"The luxury segment has been the hardest hit, and it's very apparent that some of the luxury operators don't have experience in this kind of a downturn," says DHC president Murray Dow. "Even after 9/11, the luxury segment wasn't as impacted as it now."

Dow says his company typically manages upper-upscale hotels such as Hiltons, Marriotts, Embassy Suites and Sheratons, although it has recently been approved to operate luxury brands, including Westin, Le Meridien and InterContinental. The firm is currently finalizing one luxury management deal, Dow says, adding that the DHC has been approached by banks, a special servicer and institutions to manage luxury hotels on their behalf. Over the course of the next 12 to 18 months, Dow plans to sign five new luxury management contracts.

StepStone is the property-operations arm of Hotel Asset Value Enhancement Inc. (hotelAVE), an asset management and advisory outfit. It was established two years ago under the name of Aquidmeck and currently oversees the Hotel Providence, a 96-room boutique hotel.

"There is a lot of turmoil within the real estate sector of the hotel business," says James McGrath, COO and a partner at StepStone. "Over the next 24 months, it's pretty likely that one of the largest transfers of real estate in the hotel industry will occur as compared to any other previous time in its history. When that occurs, oftentimes there is a change in property management. So we think the timing is quite perfect. There is a need for high quality management, whether it's in maximizing the very good times or helping customers through very poor times, which we are experiencing right now."

Those transfers, he relates, will be triggered either by foreclosures or when values begin to rise, traditional sales. McGrath reveals that company has been selected for several assignments but cannot announce them until final agreements are in place. In five years, StepStone expects to grow its management portfolio to 40 hotels.

Both Dow and StepStone intend to selectively invest in the properties they manage. Dow, for instance, will take a 5% equity stake and put in between $1 million to $2 million of its own capital. It also favors short-term, two- to three-year contracts.

StepStone's percentage will be deal-specific. "We have a variety of different sources, including StepStone's own capital." McGrath says. "Each scenario will be different. We don't want to be pinned down on a range."

Managing a boutique hotel requires special skills, McGrath says. "Boutique means one of a kind," he explains. "A boutique hotel, if it's done properly, can create an experience for the guest that can be out of the ordinary, from amenity offerings to the style of service, to the ways that the rooms are furnished and the design of the public space. So with an independent boutique hotel, you are able to interject a lot of personality and a lot of uniqueness."

Both firms have expertise in food and beverage and have their own proprietary restaurant brands. When taking over a hotel, the first step will be an in-depth look at the property's P&L statement as well as a focused marketing and sales approach that includes direct sales and online promotions.

"We target the accounts we want to go after and we get face-to-face with the decision makers at those organizations," McGrath details. "On the expense side, when we transition a property, we go line by line, bill by bill and review every expense, every contract to make sure it has value. If there is not a value related to associate satisfaction, guest satisfaction or driving revenues, that expense will either be renegotiated or taken out completely. We are in a time right now where the economy does not cover any sins by any operational manager."

Dow says the first step is ensuring that the team at the property level understands the monetary model of the hotel. He gives an example of a luxury hotel that was running about a 10% occupancy, yet employees kept doing their same jobs. "Do they see the bigger picture and their role in the financial success of the hotel?" he says. "In my experience, most of people who work in luxury don't have any idea about value add or debt service and those kinds of things. So there is an education of the management team. The next thing to figure out is whether the hotel should be renovated, reflagged or sold."

Both McGrath and Dow agree that the luxury and upscale segments are suffering not only from a revenue drought brought on by a slump in company profits, but a public relations nightmare as well.

"There is certainly a pullback away from the luxury hotels, both branded and independent," McGrath says. "Part of that is certainly a result of the publicized issue with AIG and other companies that have been bailed out by the federal government. While there might be some that think that there has been some permanent damage done to the luxury segment, we don't believe so. We think the upscale and luxury segments, including boutique hotels, on a long-term basis will be a good place to invest and can provide better than average returns."

Dow concurs: "The AIG factor is really big. We are even getting some of the AIG factor in some of our upper upscale properties," he says. "But corporate profits are down substantially and that drives the luxury business a lot. Those profits will come back. Luxury brands are not even thinking about recovery at this point, but there will be."

Instant Insights /

Firms Tee Up for Luxury, Upscale Management Deals

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