels are up substantially year-over-year now
for the last four years. And we’re
looking forward to a very strong 2014. We have
pulled back some of our projections for 2014 with
all the supply coming online. But despite all
the supply, which I think is going to be up about 6%
in 2014 over `13, I think it’s going to be a great
year. MICHAEL STOLER: Supply 2014,
your thoughts? SEAN HENNESSEY: Well, we’re
continuing to add rooms to the city, as Will said. Probably
over the next two years we’ll see about 11,000 new rooms
opening up in New York. The good news is that over
the past several years we’ve added thousands of
rooms and the occupancy has actually gone up.
We’re starting to see it level off now a bit. The
last couple of months… MICHAEL STOLER: 87%
occupancy is the highest number that we’ve ever had
on record, right? SEAN HENNESSEY: Yeah, I think
there will continue to be strong demand. It will be
more difficult to get a lot of pricing power. But
we can generally always find the customer. MICHAEL STOLER:
Talking about pricing power, this week it was recorded that
the Standard Hotel in an area
which 15 years ago Mr. Lydon and I wouldn’t walk
into that neighborhood, called the Meat Packing
District, sold for $1.2 million a key. I mean,
that is one of the highest numbers perhaps in New
York ever. I think it exceeds what the Mandarin
Oriental sold for a couple years ago. How can someone
pay that type of price? What do they need to have
in revenues per night to make that place
profitable? SEAN HENNESSEY: Well, Ronnie’s
probably a better guy than me to answer that because
the cost of capital is an important part of the
equation. Certainly that hotel generates I would
say somewhat superior revenues, given the cache
of the Balazs brand, and it runs a very tight
operating expense, such that it is well above
average in terms of profitability. So the
price per room, while it’s still relatively high
compared to historical trends, people could obviously
get their arms around it. MICHAEL STOLER:
How do you, when you’re going out as an
intermediary and these prices per key are going
up all the time, get lenders to be interested?
As you said prior to the show, you have banks, you
have regular commercial banks and savings banks,
you have the Wall Street conduits, the CMBS, you
have insurance companies, and you have others.
What’s the appetite today for financing and
hospitality? RONNIE LEVINE: Well I think on
the going concern hotels where there’s an in place
cash flow that you’re underwriting to, the per
key exposure is really just one metric they’re
looking to. It’s much more of a debt service coverage
or a debt yield underwriting. So the debt
yield, which is really just a cap rate to the
loan amount, those have been compressing and
coming down. Obviously, in turn meaning loan amounts
are going up on hotels but there’s still… MICHAEL STOLER:
Let’s be realistic. A hotel is a
day-to-day operation. Every day at The Jade,
your hotels, every day at the Crowne Plaza new
people come in, the beds are made, there’s another
customer. It changes each and every day. There’s no
guaranteed revenue. There are 11,000 new rooms
opening up. You had a hotel on 57th Street,
maybe a year and a half ago there was a hotel
called Park Central. Right now there were six more
hotels or seven hotels right around the Park
Central. What affect is that going to have? The
stabilization isn’t there. RONNIE LEVINE: Look, the
lenders are trying not to underwrite to the top of
the market occupancy. Hotels are generally more
conservatively underwritten because of
the factors that you’ve mentioned. I mean, they
are a day-to-day business and you’re really
underwriting a business as opposed to real estate
with long term stable cash flow. As compared to other
asset classes, it’s conservatively underwritten. But
as compared to hotels a year
ago, it’s gotten significantly more
aggressive. MICHAEL STOLER: Relating to my
question that I just brought up to Ronnie and
to the group, the Crowne Plaza Times Square is 850
rooms? TOM LYDON: Correct MICHAEL STOLER: Right now
over the last I’d say two months, you have at least
2000 new rooms within a five block radius of your
hotel. I know that many people, because I’ve been
there, visited, want to go to a new hotel like The
Jade. You may have updated your rooms, you may have
done something over there but there is the new
Quinn, there is a new hotel at the Park Central,
there’s the Viceroy, there’s the Refinery, there’s
the combination Marriot… TOM LYDON:
Courtyard and Residence Inn. MICHAEL STOLER: Right
and then you have the Hilton Garden Inn. That’s
right into your market. That’s taking away from
your business. How do you keep your business over
there in that market when you have
2500 new rooms? TOM LYDON: You have to adapt.
You can’t get in your mind that you’re going to have a
budget for an average daily rate of $350 and pretend if you
have 2500 new keys competing that you’re
going to be able to hold that all the time. I think
broader, you can’t even take the competition —
whether this happens to be we’re talking about
hotels, but whether it’s rental or condos — I think
the primary competition for our hotel has been all
the new limited service hotels from 42nd Street on
down to 23rd Street, what they call Midtown West I
believe, on all side street type of buildings.
They’ve had the fastest growth — and I think Sean
would echo this — in market share and have also
had the fastest growth in ABR. Now, even though
they’re running $50-70 behind a full service
hotel, they tend to be much more profitable
because they’re non-union and they’re not burdened
by food and beverage. So even worse than the
competition I think the biggest risk to New York
City hotel business is the supply. Logic would tell
you, you should stop building there but that’s not
the way the real estate business works. WILL OBEID: You know what
else is a big threat to the hotel business? I
was on the way over to the studio today going
down the elevator in my building and there were some guys talking about
where they stayed for their business trip. One
of them is staying at a Four Point. The other one
said yeah, I tried out AirBnB this time. I’ve
seen a lot of indicators that AirBnB is continuing
to make a lot of progress and I see that as a very
large threat. MICHAEL STOLER: I’m happy you
are bringing that up because I was about to. AirBnb is
this internet site where people rent a room. About
a week and a half ago I was out inspecting
properties for New York Community Bank. I’m on
136th Street and Broadway and we walk into one
apartment and it happened to be a very interesting
apartment because it was just like a bowling alley
type, so the bedrooms are over there. Right outside
of each bedroom there were suitcases. I said to the
banker, I said this is a rental apartment which is a
hotel. There was this woman over there who opened the door
for us and she was basically the proprietor. They
were renting out rooms. WILL OBEID: Which is mostly
illegal in New York City. MICHAEL STOLER: Correct, but that is another threat
to the hotel market over here. WILL OBEID: And
those type of services and sites are going to
continue to get more sophisticated, more
well-known and it’s a very large threat to the
hospitality industry in New York that has to pay
all types of taxes and supports all kinds of
services that they don’t. MICHAEL STOLER: What about
the suburban — okay, let’s leave Manhattan. We were
talking over here. Maybe I have this crazy attitude
towards Long Island City because I remember when
there was nothing on Long Island City and now you
have a number of apartment buildings and you have
approximately 30 hotels. I don’t see the limited
service. People said your savings and low cost alternative
out there. Do you see all these, can they all be successful
on Long Island City? SEAN HENNESSEY: Certainly from an occupancy point of view
they’re trailing Manhattan by a few points, but
they’re not running 20%. Those hotels, I don’t know
the capitalization of them but if they acquired the
land at the right price and kept the construction
cost under control, there’s no reason that
they can’t be successful. There’s neighborhoods over
there that are a lot hipper than you might give
them credit for. MICHAEL STOLER: In
Long Island City? SEAN HENNESSEY: Walk
around some weekend, I think you’ll be surprised. MICHAEL STOLER: How do the
lenders today in the market look at Long Island City
for financing? I would say it’s probably, in my mind it would
be much more difficult. It’s not Brooklyn, which
is hip, as one would say. RONNIE LEVINE: Yeah,
I think for a construction financing for a new
hotel project in that market,
that’s going to be very challenging. I don’t think
that that’s a deal you’re going to get really much
interest in from a traditional bank. I think
we’ve seen people go to alternative sources of
capital, finance companies, funds and a lot
of equity going into these deals. But, as I mentioned
to you before, what we’ve seen a lot of people doing
is really mixed use projects where there may
be a retail component, a for sale condominium or
rental component and then the hotel is just a
smaller subset or a condominium interest
within a larger project. To your point, it think in
Long Island City that would be challenging to
get done as a construction loan. MICHAEL STOLER: Mr. Lydon,
you’re a resident in New Jersey and you live in Hoboken, but in
Jersey City there have been — I believe they are breaking
ground for two new hotels over there. How do
you see the Jersey market? TOM LYDON: Actually
on that waterfront locations I think they’ve done much
better than people ever thought they would. The W
Hotel was a pioneer for sure. You have something in Weehawken
that’s right out of ferry stop, a Sheraton Suites. I just
had an occasion to have to make a reservation there
for a family coming in for a wedding and it was on a
weekend $350 for a view of Manhattan. I believe, I
would say the current downtown hotels — the
Hyatt, the Westin — I would think (I know that’s
where the Super Bowl teams stayed) — that’s not the
reason they’re doing well. I think they’re generating
very good revenues and are excellent properties. So
it wouldn’t shock me that new products can be built
and can be successful in very specific locations
and it’s all transportation oriented.
You’ve got to be able to get on that PATH right
away to get into Manhattan. MICHAEL STOLER:
That relates, you bring up the PATH and you bring up
weekends. One of the busiest markets today —
and I said this recently on a show on the Broadway
— one of the markets that’s really doing very
well is visitors from around the world want to
go to Lower Manhattan. That’s a big site. You
have major retail, enormous amounts of
retail. Brookfield Place has 260,000 square feet of
retail. The [INDISCERNIBLE] has 550,000 square feet of retail.
Some major stores are going in there. Lower Manhattan is one
of the biggest visitor sites over there. How’s your view
of Lower Manhattan today for the hospitality market? SEAN HENNESSEY: I think it’s gaining a substantial
amount of momentum. It’s been a bit in a holding
pattern with the office construction underway. You
didn’t really have the street level vibrancy. But
with the Brookfield Place, with the completion of
office towers downtown, with the redevelopment of the
seaport there’s a lot going on. MICHAEL STOLER: Right now, with
the extension going that you
can go from the path station underneath to
Brookfield Place as opposed to going above
there, I believe that and the office buildings are
really moving there and Tribeca is becoming more
of a neighborhood. You’ve been one of the
visionaries originally — the Javits Center, we all
have our opinions of how bad it was, but they’ve
gone through a major renovation. The Javits Center is really
becoming more because of the Hudson Yards over there. How are
you doing with your hotel near the Javits Center and
how does everybody look at the Hudson Yards with regard to a
new neighborhood and an area for hospitality? WILL OBEID: We have
three Gem hotels in the City. One of them is near
the Javits Center. We’re very optimistic going
forward. Over the last seven or
eight years it’s been difficult to see how the
news of Javits Center has been up and down. I’m glad
to see that it has a lot of momentum. I’ve seen
some major conventions now move to Javits. For
example, the ICSC have their big December event
every year. They’ve now moved from Midtown to
Javits, which is great. The whole Hudson Yards
development seems to really be building
momentum. We’re very bullish on the Hudson
Yards. We’re also bullish on Lower Manhattan,
specifically around the seaport area despite
about… MICHAEL STOLER: We have Howard
Hughes’ organization putting billions of dollars over
there in the seaport. The seaport is a beautiful
section and I think that is a market. I think it’s
a distinct market of Lower Manhattan over there.
There was talk about a convention hotel to be
built near the Javits Center. What’s the status
on that? SEAN HENNESSEY: That’s not
planned as part of the… MICHAEL STOLER:
Not in the Hudson Yards, but… SEAN HENNESSEY: There’s a lot of
interest in acquiring sites over there with the land costs
and the available air rights have attracted
people to the neighborhood. In my experience dealing with
hotel companies for a long time, they kind of turn their
nose up the further west you got. But now I’m working with
a client and a couple of the major hotel companies
are fighting over a site that a couple of years ago they
wouldn’t consider. So interest is there. MICHAEL STOLER: When you see
the lenders, how do they look at the Hudson Yards
of the far west side? RONNIE LEVINE: I don’t think you can argue the viability.
The amount of investment going on that area is
staggering, between what Related and Oxford are
doing, what Brookfield’s doing. There’s just so
much money and infrastructure and
momentum. I think once you hit the critical mass
there you can’t deny that that project is going to
be successful and there’s going to be significant
office there, there’s going to be
residential and obviously hotel is
going to need to be. SEAN HENNESSEY: I think once
the subway extension opens that it’s really going
to put that into Midtown. MICHAEL STOLER: Yeah,
but that’s the Hudson Yards. When we talk about
the west side, when the Inc was built — do you remember they kept an Inc
on 48th, the Inc 48 went bankrupt. Okay, maybe it
was a combination of the recession, maybe it was a
combination of the location over there. But
locations, this city has increased its bounds. A
couple of years ago when you were on my show and we
spoke about the planned Marriott on 125th Street,
which is now being replaced by the Continuum
Company’s residential tower and retail, there
was no idea if a 500 room hotel in Harlem could
absorb it. Now they have 108 rooms in Harlem and
that’s doing okay because there’s business and
there’ll be additional because of the Columbia
expansion. Do you see more hotels opening up in the
suburbs or in the far sections of Brooklyn,
Manhattan and Queens? SEAN HENNESSEY: Yeah, I think
what we’ve seen over the past 5-6 years has been
hotels expanding into very much non-traditional hotel
neighborhoods. But as long as you scale the property
and the amenities and the quality of the building
that you’re constructing to the neighborhood and
the local demand, people have discovered there’s no
reason you can’t be successful in
neighborhoods. The old logic was you had to be
near a lot of giant office towers. But people have
made a go of it with other smaller
neighborhoods. MICHAEL STOLER: I think the
logic of the office towers is one logic but I think the real
logic is the convenience of being near the subways
or the trains. I think that’s really — especially
that’s been the fact in New Jersey in certain markets. TOM LYDON: Yeah, you take the
location of the Inc property — 10th Avenue and 48th Street —
there’s no subway, there’s very little employment over
there — although you’ve got to give credit to
the auto dealers. They’ve done a fabulous job of
upgrading every dealership — that is not going to generate enough business for
that type of folk. MICHAEL STOLER: A number
of the dealerships specifically – John Catsimatidis
has a property on the corner of 56th Street where he has a
Lexus dealer and he’s publicly announced that
he’s probably going to build an apartment tower.
The other Lexus dealer on 57th Street, or the Honda,
whatever it is, TF Cornerstone is planning a
1600 apartment building over there. Now, speaking
of that, hip neighborhoods today — Williamsburg,
Bushwick, the Bronx — the Bronx hadn’t seen
anything. The Opera House Hotel opens up in the
Bronx. They’re planning a hotel near Yankee Stadium
over there. Simone Development just opened up
a hotel in the Bronx, but that’s tied in a little
bit to Montefiore. Those are hotels for specific
businesses aren’t they, in certain cases? SEAN HENNESSEY: They’re
specific niches but, as I said before, you can get away with a hotel that
caters to a niche business if it’s designed and built
correctly. WILL OBEID: Calibrated for the
neighborhood. SEAN HENNESSEY: Exactly. WILL OBEID: Whenever
we develop a hotel, the first thing
we do is say okay, what’s the context of the
neighborhood and what’s our version of contextual
development because it’s really about building the
right hotel for that neighborhood so you can
address the right market. MICHAEL STOLER: Here’s an
interesting question, especially for two hotel
owners over here. How do people make a decision to
go to the Crowne Plaza Times Square? Is it your
management company, is it the name the Crowne Plaza
or Times Square, those three components? Or is it
also Expedia, Hotels.com and all the others? Why do
people go — how do you get people to visit your
hotels? TOM LYDON: Will knows a lot more
about it than I do, but the answer is that in our hotel we
wish the Crowne Plaza name would generate more
business from just the brand. That’s the best way
to do it is to have the brand drive the reason for
people to say I want to stay at something I know
and if I’m a Priority Club Member I can get some
points and XYZ. If you don’t have that, when
you’re running a large hotel of 850 rooms, a
large food and beverage, a group business, then
everything is really based upon how you segment who
you’re trying to attract. In this type of market it
used to be you could, in our case of 850, rent half
the rooms and then the week of you’d go and catch
compression and be able to price your product and
make good money. You can’t do that today. You’ve got
to get as many people forward committing and
that means you have to deal with a lot of the
intermediaries who are getting paid a 10-20%
commission. WILL OBEID: That’s exactly
right, Tom, and we’ve seen over the last several years the
booking window shrink dramatically which makes
our job as operators that much more challenging
because everyone’s competing for those
visitors to New York City. Now look, exchange rates
have cooperated so we all have a lot of foreign
visitors still coming to the City which is great.
But we have to have a strong group sales and
marketing team that we rely to book on probably
about 30-40% of what we call our base business.
Then we have an events team and a transient team
and they’re out there really catering to
individuals in the transient crowd and
booking as many of those rooms as we can. Of
course, relationships with the so-called OTAs, the
Online Travel Agents, it’s incredibly important in
today’s day and age. You have to have the right
relationships with the OTAs so that everyone out
there can see you. That’s from the Expedia,
Hotels.com of the world right on through. Those can be
some very expensive distribution channels. MICHAEL STOLER: But
they keep your rooms busy. WILL OBEID: Yeah. The
biggest challenge for hotel owners
is controlling our own inventory and the better
than we can control our own inventory and the cost
of that inventory, the more profitable a hotel
operation is. TOM LYDON: You may have 10-15
distribution channels, as Will just said, and you
have to cut deals with each of them and then turn
them on and turn them off depending on how hungry
for business or you try to set it up so you’re never
hungry. MICHAEL STOLER: So here’s
an interesting question, Ronnie. I hear all of these
matrixes or reasons of how a hotel operates and I know Sean
does a lot of analysis. How does the
traditional bank or lender look at this, because especially
in a construction loan they’re working in a
vacuum? They’re looking at Will’s numbers on what his
projections are and what it is. Fortunately, the
projections that he may have made two years ago
have exceeded because the world is getting better.
How does a lender look at this? RONNIE LEVINE: Well
I think on a hotel construction loan
obviously it’s totally pro forma based and you’re
basically doing the project on spec and you’re
utilizing a market study or data and comp set and
you’re trying to prove out a thesis on what the
occupancy and rates this hotel’s going to achieve
and then whether it’s going to be union or not
union. You apply your expense ratios and you
guesstimate a stabilized cash flow on the property.
It’s an art, not a science and I think that a lot of
lenders are weary of underwriting to today’s
occupancy levels and today’s rates to they’re
haircutting those rates. That’s why I kind of when
we talk financing I do think that the markets are
being rather disciplined on construction financing.
I don’t think that that market is overheated. I
think it’s the better developers and the better
sponsors that are getting bank debt, which is cheap.
There’s some recourse typically coming along
with bank financing for construction loans on
hotels. Then if you can’t qualify for traditional
bank debt from the major money center banks– MICHAEL STOLER: [INDISCERNIBLE]
high money lenders there. RONNIE LEVINE: –people are
going out to, I prefer to call them, alternative sources
of capital. Yes, the hard money community is
actually, as you know very well, active in the
hospitality space, especially on land loans.
A lot of guys will start building for equity, they
get stuck, they take a mezzanine loan to
finish. The cost of the capitalization is very high. MICHAEL STOLER: You
have my apples. I don’t have them next to me.
How does `14 and `15 look for the hospitality
market, oh guru, Sean Hennessey? SEAN HENNESSEY: I think
we’ll see occupancy staying strong but it will
probably ratchet down a point or two, still
be approximate to 80%. And we’ll see room rate
growth in the 3, 4, 5% range, so slightly better than
inflation but not nearly as high as the room rates
we’ve seen in past cyclical recoveries where
we’ve often seen double digits. MICHAEL STOLER: It’s nice, the apple is shiny,
not really glowing that much but it’s not
dull it sounds like–. SEAN HENNESSEY: I would also
add that profitability’s growing slower at a lot of
properties, too. MICHAEL STOLER: So I’d like to thank the four of you for
being here — Will, Sean, Tom and Ronnie — and I’ll
see you next week. ♪[Theme Music]♪

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